Tag: news

• Headline du jour: Granted ‘decisive’ role, Chinese markets decide to slide (Reuters)
• Desperate Philippine typhoon survivors loot, dig up water pipes (Reuters)
• Fading Japanese market momentum frustrates investors (FT)
• China’s meager aid to the Philippines could dent its image (Reuters)
• Central Banks Risk Asset Bubbles in Battle With Deflation Danger (BBG)
• Navy Ship Plan Faces Pentagon Budget Cutters (WSJ)
• Investors pitch to take over much of Fannie and Freddie (FT)
• To expand Khamenei’s grip on the economy, Iran stretched its laws (Reuters)
• Short sellers bet that gunmaker shares are no long shot (FT)
• Deflation threat in Europe may prompt investment rethink (Reuters)
• Apple’s $10.5B on Robots to Lasers Shores Up Supply Chain (BBG)
• Japan passes law to launch reform of electricity sector (Reuters)
• Attack on Junk-Loan Excess Risks LBO Profits as U.S. Cracks Down (BBG)
• Equity Traders’ Bonuses Seen Rising as Rates Salesmen Face Drop (BBG)

 

Overnight Media Digest

WSJ

* New guidelines for reducing cholesterol and heart-attack risks mark the biggest shift in cardiovascular-disease prevention in nearly three decades. The change could more than double the number of Americans who qualify for treatment with the cholesterol-cutting drugs known as statins. ()

* China’s Communist Party plans to establish a new state security committee that analysts say will cement President Xi Jinping’s hold on the military, domestic security and foreign policy. ()

* AMR Corp and US Airways Group reached an antitrust settlement with the U.S. government to allow their $17 billion merger to proceed with only limited concessions, paving the way for a new global airline colossus. ()

* Microsoft is abandoning major elements of its controversial “stack ranking” employee review and compensation system, the latest blow against a once-popular management technique. ()

* Starbucks was ordered to pay nearly $2.8 billion for backing out of a partnership with Kraft Foods to distribute packaged coffee to grocery stores. ()

* President Barack Obama tapped senior Treasury Department official Timothy Massad to head the Commodity Futures Trading Commission, setting up a tight deadline to avoid a commission hobbled by vacancies. ()

* Boeing’s unionized workers were set to vote Wednesday on a contract that could have a far-reaching impact on relations between America’s biggest exporter and organized labor. ()

* Francis Bacon’s “Three Studies of Lucian Freud” just became the most expensive work at auction when it sold for $142.4 million at Christie’s in New York. Christie’s in New York made auction history Tuesday when it sold well over half a billion dollars worth of contemporary art in less time than it takes to watch a football game. ()

 

FT

US Airways Group Inc and AMR Corp, parent of bankrupt American Airlines, will be allowed to merge to become the world’s largest airline after they agreed a series of divestments to settle a suit filed by U.S. antitrust regulators to stop the $11 billion merger.

Britain’s Financial Conduct Authority, one of seven regulators investigating a global probe on foreign exchange manipulation, has so far requested information from at least 15 of the world’s biggest banks, according to two people close to the situation.

Activist investor Dan Loeb, founder of hedge fund Third Point LLC, said Tuesday that his investment firm has taken a stake in FedEx Corp and that he met Chief Executive Fred Smith to discuss ways to improve the U.S. parcel delivery company’s performance.

Starbucks Corp has been ordered to pay Kraft Foods $2.76 billion for ending the companies’ grocery deal at least three years early, the coffee chain said on Tuesday.

IntercontinentalExchange Inc confirmed it would float Euronext, dismissing speculation that the owner of the Paris and Amsterdam stock exchanges could be sold, as it completed the $10 billion takeover of NYSE Euronext on Wednesday.

EDF Energy, one of the Britain’s “big six” energy suppliers, said it would raise gas and electricity prices for British households by 3.9 percent, significantly lower than the size of increases announced by four of its competitors.

 

NYT

* Nearly half of the members of the House of Representatives have signed letters signaling opposition to “fast track” authority for a trade pact with Pacific Rim nations.

* After months of setbacks and delays, the merger of American Airlines and US Airways to create the world’s largest airline became all but certain on Tuesday after the airlines reached a settlement with the Justice Department just two weeks before a scheduled trial.

* President Obama nominated Timothy Massad, who oversaw the unwinding of the government’s bailout program, to succeed Gary Gensler at the Commodity Futures Trading Commission.

* Johnson & Johnson has tentatively agreed to a settlement that could reach up to $4 billion to resolve thousands of lawsuits filed by patients injured by a flawed all-metal replacement hip, said two lawyers briefed on the plan. ()

* Mayor Michael Bloomberg on Tuesday insisted that Bloomberg News, which he owns, did not censor itself by killing two articles related to China. But he also asserted that, for at least a couple more months, he is not involved with the news service because of his role as mayor. ()

* Janet Yellen, President Obama’s choice to lead the Federal Reserve over the next four years, has championed the idea that the Fed can stimulate the economy simply by speaking clearly. ()

* High-voltage, superfast public devices for recharging electric cars are appearing more frequently, though some are more expensive for drivers than home chargers, or even gasoline. ()

* Starbucks said on Tuesday that it would pay Kraft Foods $2.75 billion, ending a long-running spat over an agreement the two food titans had for distribution of Starbucks packaged coffee in grocery stores. ()

* Private bank consultants, long known as Wall Street’s shadow regulators, are now facing some regulation of their own. The Office of the Comptroller of the Currency, which oversees some of the nation’s biggest banks, announced on Tuesd
ay that it had adopted some of the first federal standards governing the use of consultants. ()

* Hotel operator Extended Stay America priced its initial public offering on Tuesday at $20 a share, in the middle of its expected range. At that price, the company will have raised $565 million and will be valued at $4 billion. ()

 

Canada

THE GLOBE AND MAIL

* The Conservative government will squeeze public-service salaries and sell off government assets to enter the next federal election with a budget surplus of at least $3.7 billion, paving the way for promised big-ticket tax cuts.

