We just had the 2nd credit union failure of the year, the forced merger of the New Mexico Correctional Employees FCU of Santa Fe, New Mexico.
It happened at the beginning of February, but the NCUA only added it to their website recently. (Here is the Full NCUA list.)
It appears that this year has a good chance of being no worse than last year, as this graph pr0n shows:
And here they are, ordered, and numbered for the year so far.
I’m not sure how much this bears on banking for the rest of the US.
I am vaguely aware of issues with the Puerto Rican economy, particularly with regard to their budget and debt service for their state owned enterprises.
So, here is the graph pr0n with last few years numbers for comparison (FDIC only):
She ascribes the delays in her nomination purely to animus on the part of Republicans.
While I agree that the bulk of the opposition is driven by hatred and political expedience, but we also need to look at what the Republicans are actually saying, and the history of the Obama administration’s approach to corruption in the finance industry.
The stated reason given by Republicans to oppose Lynch is her role in what is clearly a laughable settlement with HSBC over money laundering and tax evasion, and I would argue that Obama’s selection of Ms. Lynch is likely to have been driven (at least in part) by her cozy relationship with the Banksters.
It is clear that Barack Obama is determined not to have a meaningful accounting of Wall Street criminality:
Senate Republicans are seizing on the global tax scandal engulfing HSBC to delay the confirmation of Loretta Lynch, Barack Obama’s nominee for attorney general, the Guardian can reveal.
The Republican chairman of the Senate judiciary committee, Chuck Grassley, was on Friday preparing a fresh tranche of questions for Lynch about the huge cache of leaked data showing how HSBC’s subsidiary helped conceal billions of dollars from domestic tax authorities.
Grassley and another Republican senator are planning to investigate whether Lynch could have done more to stand up to the world’s second largest bank.
Lynch negotiated a controversial settlement with HSBC in 2012, after the bank admitted to facilitating money-laundering by Mexican drug cartels and helping clients evade US sanctions.
Now there are questions over why she did not also pursue HSBC over evidence that its Swiss arm helped US taxpayers hide their assets.
The secret bank files – obtained and examined in detail this week in a series of reports by the Guardian, CBS 60 Minutes and other media outlets – reveal that HSBC’s Swiss arm colluded with some high net-worth individuals to hide their assets from tax authorities across the world.
The new data, leaked by a whistleblower, was obtained by French tax authorities and shared with the US government in 2010, raising questions over why the Department of Justice has yet to take action against HSBC in the US.
It’s a legitimate question, particularly since HSBC’s acts have been egregious enough to lead Swiss law enforcement to raid HSBC.
Considering the degree to which secrecy, and tax evasion, have been central to the business of Swiss banking, the fact that they have initiated a criminal investigation, and that the US Department of Justice has not, is telling.
It should be noted that Lynch claimed that she did not have sufficient evidence for criminal prosecutions, but as Empty Wheel notes, “Sure, she and her prosecutors were unable to find the evidence in Carl Levin’s gift-wrapped case. But trust her, she seems to be saying, she might one day see fit to charge some warm bodies with fraud if she’s confirmed.”
Note that there are now allegations that HSBC gave material support to terrorists.
The European Central Bank has just increased emergency liquidy funding to Greek banks by €5 billion:
The European Central Bank (ECB) just increased the amount of emergency funding available to Greek banks by €5 billion — despite indications that the savers were pulling less of their money out in February.
On Thursday, Reuters reported that the ECB was extending the Emergency Liquidity Assistance that can be given to Greek banks from its current (self-imposed) maximum of €60 billion to €65 billion. However, its reasons for doing so remain unclear.
Earlier reports had suggested that fears of deposit flight, where Greek savers withdrew their money from banks and deprived them of a key source of funding, after the left-wing Syriza party took power and the ECB altered its rules to prevent Greek government debt (and government-guaranteed debt) from being used to access its emergency loan programme were failing to materialise. A survey of Greek banks found that although savers remained nervous about the new government’s plans deposit outflows had slowed in February, according to Reuters.
We have had the 3rd bank failure of the year, Capitol City Bank & Trust Company, of Atlanta, GA.
