Daily Archives: April 10, 2015

HSBC Tax Scandal: France Starts Criminal Probe

HSBC has expressed outrage at being placed on €1bn bail amid a criminal investigation in France into historical tax issues.

The UK-listed bank said it was informed on Wednesday that French magistrates were examining the “conduct of its Swiss private bank in 2006 and 2007 for alleged tax-related offences.”

Its statement said the court’s decision is “without legal basis and bail is unwarranted and excessive”.

The bank added that it intended to appeal and “defend itself vigorously in any future proceedings”.

Activities at the private bank are being examined in several other countries including Germany and Argentina in the wake of the publication of stolen files.

Read on.

House Republicans Want To Hand Warren Buffett Bigger Profits On Loans To Poor People

WASHINGTON — House Republicans are set to deliver a major favor to Warren Buffett next week, days after a devastating expose detailed consumer abuses in his corporate empire. And many Democrats seem willing to help the world’s third-richest person extract additional profit from the poor.

Buffett is the most dominant player in the mobile home business. As chairman and CEO of Berkshire Hathaway, he controls Clayton Homes, the largest U.S. mobile home manufacturer, as well as the two biggest mobile home lenders — 21st Mortgage Corp. and Vanderbilt Mortgage and Finance. Last week, The Seattle Times and The Center For Public Integrity reported that Buffett’s empire relies on predatory practices that trick and trap borrowers into taking on doomed, expensive loans.

Neither Berkshire nor Clayton responded to requests for comment for this article.

Read on.

“Another Crisis Is Coming”: Jamie Dimon Warns Of The Next Market Crash

Last October’s Treasury flash crash — which Gregg Berman will tell you wasn’t the fault of HFT and which will likely repeat at some point or another thanks to the fact that Fed purchases have reduced market depth — may no longer be a once every three billion year occurrence as statistics would dictate, Jamie Dimon observes, in his latest letter to JPM shareholders, before suggesting that the event “should make you question statistics.” Amusingly, Dimon seems to confuse cause and effect a bit, as it’s really not the fault of “statistics” per se, but rather the fault of shifting market dynamics (and by “dynamics” we mean increased manipulation and never-before-seen distortions and dislocations) that have rendered the old statistical models obsolete. But at least Dimon sees the event, and recent similar shakeups in FX markets for what they are: “warning shots across the bow.” Here’s Dimon:

Recent activity in the Treasury markets and the currency markets is a warning shot across the bow 

Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so – of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardized and liquid financial instruments in the world.

Next, Dimon decides he’s going to do some thinking about what a new crisis might look like under existing market conditions and the new regulatory regime. You can read the entire three-page “thought experiment” on pages 32 through 35 of the letter (below), but the conclusion Dimon ultimately comes to is this:

The items mentioned above (low inventory, reluctance to extend credit, etc.) make it more likely that a crisis will cause more volatile market movements with a rapid decline in valuations even in what are very liquid markets. It will be harder for banks either as lenders or market-makers to “stand against the tide.”

Perhaps more important are the JPM chief’s observations about liquidity in credit markets which, as regular readers are no doubt aware, is a topic we’ve been pounding the table on literally for years:

There already is far less liquidity in the general marketplace: why this is important to issuers and investors

Liquidity in the marketplace is of value to both issuers of securities and investors in securities. For issuers, it reduces their cost of issuance, and for investors, it reduces their cost when they buy or sell. Liquidity can be even more important in a stressed time because investors need to sell quickly, and without liquidity, prices can gap, fear can grow and illiquidity can quickly spread – even in supposedly the most liquid markets. 

Some investors take comfort in the fact that spreads (i.e., the price between bid and ask) have remained rather low and healthy. But market depth is far lower than it was, and we believe that is a precursor of liquidity. For example, the market depth of 10-year Treasuries (defined as the average size of the best three bids and offers) today is $125 million, down from $500 million at its peak in 2007. The likely explanation for the lower depth in almost all bond markets is that inventories of market-makers’ positions are dramatically lower than in the past. For instance, the total inventory of Treasuries readily available to market-makers today is $1.7 trillion, down from $2.7 trillion at its peak in 2007. Meanwhile, the Treasury market is $12.5 trillion; it was $4.4 trillion in 2007. The trend in dealer positions of corporate bonds is similar. Dealer positions in corporate securities are down by about 75% from their 2007 peak, while the amount of corporate bonds outstanding has grown by 50% since then.

Inventories are lower – not because of one new rule but because of the multiple new rules that affect market-making, including far higher capital and liquidity requirements and the pending implementation of the Volcker Rule. There are other potential rules, which also may be adding to this phenomenon. For example, post-trade transparency makes it harder to do sizable trades since the whole world will know one’s position, in short order. 

Read on.

Victims of Financial Wrongdoing Need a More Muscular S.E.C.

Given the many billions of dollars financial companies have paid in regulatory and legal settlements related to the mortgage crisis, how much money has actually found its way into the pockets of investors harmed by their actions?

Less than you may think. To start with, little of the cash generated in most of the Justice Department settlements went to investors. Much of this money went into Treasury coffers or to various states while troubled borrowers were promised loan modifications and other relief as part of the deals.

Wronged investors are entitled to receive money, however, from lawsuits filed by the Securities and Exchange Commission. While the S.E.C. cannot, by law, seek compensatory damages for losses incurred by investors, the agency does collect penalties and disgorgement of ill-gotten gains from both institutions and individuals.

Read on.

Deutsche Bank could settle Libor probe this month – source

(Reuters) – Deutsche Bank AG (>> Deutsche Bank AG), which faces allegations that it tried to rig the Libor benchmark interest rate, could settle with U.S. and UK authorities as early as this month, a source familiar with the matter said.

The penalties are likely to exceed $1.5 billion (1 billion pounds), the amount UBS Group AG (>> UBS Group AG) paid in 2012, the source said.

Read on.