* Ontario is looking to clamp down on tax-dodging corporations, reform its system of credits and drag the black market into the light of day – all in a bid to raise more revenue.

Reports in the business section:

* The U.S. oil boom will vault the country into first place among crude producers within two years, the International Energy Agency says, which will pose a stiff challenge for the Canadian energy industry as it faces rapidly declining American demand for imported oil.

* Canada’s finance minister Jim Flaherty says he’ll intervene in the housing market for a fifth time, if that’s what’s needed, to head off any bubble. Canada’s housing market is seen by some groups as among the frothiest in the world, though most economists do not expect a U.S.-style meltdown.

NATIONAL POST

* Ottawa has earmarked $2.8 billion to pay for Alberta’s flood recovery costs. Federal Employment Minister Jason Kenney says the amount is less than the $3.1 billion Alberta had asked for following the devastating floods that hit southern Alberta in June.

* Members of Canada’s top court directed sharp questions at federal lawyers Tuesday about whether the Harper government can unilaterally change the Senate and thus alter Canada’s democratic landscape.

FINANCIAL POST

* The Chinese state-owned firm CNOOC Ltd has plunked down $12 million with the British Columbia government to secure land for a potential gas plant on Canada’s West Coast, in the latest move by a state-owned energy company doubling down on the province’s gas resources.

* The Canadian Secured Credit Facility, one of Ottawa’s responses to the credit crisis, may be the most financially successful government program in recent history. The reason: every penny of capital that was provided has now been repaid and the government received market interest rates along the way.

 

China

SHANGHAI SECURITIES NEWS

– The People’s Bank of China is mulling the creation of a commodities trading platform in the Shanghai free trade zone, starting with an oil futures contract, an unnamed industry source said at a forum on the free trade zone (FTZ) in Shanghai.

– China’s central bank is considering a platform for trading commercial paper in the Shanghai FTZ, said an academic.

SHANGHAI DAILY

– Shanghai will adjust the city’s air pollution warning system after it took 27 hours to report poor air quality last week, the Shanghai Environmental Protection Bureau said on Tuesday. Changes may include a lower threshold and a more finely delineated pollution gauge.

CHINA DAILY

– The Ministry of Public Security says it is preparing to crack down on websites brokering marriages between Chinese and foreigners on concerns they enable human trafficking and fraud.

– Electric luxury car maker Tesla continues to struggle with a trademark dispute in China preventing it from selling cars under the Tesla or Tesla Motors name.

– SOHO China has begun to “rebalance” its real estate portfolio in Shanghai and Beijing, according to a microblog post by SOHO Chairman Pan Shiyi, indirectly confirming domestic media reports that the property giant was beginning to sell off property in both markets.

PEOPLE’S DAILY

– China’s reforms stand at a historic starting point, said a commentary in the paper that acts as the government’s mouthpiece, referring to announcements of new policy directives from the third party plenum that closed on Tuesday. The overall objective of comprehensive reform is to improve the socialist system with Chinese characteristics, it said.

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

ATK (ATK) upgraded to Outperform from Neutral at Credit Suisse
Heartland Express (HTLD) upgraded to Outperform from Market Perform at Wells Fargo
NuStar GP Holdings (NSH) upgraded to Neutral from Underperform at Credit Suisse
Pernix Therapeutics (PTX) upgraded to Hold from Sell at Cantor
Red Hat (RHT) upgraded to Overweight from Neutral at Piper Jaffray
Synutra (SYUT) upgraded to Outperform from Perform at Oppenheimer
U.S. Steel (X) upgraded to Overweight from Equal Weight at Morgan Stanley
Western Refining (WNR) upgraded to Buy from Neutral at UBS

Downgrades

Air Methods (AIRM) downgraded to Hold from Buy at WallachBeth
Amedisys (AMED) downgraded to Sell from Hold at Deutsche Bank
Aon plc (AON) downgraded to Neutral from Buy at UBS
Computer Programs (CPSI) downgraded to Equal Weight from Overweight at First Analysis
Dean Foods (DF) downgraded to Neutral from Outperform at Credit Suisse
Denbury Resources (DNR) downgraded to Market Perform from Outperform at Raymond James
Nucor (NUE) downgraded to Equal Weight from Overweight at Morgan Stanley
WhiteHorse Finance (WHF) downgraded to Equal Weight from Overweight at Barclays
WhiteHorse Finance (WHF) downgraded to Hold from Buy at BB&T

Initiations

Aetna (AET) initiated with an Outperform at FBR Capital
Boyd Gaming (BYD) initiated with a Market Perform at FBR Capital
Centene (CNC) initiated with an Outperform at FBR Capital
Durata Therapeutics (DRTX) initiated with a Buy at Janney Capital
Flamel Technologies (FLML) initiated with a Buy at Janney Capital
Humana (HUM) initiated with a Market Perform at FBR Capital
Impax (IPXL) initiated with a Buy at Janney Capital
Las Vegas Sands (LVS) initiated with an Outperform at FBR Capital
lululemon (LULU) initiated with an Overweight at JPMorgan
MGM Resorts (MGM) initiated with an Outperform at FBR Capital
Penn National (PENN) initiated with a Market Perform at FBR Capital
Splunk (SPLK) initiated with a Hold at Jefferies
Tableau Software (DATA) initiated with a Buy at Janney Capital
UnitedHealth (UNH) initiated with an Outperform at FBR Capital
Wellpoint (WLP) initiated with a Market Perform at FBR Capital
Wynn Resorts (WYNN) initiated with a Market Perform at FBR Capital