And here they are, ordered, and numbered for the year so far.
Looks rather similar to the past 2 years.
Here is the Full NCUA list.
So, here is the graph pr0n with last few years numbers for comparison (FDIC only):
I left finance because if I'm going to take it up the ass for a decade, I'd prefer to get in to a hall of fame for it.
— Veronica Vain (@TheVeronicaVain) January 14, 2015
Pr0n Actress Veronica Vain explaining why she left Wall Street for adult films.
H/t The Independent
We just had the 1st credit union faiure of the year, American Bakery Workers Federal Credit Union of Philadelphia, PA.
And here they are, ordered, and numbered for the year so far.
Not enough data to show anything, but enough for a picture, so, here is the graph pr0n with last few years numbers for comparison (FDIC only):
That the prevalence of terrorism in the Muslim world is largely funded by the House of Saud:
Federal Minister for Inter-provincial Coordination (IPC) Riaz Hussain Pirzada has accused the Saudi government of creating instability across the Muslim world, including Pakistan, through distribution of money for promoting its ideology.
Addressing a two-day ‘Ideas Conclave’ organised by the “Jinnah Institute” think tank in Islamabad, the federal minister said ‘the time has come to stop the influx of Saudi money into Pakistan’.
Now if only someone like a US Senator were to issue a similar condemnation.
It is patently clear that the font from which international Jihad springs is the pocketbook of the House of Saud.
They fund the schools where Jihadis are created, the social welfare organizations which they fund are Islamist, and they make a concerted effort to export their home grown nut-jobs to other Arab and Muslim nations, where they are some else’s problem.
H/t Emptywheel
The SEC has fined Standard & Poor’s ratings agency and banned them from rating mortgage backed (MBS) securities for a year:
Financial companies are still paying the price for the crisis of 2009, as Standard & Poor’s showed when it agreed on Wednesday to pay the US government and two states more than $77m to settle charges that it inflated its ratings of mortgage-backed securities.
In its first enforcement action against a major rating agency, the Securities and Exchange Commission accused S&P of fraudulent misconduct, saying the company loosened standards on its ratings to drum up business in recent years.
The agreement requires S&P to pay more than $58m to the SEC, $12m to New York and $7m to Massachusetts.
As part of its agreement with the SEC, Standard & Poor’s Ratings Services, a division of McGraw Hill Financial, will take a “timeout” from rating certain types of mortgage-backed securities for a year.
“These settlements involve findings of intentional fraud in 2011 and 2012, well after the financial crisis,” said Andrew Ceresney, director of the SEC’s enforcement division, on a call with reporters. “The financial crisis may be behind us, but these cases are an important reminder that the race-to-the-bottom behavior exists even though the financial crisis has ended.”
S&P said in a statement that it did not admit or deny any of the charges.
It’s likely the first in a line of settlements between S&P and government agencies. In 2013, the Justice Department and attorneys general from other states filed civil lawsuits against the company for misrepresenting risks in the years leading up to the financial crisis.
“This is the first time a major credit rating agency has been subject to a timeout,” Ceresney said. “It’s unprecedented.”
It is only unprecedented because the Obama administration has been so deferential to the banksters.
It’s chump change for them, and they are a (relatively) small player in the MBS ratings game, so they will be crying to the bank.
What should have happened is a criminal indictment, which would have been immediately followed by an Arthur Andersen style implosion.
That would make the banksters sit up and notice.
As you are no doubt aware if you follow the financial papers, the Swiss Central Bank abruptly ended its peg to the Euro, and then all hell broke loose:
One does not normally see sharp right angles in financial charts, but you could pretty much cut yourself on this chart of the volatility of the Swiss franc against the euro:
One straightforward takeaway is: Whoa, that volatility is super high! But perhaps a more useful takeaway is: Whoa, it was super low for a really long time! This is of course because the Swiss National Bank capped the franc’s value against the euro: The SNB wanted a price of no less than CHF 1.20 per euro, and the euro itself wanted a price of no higher than CHF 1.20 for reasons of its own, so the result was pretty much a peg at slightly above 1.20. In the 12 months ending on Wednesday, the euro traded in a range of 1.20095 to 1.23640 francs:
………
That chart looks more jagged than it is, because you’re standing too close to it. Here, I’ve zoomed out by two days:
………
On the other hand! Imagine being a retail foreign-exchange broker and letting your customers day-trade Swiss francs with lots of leverage. How much leverage would you feel comfortable giving them? Well, if daily moves are typically less than 0.1 percent, then that means that 95 percent of the time their positions will move by less than 0.2 percent in a day. So if you required 2 percent margin — that is, you demand $2 of cash from them for every $100 worth of Swiss francs that they trade — you’d feel pretty safe. That would mean that, 95 percent of the time, customers couldn’t lose more than one-tenth of their equity in a day — so if they lost money and skipped out on you, you’d be able to liquidate their positions without getting close to losing any of the money you’d lent them.
On the other hand when the euro/franc moves by 19 percent in a day, they’re gonna get utterly smoked, and so are you. This is roughly the boat in which FXCM Inc. finds itself. Like many other retail foreign exchange brokers, it offered 50:1 leverage on FX trades. And yesterday its “clients experienced significant losses” on the Swiss franc move, and “generated negative equity balances owed to FXCM of approximately $225 million.” id=”footnote-1421429157415-ref”> And now it’s in talks with Jefferies Group for a large cash infusion to fix the problem. FXCM is also distinguished by just an unbelievable sense of irony:FXCM Chief Executive Officer Drew Niv, in remarks published in Bloomberg Markets magazine’s December issue, said individual currency traders are enticed by the chance to control large positions with little money down.
“Currencies don’t move that much,” he said. “So if you had no leverage, nobody would trade.”
Famous last word words. FXCM is basically insolvent now, and is relying on a loan from a “white knight”, in exchange for who knows what concessions.
Here is the scary quote about this:
As realized volatility gets lower, estimates of future volatility — and so estimates of future losses — get lower. And so position limits get higher, as banks feel safer with the risks they’re taking, because, on a historical basis, they don’t look that risky. And then the risk that didn’t look risky becomes the one that gets you.
So, what we have just had a major case of “It’s different this time” contagion because a non-EU member dropped a peg following months (years?) of denials.
We have another player, and one who is one of the EU’s “stronger” members who is not on the Euro, but is on a peg, Denmark, which retains the Krone.
And Denmark is promising to do whatever it takes to keep their peg:
Denmark moved to quash speculation it may follow Switzerland and abandon its euro peg, delivering a surprise interest-rate cut to prevent the krone gaining further.
“We have the necessary tools to defend the peg,”Karsten Biltoft, head of communications at the Copenhagen-based central bank, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.”
Since the Swiss National Bank shocked markets on Jan. 15 by jettisoning its three-year-old euro peg, Scandinavia’s biggest banks have fielded calls from hedge funds and other offshore investors asking whether Denmark could be next. Danske Bank A/S (DANSKE) has sought to dispel the speculation, noting Denmark’s three-decades-old currency regime is backed by the European Central Bank, unlike the SNB’s former system.
………
The Danish bank today cut its deposit rate to minus 0.2 percent, matching a record low, from minus 0.05 percent and lowered its lending rate to a record 0.05 percent from 0.2 percent. While the bank can adjust rates at any time, it traditionally announces changes on Thursdays and mostly in connection with ECB moves.
Is it just me, or do the assurances of the bankers at Copenhagen not sound particularly credible right now?
If Denmark is forced to drop its peg, all hell breaks loose, because it opens a Pandora’s box of asymmetries that have been growing in the Euro zone, and the EU over the past 3 decades.
It will not be pretty.
Well, sort of.
He won’t be an Undersecretary of the Treasury, but he will be an adviser to the Treasury.
So, he will still be there, albeit without a budget or staff who report to him.
I suppose that this is as good as can be expected.