HOT STOCKS

Five banks (C, BK, JPM, HBC, BAC) to provide information on U.S. taxpayers with offshore bank accounts
PetroChina (PTR) acquired Petrobras (PBR) assets in Peru for about $2.6B
Mondelez (MDLZ): Arbitrator ruled Starbucks (SBUX) must pay $2.7B to end contract dispute (KRFT)
CNOOC (CEO) to examine LNG development in British Columbia
Cooper Tire (CTB) filed to delay 10-Q
Clean Energy (CLNE), UPS (UPS) signed LNG fuel agreements to supply LNG in North America
YRC Worldwide (YRCW) in contract talks with International Brotherhood of Teamsters
Tim Hortons (THI) to buy back up to 2.12M common shares
Cosi (COSI) adopted shareholders rights plan

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
TRI Pointe Homes (TPH), E-House (EJ), Copa Holdings (CPA), SINA (SINA), WuXi PharmaTech (WX), Hyperion Therapeutics (HPTX), Babcock & Wilcox (BWC), Luxoft (LXFT), MBIA (MBI), GenMark (GNMK), Potbelly (PBPB), RealD (RLD), Cvent (CVT), Woodward (WWD)

Companies that missed consensus earnings expectations include:
Dawson Geophysical (DWSN), NGL Energy Partners (NGL), Thompson Creek (TC
), Banro Corporation (BAA), Frank’s International (FI), Discovery Labs (DSCO), MarkWest Energy (MWE), Federal Agricultural Mortgage (AGM), YRC Worldwide (YRCW), Codexis (CDXS),

Companies that matched consensus earnings expectations include:
NQ Mobile (NQ)

NEWSPAPERS/WEBSITES

• Royal Dutch Shell (RDS.A) and the Iraqi government are nearing a deal to build an $11B petrochemical facility in southern Iraq, sources say, the Wall Street Journal reports
• The pay TV industry (DISH, VZ, CHTR, T, DIS) continued to lose subscribers in Q3, analysts estimated, providing further evidence that some consumers are dropping their pay TV subscriptions, or cutting the cord, the Wall Street Journal reports
• The Federal Reserve should keep monetary policy ultra-easy given the economy’s tepid growth and an uncertain outlook for jobs growth, two senior officials said, reinforcing views that the U.S. central bank will not taper bond buying before next year, Reuters reports
• NTT Docomo (DCM), Japan’s largest mobile-phone operator, said the addition of Apple’s (AAPL) iPhone to its handset lineup in September is helping reduce subscriber losses to competing carriers (SFTBF), Bloomberg reports
• Wynn Resorts (WYNN) has yet to receive a demand for information for a U.S. criminal investigation into the company’s donation to the University of Macau seven months after prosecutors disclosed the probe, Bloomberg reports

SYNDICATE

Annie’s (BNNY) announces secondary offering of 2.54M shares for holders
Atossa Genetics (ATOS) files to sell 4.2M shares of common stock for holders
Baltic Trading (BALT) files to sell common stock
BreitBurn Energy (BBEP) files to sell 15M common units
Chegg (CHGG) 15M share IPO priced at $12.50
Chelsea Therapeutics (CHTP) to offer common stock
Dynagas LNG (DLNG) 12.5M share IPO priced at $18.00
EROS International (EROS) 5M share IPO priced at $12.00
Einstein Noah (BAGL) files to sell 2.5M shares of common stock for holders
Extended Stay America (STAY) 28.25M share IPO priced at $20.00
Luxoft (LXFT) files to sell common stock for Rus Lux Limited
Safe Bulkers (SB) files to sell 5M shares and 1M shares in private placement
Synta Pharmaceuticals (SNTA) files to sell common stock

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Jz_uz5rNlLg/story01.htm Tyler Durden

As non-collocated, carbon-based traders walk in today, they are once again greeted by a very unfamiliar shade of green in the equity futures market. There has not been a specific catalyst for another day of equity weakness however it started in Asia, where we again witnessed a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng.

In Europe, stocks also traded lower, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, where UniCredit shares fell over 4% as credit spreads widened (iTraxx subFin index up 6bps). The focus was very much on the UK, where market participants digested the release of better than expected jobs report and then the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, GBP outperformed its peers and the short-sterling strip bear steepened as market participants reassessed future interest rate path. Looking elsewhere, softer stocks supported Bunds, which edged higher after supply from Italy and Germany was successfully absorbed.

As DB notes, it appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent – so his comments that the government shutdown will make coming data “less reliable” than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.

In other words, an Oscar-worthy good-cop/bad-cop performance by the Fed’s henchmen, confusing algotrons for the second day in a row.