Over at Credit Slips, Adam Levitin, has a a very interesting perspective on the reactions to this development:
There’ve been a bunch of post-mortems of the Antonio Weiss nomination in the press the last few days (see, e.g., here, here, and here). When I read them I often feel like I’m reading a story about a kid who went to a fancy eastern boarding school, where he was head of the literary society, lettered in three sports, and did lots of charity work, but didn’t get into the Ivy League school where all of his family and family friends went. The result: shock and outrage that the kid was denied his birthright!
Being nominated for Undersecretary of the Treasury isn’t quite like getting into Harvard (or even Yale). Yet reading Weiss’s defenders’ (and their all-too-willing journalist abetters), one would think that’s the story. And that underscores precisely what the problem was with the Weiss nomination, and what Weiss’s defenders just don’t get (or want to admit they get): the assumption that Wall Street success entitles someone to an important policy position for which they have no apparent qualifications.
The problem with Antonio Weiss was never that he worked on Wall Street. It was that working on Wall Street was his only qualification (besides giving lots of political donations). ……… The problem was that Weiss’s Wall Street pedigree was that was touted as his only qualification (unless one counts bankrolling a little-read literary magazine), as if it should be self-evident that anyone C-suite type from Wall Street is qualified for any job at Treasury. ………
If one looks at the actual criticisms made of Weiss by his critics (as opposed to how they were characterized by his defendants), you’ll see that the core complaint is that Weiss lacked relevant qualifications for the particular position for which he was nominated. Doing international M&A had very little connection to the position for which he was nominated. Being a wealthy liberal donor with good connections shouldn’t result in an important policy position. ………
If Weiss had been the head of a Treasury desk or the head of compliance at a Wall Street bank or had some record of weighing in on policy issues, I don’t think you’d have seen the same pushback against his appointment. Yes, there are real concerns about intellectual capture at the Treasury and revolving door problems, but what it comes down to is that a Wall Street background alone should not block a nominee, but by the same token, a Wall Street background alone cannot be what qualifies a nominee.
The degree of self-entitlement that is felt by the movers and shakers in finance, and the degree to which this self-entitlement is blindly accepted by the “very serious people” in government who set our policy.
It explains why our financial policy is so f%$#ed up.
The FDIC closed the First National Bank of Crestview of Crestview, Florida.
Week 3, same as last year.
This really is less data than anecdote at this point.
The Gray Lady has noticed that Silicon Valley is looking to education as a new profit center.
The article itself is rather adulatory of such efforts, rather unsurprising given the New York Times‘ predilection for the financialization of pretty much everything, but I am not so sanguine:
The education technology business is chock-full of fledgling companies whose innovative ideas have not yet proved effective — or profitable. But that is not slowing investors, who are pouring money into ventures as diverse as free classroom-management apps for teachers and foreign language lessons for adult learners.
Venture and equity financing for ed tech companies soared to nearly $1.87 billion last year, up 55 percent from the year before, according to a new report from CB Insights, a venture capital database. The figures are the highest since CB Insights began covering the industry in 2009.
………
“Education is one of the last industries to be touched by Internet technology, and we’re seeing a lot of catch-up going on,” said Betsy Corcoran, the chief executive of EdSurge, an industry news service and research company. “We’re starting to see more classical investors — the Kleiner Perkinses, the Andreessen Horowitzes, the Sequoias — pay more attention to the marketplace than before.”
Translation: There’s public taxpayer money in them there hills.
And then we have this pearl:
“I think there are businesses that won’t be able to cross that bridge,” said Michael Moe, chief executive of GSV Capital, a venture capital firm. “But if you monetize 2 to 20 percent of the network, there’s no reason it can’t work in education.”
Yes, let’s all of us f%$# our children so that you can buy a vacation house in the Hamptons.
Not enough bullets.
I did not notice this story when the Global Post published it in April, but when they republished the fact that Vietnam is executing corrupt bankers, I felt kind of jealous:
Editor’s note: This story was first published on April 3, 2014. GlobalPost is featuring it again as one of our must-reads of 2014.
BANGKOK — For the most part, American bankers whose rash pursuit of profit brought on the 2008 global financial collapse didn’t get indicted. They got bonuses.
Odds are that scandal would have played out differently in Vietnam, another nation struggling with misbehaving bankers.The authoritarian Southeast Asian state doesn’t just send unscrupulous financiers to jail. Sometimes, it sends them to death row.
Amid a sweeping cleanup of its financial sector, Vietnam has sentenced three bankers to death in the past six months.
One duo now on death row embezzled roughly $25 million from the state-owned Vietnam Agribank. Their co-conspirators caught decade-plus prison sentences.
I do not approve of capital punishment, but this whole “Decades-plus prison sentence” thing? That I wholeheartedly approve.
Rather unsurprisingly, the regulator in question, is New York Superintendent of Financial Services Benjamin Lawsky, who has had nothing to do with the Obama administration.
He went after the astonishingly corrupt and incompetent mortgage servicer Ocwen, and uncovered self-dealing by the CEO that forced his resignation.
It would have been nice if William Erbey were breaking rocks somewhere, but it is a start:
Let’s say you run a company whose misdeeds are splashed across the front pages of the business section on an almost weekly basis. You might reasonably expect to be fired without delay. But then let’s also stipulate that you’re in the financial services industry. Recent history suggests you’ll be able to keep your job and your handsome bonus, and that even if law enforcement officials penalize the company for improprieties, somebody else—like your shareholders— will pay those fines, leaving you to continue your charmed life unscathed.
William Erbey, the billionaire chairman of the mortgage servicing giant Ocwen, probably thought that would be his fate as well, but he didn’t anticipate the determination of New York Superintendent of Financial Services Benjamin Lawsky. On Monday, Lawsky announced Erbey would step down chairman of Ocwen and four related businesses, as part of the settlement of an investigation into the company’s sad enduring legacy of ripping off homeowners.
It isn’t a prison sentence. But on the spectrum of accountability for financial industry executives, “forced to resign” beats “suffered no consequences while staying in power.”
Lawsky has been chasing Ocwen for several years. A mortgage servicer handles day-to-day operations on loans, from collecting monthly payments to making decisions after a default. Ocwen has grown almost ten-fold since 2009 by purchasing the rights to service distressed loans from the likes of JPMorgan Chase, Bank of America, and Ally Bank. Big banks have engaged in a fire sale of their mortgage servicing rights, because of increased compliance standards for servicing, and because of new bank capital rules that make servicing loans costly. As a non-bank, Ocwen has more wherewithal to handle mortgage servicing, and this has made it the 4th-largest servicer in America. ………
………
The federal Consumer Financial Protection Bureau found similar problems with Ocwen and reached an agreement on a $2.1 billion settlement. But most of the money went toward modifying loans that Ocwen serviced but didn’t own, allowing it to pay the fine with other people’s money.
More recently, Lawsky uncovered more Ocwen secrets. He discovered that four other public companies chaired by Ocwen chairman William Erbey have close business relationships with the mortgage servicer (Erbey is also the largest individual shareholder for all the companies). One subsidiary hosts nearly all of Ocwen’s online auctions; another handles all Ocwen post-foreclosure real estate transactions. So Ocwen profits by funneling default-related business to closely associated companies, providing an incentive to push borrowers into default.
Lawsky also found that Ocwen backdated letters to borrowers, making it impossible for them to challenge denials of their mortgage modifications within a specific time frame. He also investigated whether Ocwen stalled short sales, where homes get sold for less than the balance on the mortgage, in order to collect additional fees.
And here is the special sauce:
This time, Lawsky did not spare top executives. Erbey will resign both Ocwen and the four related companies by January 16, and subsequently hold “no directorial, management, oversight, consulting, or any other role at Ocwen or any related party.” Any other Ocwen employees also working for one of the other four companies will have to drop those responsibilities.
Under the agreement, Ocwen will add two new independent board positions, and an Operations Monitor will work directly with the board on oversight functions, and determine whether other senior management will have to be fired. Ocwen cannot acquire other mortgage servicing rights without the consent of the Operations Monitor.