Going forward, the US Treasury will auction off USD 24bln in 10y notes, while Cisco will report after the closing bell on Wall Street. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

 

Overnight news bulletin from Bloomberg and RanSquawk

• BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.
• UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) – 12th straight monthly decline.
• German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.
• Treasuries gain, led by belly of curve; 10Y yield retreat from highest level since mid-Sept. as stocks decline across the globe, copper falls.
• Focus remains on timing of any Fed decision to taper asset purchases; Yellen may shed light at tomorrow’s confirmation hearing. Lockhart yday said taper would likely be considered in December; Kocherlakota said tapering could impede economy’s slow progress
• 10Y notes to be sold today yield 2.790% in WI trading; drew 2.657% at October auction and 2.946% in Sept., which was highest since June 2011
• Bank of England Governor Mark Carney signaled that officials may consider raising interest rates sooner than they previously forecast as the U.K. economy recovers “robustly” and inflation slows * U.K. unemployment declined to 7.6% in 3Q, closer to the  BOE’s key threshold, while a narrower measure of joblessness fell for a 12th month in October
• U.K. Deputy Prime Minister Nick Clegg will distance himself from David Cameron’s call for permanently lower state spending, saying his Liberal Democrats aren’t ideologically wedded to budget cuts
• Merkel’s willingness to compromise with the Social Democrats to form a coalition risks rolling back steps taken by her predecessor that made Europe’s biggest economy stronger, her Council of Economic Experts said
• Former President Bill Clinton endorsed altering a key provision of Obamacare, saying Obama should keep a pledge he repeatedly made in campaigning for the law that Americans wouldn’t lose coverage they liked when it took effect
• China elevated the role of markets while maintaining the state’s dominance in the nation’s economic strategy, seeking to balance finding new sources of growth with sustaining the Communist Party’s grip on power
• Sovereign yields mostly lower, EU peripheral spreads widen. Asian and European stocks, U.S. equity-index futures fall. WTI crude, and gold gain; copper lower

Asian Headlines

On the Chinese third plenum, Goldman Sachs says China Plenum is ‘insufficient’ to drive China stocks up.

Separately S&P’s Kim Eng Tan says the implementation of reforms that support the decisive role of market forces in the allocation of resources could in turn support the long term sovereign credit ratings on China. In other news, Morgan Stanley says China to cut interest rates twice in 2014.

BoJ’s Miyao said won’t rule out any steps in advance if BoJ were to act again.

EU & UK Headlines

BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.

BoE’s Carney said constant rate scenario shows potential advantages of keeping rates unchanged after hitting 7% unemployment. He also did not rule out lower jobless threshold to 6.5% from 7.0%. Forecasts are based on market expectations, not nominal rates and uses market forecasts of key rate reaching 1% by 2015 Q4.

UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) – 12th straight monthly decline.
– ILO Unemployment Rate 3-months (Sep) 7.6% vs. Exp. 7.6% (Prev. 7.7%)
– Employment Change 3M/3M (Sep) 177K vs. Exp. 113K (Prev. 155K)
– Claimant Count Rate (Oct) M/M 3.9% vs Exp. 3.9% (Prev. 4.0%) – lowest Since Jan 2009
– Average Weekly Earnings (Sep) 3M/Y 0.7% vs Exp. 0.7% (Prev. 0.7%, Rev. to 0.8%)
– Weekly Earnings ex Bonus (Sep) 3M/Y 0.8% vs Exp. 0.9% (Prev. 0.8%)

German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.

Eurozone Industrial Production SA (Sep) M/M -0.5% vs Exp. -0.3% (Prev. 1.0%)

Eurozone Industrial Production WDA (Sep) Y/Y 1.1% vs Exp. 0.0% (Prev. -2.1%) – biggest gain since September 2011.

Italy successfully sold EUR 5.468bln (vs. exp. EUR 5.5bln) in 3y, 30y and CCTeu bonds. The shorter dated paper was sold at lowest yield since March 2010. Germany also sold EUR 4.032bln in 0.25% 2015, b/c 2.2 (Prev. 2.3) and avg. yield 0.1% (Prev. 0.19%), retention 19.4% (Prev. 15.18%).

US Headlines

PIMCO’s Bill Gross raised the percentage of Treasuries and other US g
overnment-related debt in his flagship fund in October after the Federal Reserve unexpectedly maintained its bond purchases.

CME Group has substantially raised transaction fees for the first time in four years as it flexes its pricing muscle as the dominant US futures exchange operator.

Equities

Risk averse sentiment dominated the session this morning, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, as credit spreads widened (iTraxx subFin index up 6bps) and Bunds moved into positive territory after supply from Italy and Germany was absorbed.

FX

GBP outperformed its peers, driven by the release of better than expected jobs report and also the release of the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, the pair managed to recover some of the losses made yesterday following the release of softer than expected inflation data.

RBNZ Financial Stability Report said the NZD remains elevated, and timing and size of interest rate increases are uncertain. RBNZ’s Wheeler said interest rates are likely to rise.

Commodities

Commerzbank’s technician Axel Rudolph says that a slip through the six-month support line at USD 1270.16 will confirm bearish outlook.

AMCU lowered basic wage increase demand to ZAR 8,668 from ZAR 12,500, according to Impala spokesman. Also, according to AMCU, Impala Platinum raises wage offer to union by 0.5%. It was also reported that Amplats security disperses protest with rubber bullets, according to SAFM.

The Israeli PM Netanyahu has called for Western countries to trim their dependency on oil for the transportation sector due to the instability of the commodity.

Libya’s Zawiya refinery has reopened, according to the National Oil Corp

Following last month’s late payment by Ukraine to Russia, Ukraine has said it does not need to buy any Russian gas before the year’s end.

Key Macro/FX highlights from SocGen

Let’s hear it from the horse’s mouth this morning: does BoE governor Carney now believe that the UK unemployment rate threshold of 7% will be reached earlier than it though t back in August? GBP is not an outright buy vs the USD if that is the case (UK real rates are falling vs the US), but sterling should stay bid vs the currencies where deflationary or disinflation pressures reign supreme, ie the Scandis, the EUR and the Swiss Franc. EUR/GBP did well yesterday to reach back over the 50d ma (0.8440) but this should be as good as it gets if the BoE revises up its short-term growth and inflation forecast. UK rate hike expectations have eased back thanks to the delayed tapering in the US, but short sterling may not easily be swayed by the governor to give up pricing in a first hike at the turn of 2014/2015 in particular if the employment data due one hour ahead of the QIR shows a fall in the unemployment rate to 7.6%.