Ocwen will also pay $150 million to New York homeowners harmed by the company. Instead of a “soft-dollar” promise of mortgage modifications that Ocwen can pass on to the owners of the loans they service, these are cash penalties—$100 million to the Department of Financial Services for housing counseling and community redevelopment programs, and $50 million to be split by Ocwen foreclosure victims, with $10,000 for each borrower on whom Ocwen completed foreclosure, and the rest handed out to those with active foreclosures in process. Ocwen will also have to re-evaluate borrowers in foreclosure after paying the penalty, “in light of their improved financial condition resulting from such payment.”
Ocwen cannot take a tax deduction on any of these payments, per the agreement. The company also agreed to provide all of its New York borrowers with their complete loan files upon request, along with assurances to detail reasons for any denials of mortgage relief. As the loan files represent evidence in private borrower misconduct litigation, it could expose Ocwen to further legal headaches.
Seriously, if there had been any appetite for even a cursory investigation of the banksters by Obama and His Evil Minions™, we would have seen a lot more of this.
Then again, if we did that, Obama would not be able to get his 6 figure speaking gigs from Wall Street execs when he leaves offices.
One has to have priorities.
Yeah, this is pretty much what happens when you pass a PBS sponsorship clip through a Bullsh%$ to English translator:
H/t Neo at the Stellar Parthenon BBS.
And here they are, ordered, and numbered for the year so far.
Slow year for bank failures, which is a good thing.
So, here is the graph pr0n with last few years numbers for comparison (FDIC only):
Elizabeth Warren’s campaign against Wall Street insider Antonio Weiss’ nomination for undersecretary for domestic finance for the US Treasury is picking up steam:
Under pressure from progressive groups to reject Wall Street influence, three more Senate Democrats yesterday turned against the nomination of Antonio Weiss for a senior post at the U.S. Treasury Department.
President Barack Obama’s choice of Weiss, an investment banker at Lazard Ltd. (LAZ), has put him at the center of an ideological fight within the Democratic Party over the finance industry’s clout in Washington.
The attacks are coming from Democrats who say the Obama administration relies too much on Wall Street veterans to fill important regulatory posts. They are criticizing Weiss, in particular, for his role in engineering tax-lowering inversion deals for U.S. companies.
The opposition yesterday from Joe Manchin of West Virginia, Jeanne Shaheen of New Hampshire and Al Franken of Minnesota further complicates the nomination for the administration and Democratic leaders. After defending Weiss’s Democratic bona fides and accepting his campaign contributions, they’ll have to turn to Republicans to get him into office.
“This fits the administration’s pattern of choosing Wall Street insiders to senior policy positions instead of those with strong consumer protection or community bank and credit union experience,” Manchin said on the Senate floor yesterday.
There are now note enough Democratic votes to
Neither Shaheen nor Manchin are representatives of the “Democratic Wing of the Democratic Party,” and the fact that they are bucking the President is a big deal.
It appears that the idea that someone who has no background in domestic finance is a good selection for the undersecretary for domestic finance, simply because they are a big Democratic donor, and they have a background in the financial industry is no longer as universally held as it used to be.
It also appears that people are finally getting the idea that multimillion dollar payouts from the financial industry for people who go into government service is implicitly corrupt.
Good.
Any discomfort that Barack Obama might experience because a portion of the Democratic Party has realized that he is Wall Streets biggest fan is well deserved.
As former federal regulator Bill Black notes, the second circuit court decision effectively legalizes insider trading:
We know that insider trading is an activity in which cheaters prosper. We know that Wall Street and the City of London are dominated by a fraudulent culture and we know that firm culture is set by the officers that control the firm. We know that the Department of Justice (DOJ) has allowed that to occur by refusing to prosecute any of the thousands of senior bank officers who became wealthy by leading the three most destructive financial fraud epidemics (appraisals, “liar’s” loans, and fraudulent sales of these fraudulently originated mortgages to the secondary market) in history. No one is surprised that Wall Street’s elites have also engaged in widespread efforts to rig the stock markets so that they can shoot fish in the barrel through insider trading. Unlike the three fraud epidemics, one DOJ office, the Southern District of New York, has brought a series of criminal prosecutions against these officers.