UST 10y yields traded a 2.79% high yesterday (swaps 2.92% high) giving the USD free rein to strengthen vs its major counterparts. Scandi currencies continued to take a beating after CPI data showed Sweden slipped into deflation in October. Whether that leads the majority on the Riksbank committee to give in to the two doves Ekholm and Flordenand vote for a 25bp rate cut at the December meeting remains to be seen, but the high correlation with US 10y yields suggests there is further upside potential for USD/SEK. Also keep an eye on USD/JPY. As the pair approaches 100.00, short-term vol has started to pick up.

Bank of Indonesia, in a surprise decision yesterday increased its benchmark reference rate by 25bps to 7.25% a move aimed at easing its current account shortfall. Meanwhile, INR depreciated for a 9th day in a row (MSCI EM down for an 8th day on trot) and there could be more pain for the rupee after weaker industrial output (+2% yoy) and higher inflation (10.09%) sparked worries of stagflation.

The RUB took no solace from the flash GDP estimate yesterday (Q3 GDP +1.2% yoy in Q3). The central bank widened tio corridor by 5 kopeks to 32.45-39.45 rubles. We believe another quarter of growth below1.5% would force CBR to cut its benchmark rate in early 2014. With EUR/HUF on the verge of 300, we will be paying close attention to the minutes of Hungary’s central bank meeting. Will these provide justification to expect future policy easing after a sharp drop in CPI inflation to 0.9% in October? Next resistance is at 303.21.

DB’s Jim Reid concludes the overnight event recap

It appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent – so his comments that the government shutdown will make coming data “less reliable” than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.

In Asia this morning, we are again witnessing a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng. On this point, DB’s Jun Ma thinks further detail may be released a few days later, but it’s fair to say that the market has been a little underwhelmed thus far. US treasury secretary Jack Lew said this morning that there are “lots of questions still to be answered” on Chinese reforms, particularly in the area of currency.

Coming back to the issue of low inflation, European inflation has been topical recently especially following the low inflation reading for the euro area in October, the recent rate cut from the ECB and a dovish report on Draghi yesterday (Germany’s FAZ newspaper reported that Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly). Indeed yesterday we saw the October inflation reading in Germany confirmed at just 1.2% YoY, while in the UK the annual inflation reading was below consensus at both the headline (2.2% vs 2.5% expected) and at the core level (1.7% vs 2.0% expected). Indeed the UK’s core inflation number is at a level that was last seen in 2009. Again this ties in with the arguments made in our long-term study from September “A Nominal Problem” where we highlighted how we were having a global problem with both low real GDP and low inflation. The latter get mentioned less when talking about central bank policy, especially in connection with the US taper. In terms of the market reaction, EURGBP gained 0.75% yesterday, with the bulk of the increase coming after the UK inflation p
rint with 10yr gilts outperforming amid a generally weakish day for fixed income.

The economic data calendar looks light again today but one highlight will be the Bank of England’s inflation report. UK employment, Eurozone industrial production and Spanish CPI are also worth looking out for today. It will be a bumper day of Italian auctions with more than $5bn in new issuance today consisting of 5yr floaters, 2016s and 2044s. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/v25lBWBJJxA/story01.htm Tyler Durden

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children.

 

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks.

 

– From an excellent MarketWatch article:  Want 18% returns? Become a subprime lender

Being a somewhat conscious human being in a world in which our “leaders” have completely lost their minds can be challenging at times. One side effect of this condition is a certain emotional numbness when it comes to reacting to new events occurring in the world around you. It’s simply hard to shock me these days, but every now and then it does happen. The following article published by MarketWatch had me literally shaking my head the entire time. If this isn’t peak insanity, I do not want to know what is. We now have chiropractors and orchestral conductors competing with Blackstone in a crowded, insane trade.

Read it and weep:

Barry Jekowsky wanted to build “legacy wealth” to pass down to his children. But the 58-year-old orchestral conductor, who waved the baton for 24 years at the California Symphony, didn’t trust the stock market’s choppy returns to achieve his goals. And the tiny interest earned by his savings accounts were of no help. Instead, Jekowsky opted for an unlikely course: He became a subprime lender, providing his own cash to home buyers with poor credit and charging interest rates of 10% to 18%. It may sound risky, but “it helps me sleep better at night,” he says. “Where else can you find [these] returns?”

Go ahead and read that twice. Ok, now let’s move on, it gets worse.

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children. There is no official data, though it’s estimated that at least 100,000 such lenders exist — and the trend is on the rise, says Larry Muck, chairman of the American Association of Private Lenders, which represents a range of lenders including private-equity firms and individuals who are lending their own cash. “We know the number of people who are doing this is increasing dramatically — over the last year it’s grown exponentially,” he says.

The baby boomers will not rest until they destroy the entire world.

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks.

 

The move toward mom-and-pop lending comes in the wake of what experts say is the creation of a perfect storm: Banks are still skittish about lending to home buyers with poor credit. Meanwhile, investors who have endured years of low returns from plain-vanilla investment portfolios are itching for something more.

 

The operations often function like a game of telephone. Subprime home buyers, who know they have no shot at getting a mortgage from a bank, start spreading the word to friends and acquaintances that they are on the lookout for anyone who will lend to them. Eventually, the word reaches someone who is willing to lend his or her cash. Other times, a group of individuals pool their cash together to fund the loan.

A game of telephone…

What all these lenders have in common, however, is their willingness to lend to borrowers with low credit scores. In some cases, they do not even check their scores. They point to examples of otherwise reliable borrowers who fell on hard times during the recession and were unable to keep up with loans. Many say they work with borrowers who intentionally stopped paying mortgages (even though they could afford the payments) when they ended up owing more on the loans than the home was worth.

 

Separately, lenders are supposed to be registered with the state where they are originating loans, but many mom-and-pop loan officers are not, says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. And since most of these lenders do not originate a large number of loans per year, they are not required to report their activities to the federal government. “It’s a shadow business,” says Cecala.

 

In a sign that the trend may be here to stay, boot camps are training average Joes to become private lenders. Last month, Wealth Classes, a financial-education company based in Walnut Creek, Calif., that launched in 2007, hosted a networking retreat for 250 students who recently became lenders. Many of the company’s students end up lending to subprime borrowers, though others lend to real estate investors who don’t want to wait weeks to get a mortgage from a bank, says George Antone, founder of Wealth Classes. (Private lending transactions typically take about a week or two to go through, while a mortgage from a bank usually requires at least one-month of waiting time.)

 

Randy King, 61, joined Wealth Classes about three years ago when he started using his own cash to fund other people’s mortgages. A former U.S. Air Force servicemember, King, who is based in Colorado Springs, transitioned to buying fixer uppers and selling them and is now a lender for borrowers — many of whom are subprime — who are buying investment properties.

 

Going forward, experts say, it will be difficult to slow down privately funded subprime loans. This funding spreads mostly by w
ord of mouth, so there’s no official advertisement plug that anyone can pull. Consider King. He recently visited his chiropractor who inquired about his lending operations and then asked if he could jump into one of the deals as well. The chiropractor explained where he would get the funds to become a loan officer: He would use some cash he had saved and withdraw equity from his home using a home-equity line of credit.

QE insanity has arrived. Next up silicon bagel implants.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Jto_Ma2Lixo/story01.htm Tyler Durden

Sadly, only in our new normal world is this funny…

 

 

(h/t @DCMFutures)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zttkwt1u_NI/story01.htm Tyler Durden

By US District Judge Jed S. Rakoff (pdf)

Why Have No High Level Executives Been Prosecuted In Connection With The Financial Crisis?

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans  leading lives of quiet desperation: without jobs, without resources, without hope. Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever-more-esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

If it was the former – if the recession was due, at worst, to a lack of caution – then the criminal law has no role to play in the aftermath. For, in all but a few  circumstances (not here relevant), the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct, and nothing less. If the Great Recession was in no part the handiwork of intentionally fraudulent practices by high-level executives, then to prosecute such executives criminally would be “scapegoating” of the most shallow and despicable kind.

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years or so in bringing to justice even the highest level figures who orchestrated mammoth frauds. Thus, in the 1970’s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. Again, in the 1980’s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than 800 individuals, right up to Charles Keating. And, again, the widespread accounting frauds of the 1990’s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected C.E.O.’s as Jeffrey Skilling and Bernie Ebbers.

In striking contrast with these past prosecutions, not a single high level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be. It may not be too soon, therefore, to ask why.

One possibility, already mentioned, is that no fraud was committed. This possibility should not be discounted. Every case is different, and I, for one, have no opinion as to whether criminal fraud was committed in any given instance.

But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgagebacked securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

Without multiplying examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the sole collateral for highly-leveraged securities that were marketed as triple-A, i.e., of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?

While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and  other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. Rather, their position has been to excuse their failure to prosecute high level individuals for fraud in connection with the financial crisis on one or more of three grounds:

First, they have argued that proving fraudulent intent on the part of the high level management of the banks and companies involved has proved difficult. It is undoubtedly true that the ranks of top management were several levels removed from those who were putting together the collateralized debt obligations and other securities offerings that were based on dubious mortgages; and the people generating the mortgages themselves were often at other companies and thus even further removed. And I want to stress again that I have no opinion as to whether any given top executive had knowledge of the dubious nature of the underlying mortgages, let alone fraudulent intent. But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this context. Who, for example, were generating the so-called “suspicious activity” reports of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top level banker, one might argue, confronted with increasing evidence from his own and other banks that mortgage fraud was increasing, might have inquired as to why his bank’s mortgage-based securities continued to receive triple-A ratings? And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?

This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, in cases involving complexities, such as accounting treatments, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068 (2011), “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants
cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.” Thus, the Department’s claim that proving intent in the financial crisis context is particularly difficult may strike some as doubtful.

Second, and even weaker, the Department of Justice has sometimes argued that, because the institutions to whom mortgage-backed securities were sold were themselves sophisticated investors, it might be difficult to prove reliance. Thus, in defending the failure to prosecute high level executives for frauds arising from the sale of mortgage-backed securities, the then head of the Department of Justice’s Criminal Division, told PBS that “in a criminal case … I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides. And so even though one side may have said something was dark blue when really we can say it was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying at all on the description of the color.”

Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law. In actuality, in a criminal fraud case the Government is never required to prove reliance, ever. The reason, of course, is that would give a crooked seller a license to lie whenever he was dealing with a sophisticated counterparty. The law, however, says that society is harmed when a seller purposely lies about a material fact, even if the immediate purchaser does not rely on that particular fact, because such misrepresentations create problems for the market as a whole. And surely there never was a situation in which the sale of dubious mortgage-backed securities created more of a huge problem for the marketplace, and society as a whole, than in the recent financial crisis.

The third reason the Department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.” To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse — sometimes labeled the “too big to jail” excuse – is disturbing, frankly, in what it says about the Department’s apparent disregard for equality under the law.

In fairness, however, Mr. Holder was referring to the prosecution of financial institutions, rather than their C.E.O.’s. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations, for your consideration or amusement as the case may be.

At the outset, however, let me say that I totally discount the argument sometimes made that no such prosecutions have been brought because the top prosecutors were often people who previously represented the financial institutions in question and/or were people who expected to be representing such institutions in the future: the so-called “revolving door.” In my experience, every federal prosecutor, at every level, is seeking to make a name for him-or-herself, and the best way to do that is by prosecuting some high level person. While companies that are indicted almost always settle, individual defendants whose careers are at stake will often go to trial. And if the Government wins such a trial, as it usually does, the prosecutor’s reputation is made. My point is that whatever small influence the “revolving door” may have in discouraging certain white-collar prosecutions is more than offset, at least in the case of prosecuting high-level individuals, by the career-making benefits such prosecutions confer on the successful prosecutor.

So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis? I offer, by way of speculation, three influences that I think, along with others, have had the effect of limiting such prosecutions.

First, the prosecutors had other priorities. Some of these were completely understandable. For example, prior to 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after 9/11 many of these agents were shifted to anti-terrorism work. Who can argue with that? Eventually, it is true, new agents were hired for some of the vacated spots in fraud detection; but this is not a form of detection easily learned and recent budget limitations have only exacerbated the problem.

Of course, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the S.E.C. But at the very time the financial crisis was breaking, the S.E.C. was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes, which for awhile were, along with accounting frauds, its chief focus. More recently, the S.E.C. has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led S.E.C. enforcement to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

As for the Department of Justice proper, a decision was made around 2009 to spread the investigation of these financial fraud cases among numerous U.S. Attorney’s Offices, many of which had little or no prior experience in investigating and prosecuting sophisticated financial frauds. At the same time, the U.S. Attorney’s Office with the greatest expertise in these kinds of cases, the Southern District of New York, was just embarking on its prosecution of insider trading cases arising from the Rajaratnam tapes, which soon proved a gold mine of good cases that absorbed a huge amount of the attention of the securities fraud unit of that office. While I want to stress again that I have no inside information, as a former chief of that unit I would venture to guess that the cases involving the financial crisis were parceled out to Assistants who also had insider trading cases. Which do you think an Assistant would devote most of her attention to: an insider trading case that was already nearly ready to go to indictment and that might lead to a high-visibility trial, or a financial crisis case that was just getting started, would take years to complete, and had no guarantee of even leading to an indictment? Of course, she would put her energ
y into the insider trading case, and if she was lucky, it would go to trial, she would win, and she would then take a job with a large law firm. And in the process, the financial fraud case would get lost in the shuffle.

Alternative priorities, in short, is, I submit, one of the reasons the financial fraud cases were not brought, especially cases against high level individuals that would take many years, many investigators, and a great deal of expertise to investigate. But a second, and less salutary, reason for not bringing such cases is the Government’s own involvement in the underlying circumstances that led to the financial crisis.

On the one hand, the government, writ large, had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the for-a-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations; and what did the government care, since they were helping to boom the economy and helping voters to realize their dream of owning a home.

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

Please do not misunderstand me. I am not alleging that the Government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important, and it is the shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?

In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower level participant in the fraud whom you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate in order to reduce his sentence, and – aided by the substantial prison penalties now available in white collar cases – you go up the ladder. For a detailed example of how this works, I recommend Kurt Eichenwald’s well-known book The Informant, which describes how FBI agents, over a period of three years, uncovered the huge price-fixing conspiracy involving high-level executives at Archer Daniels, all of whom were successfully prosecuted.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.

I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more
than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.

In conclusion, I want to stress again that I have no idea whether the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was — as various governmental authorities have asserted it was –- then, the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_Kcs2ih2sEk/story01.htm Tyler Durden

By US District Judge Jed S. Rakoff (pdf)

Why Have No High Level Executives Been Prosecuted In Connection With The Financial Crisis?

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans  leading lives of quiet desperation: without jobs, without resources, without hope. Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever-more-esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

If it was the former – if the recession was due, at worst, to a lack of caution – then the criminal law has no role to play in the aftermath. For, in all but a few  circumstances (not here relevant), the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct, and nothing less. If the Great Recession was in no part the handiwork of intentionally fraudulent practices by high-level executives, then to prosecute such executives criminally would be “scapegoating” of the most shallow and despicable kind.

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years or so in bringing to justice even the highest level figures who orchestrated mammoth frauds. Thus, in the 1970’s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. Again, in the 1980’s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than 800 individuals, right up to Charles Keating. And, again, the widespread accounting frauds of the 1990’s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected C.E.O.’s as Jeffrey Skilling and Bernie Ebbers.

In striking contrast with these past prosecutions, not a single high level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be. It may not be too soon, therefore, to ask why.

One possibility, already mentioned, is that no fraud was committed. This possibility should not be discounted. Every case is different, and I, for one, have no opinion as to whether criminal fraud was committed in any given instance.

But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgagebacked securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

Without multiplying examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the sole collateral for highly-leveraged securities that were marketed as triple-A, i.e., of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?

While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and  other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. Rather, their position has been to excuse their failure to prosecute high level individuals for fraud in connection with the financial crisis on one or more of three grounds:

First, they have argued that proving fraudulent intent on the part of the high level management of the banks and companies involved has proved difficult. It is undoubtedly true that the ranks of top management were several levels removed from those who were putting together the collateralized debt obligations and other securities offerings that were based on dubious mortgages; and the people generating the mortgages themselves were often at other companies and thus even further removed. And I want to stress again that I have no opinion as to whether any given top executive had knowledge of the dubious nature of the underlying mortgages, let alone fraudulent intent. But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this context. Who, for example, were generating the so-called “suspicious activity” reports of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top level banker, one might argue, confronted with increasing evidence from his own and other banks that mortgage fraud was increasing, might have inquired as to why his bank’s mortgage-based securities continued to receive triple-A ratings? And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?

This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, in cases involving complexities, such as accounting treatments, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068 (2011), “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.” Thus, the Department’s claim that proving intent in the financial crisis context is particularly difficult may strike some as doubtful.

Second, and even weaker, the Department of Justice has sometimes argued that, because the institutions to whom mortgage-backed securities were sold were themselves sophisticated investors, it might be difficult to prove reliance. Thus, in defending the failure to prosecute high level executives for frauds arising from the sale of mortgage-backed securities, the then head of the Department of Justice’s Criminal Division, told PBS that “in a criminal case … I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides. And so even though one side may have said something was dark blue when really we can say it was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying at all on the description of the color.”

Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law. In actuality, in a criminal fraud case the Government is never required to prove reliance, ever. The reason, of course, is that would give a crooked seller a license to lie whenever he was dealing with a sophisticated counterparty. The law, however, says that society is harmed when a seller purposely lies about a material fact, even if the immediate purchaser does not rely on that particular fact, because such misrepresentations create problems for the market as a whole. And surely there never was a situation in which the sale of dubious mortgage-backed securities created more of a huge problem for the marketplace, and society as a whole, than in the recent financial crisis.

The third reason the Department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.” To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse — sometimes labeled the “too big to jail” excuse – is disturbing, frankly, in what it says about the Department’s apparent disregard for equality under the law.

In fairness, however, Mr. Holder was referring to the prosecution of financial institutions, rather than their C.E.O.’s. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations, for your consideration or amusement as the case may be.

At the outset, however, let me say that I totally discount the argument sometimes made that no such prosecutions have been brought because the top prosecutors were often people who previously represented the financial institutions in question and/or were people who expected to be representing such institutions in the future: the so-called “revolving door.” In my experience, every federal prosecutor, at every level, is seeking to make a name for him-or-herself, and the best way to do that is by prosecuting some high level person. While companies that are indicted almost always settle, individual defendants whose careers are at stake will often go to trial. And if the Government wins such a trial, as it usually does, the prosecutor’s reputation is made. My point is that whatever small influence the “revolving door” may have in discouraging certain white-collar prosecutions is more than offset, at least in the case of prosecuting high-level individuals, by the career-making benefits such prosecutions confer on the successful prosecutor.

So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis? I offer, by way of speculation, three influences that I think, along with others, have had the effect of limiting such prosecutions.

First, the prosecutors had other priorities. Some of these were completely understandable. For example, prior to 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after 9/11 many of these agents were shifted to anti-terrorism work. Who can argue with that? Eventually, it is true, new agents were hired for some of the vacated spots in fraud detection; but this is not a form of detection easily learned and recent budget limitations have only exacerbated the problem.

Of course, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the S.E.C. But at the very time the financial crisis was breaking, the S.E.C. was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes, which for awhile were, along with accounting frauds, its chief focus. More recently, the S.E.C. has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led S.E.C. enforcement to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

As for the Department of Justice proper, a decision was made around 2009 to spread the investigation of these financial fraud cases among numerous U.S. Attorney’s Offices, many of which had little or no prior experience in investigating and prosecuting sophisticated financial frauds. At the same time, the U.S. Attorney’s Office with the greatest expertise in these kinds of cases, the Southern District of New York, was just embarking on its prosecution of insider trading cases arising from the Rajaratnam tapes, which soon proved a gold mine of good cases that absorbed a huge amount of the attention of the securities fraud unit of that office. While I want to stress again that I have no inside information, as a former chief of that unit I would venture to guess that the cases involving the financial crisis were parceled out to Assistants who also had insider trading cases. Which do you think an Assistant would devote most of her attention to: an insider trading case that was already nearly ready to go to indictment and that might lead to a high-visibility trial, or a financial crisis case that was just getting started, would take years to complete, and had no guarantee of even leading to an indictment? Of course, she would put her energy into the insider trading case, and if she was lucky, it would go to trial, she would win, and she would then take a job with a large law firm. And in the process, the financial fraud case would get lost in the shuffle.

Alternative priorities, in short, is, I submit, one of the reasons the financial fraud cases were not brought, especially cases against high level individuals that would take many years, many investigators, and a great deal of expertise to investigate. But a second, and less salutary, reason for not bringing such cases is the Government’s own involvement in the underlying circumstances that led to the financial crisis.

On the one hand, the government, writ large, had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the for-a-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations; and what did the government care, since they were helping to boom the economy and helping voters to realize their dream of owning a home.

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

Please do not misunderstand me. I am not alleging that the Government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important, and it is the shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?

In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower level participant in the fraud whom you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate in order to reduce his sentence, and – aided by the substantial prison penalties now available in white collar cases – you go up the ladder. For a detailed example of how this works, I recommend Kurt Eichenwald’s well-known book The Informant, which describes how FBI agents, over a period of three years, uncovered the huge price-fixing conspiracy involving high-level executives at Archer Daniels, all of whom were successfully prosecuted.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.

I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.

In conclusion, I want to stress again that I have no idea whether the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was — as various governmental authorities have asserted it was –- then, the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_Kcs2ih2sEk/story01.htm Tyler Durden