Wall Street’s court of appeals (the Second Circuit) has just issued an opinion not simply overturning guilty verdicts but making it impossible to retry the elite Wall Street defendants that grew wealthy through trading on insider information. Indeed, the opinion reads like a roadmap (or a script) that every corrupt Wall Street elite can follow to create a cynical system of cutouts (ala SAC) that will allow the most senior elites to profit by trading on insider information as a matter of routine with total impunity. The Second Circuit decision makes any moderately sophisticated insider trading scheme that uses cutouts to protect the elite traders a perfect crime. It is a perfect crime because (1) it is guaranteed to make the elite traders who trades on the basis of what he knows is secret, insider information wealthy absent successful prosecutions and (2) using the Second Circuit’s decision as a fraud roadmap, an elite trader can arrange the scheme with total impunity from the criminal laws. The Second Circuit ruling appears to make the financial version of “don’t ask; don’t tell” a complete defense to insider trading prosecutions. The Second Circuit does not simply make it harder to prosecute – they make it impossible to prosecute sophisticated insider fraud schemes in which the elites use junior cutouts to create (totally implausible) deniability.The New York Times article on the decision was entitled “Two Insider Trading Convictions Are Overturned in Blow to Prosecutors.” The title is partially correct. The real blows, however, were to investors, the already crippled integrity of Wall Street, and every honest trader on Wall Street who cannot possibly compete with his rivals who cheat through the “sure thing” of insider trading now that the Second Circuit has written an opinion explaining how to corrupt the entire system with impunity from the criminal laws.
………
The Second Circuit decision admits that the prosecutors presented evidence established a massive conspiracy designed to allow Wall Street elites to profit by engaging in insider trading, a conspiracy that greatly enriched the defendants that were convicted in the case under appeal.
“At trial, the Government presented evidence that a group of financial analysts exchanged information they obtained from company insiders, both directly and more often indirectly. Specifically, the Government alleged that these analysts received information from insiders at Dell and NVIDIA disclosing those companies’ earnings numbers before they were publicly released in Dell’s May 2008 and August 2008 earnings announcements and NVIDIA’s May 2008 earnings announcement. These analysts then passed the inside information to their portfolio managers, including Newman and Chiasson, who, in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.”
The Second Circuit was not distressed that senior Wall Street officials received information that was clearly insider information that they knew they should not have access to. The insider information they were provided was the crown jewels – two major corporations’ soon to be announced “numbers” – at least one of which was sure to be a major surprise to the markets. A senior trader that knows “the number” in advance, particularly when he knows that the number will be a surprise, can shoot fish in a small barrel with a large shotgun. The insider information allows the senior trader to reduce the risk of loss to trivial levels while increasing the probability of gain to near certainty. The trader makes a fortune by cheating, not through any unusual skill. The senior trader knows that no employee of any publicly traded corporation is permitted to release such secret and proprietary insider information to investors.
The Second Circuit was not distressed that the senior Wall Street officials did not react to being provided what was clearly insider information by demanding to know how their analysts got the information and instructing them that their actions violated the firms’ ethical standards and would lead to their termination if it were ever repeated. The firm’s ethics manuals banned the senior traders from trading on the basis of insider information. Instead, of serving as ethical leaders in training the analysts not to engage in such behavior and instead of following their firm’s ban on trading on the basis of insider information, the senior officers engaged in a cynical financial version of “don’t ask; don’t tell.” The analysts and the senior officials that traded on the inside information understood the wisdom of the old line “ask me no questions and I’ll tell you know lies.” The senior officers proceeded to profit by exploiting this advantage over honest investors while minimizing the risk of a successful prosecution not by being ethical, but by consciously maintaining (not remotely) “plausible deniability.”
………
But worse will soon come. The Second Circuit’s decision is a “how to” manual on how elites Wall Streeters can become wealthy through insider trading with impunity from the criminal laws. The Second Circuit opinion shows that using a “cutout” is the key to achieve the “sure thing” of enormous wealth through insider trading without financial or legal risk. The Second Circuit lays out the game plan. The little folks in the organization develop the contacts with insiders in publicly traded firms. The analysts function initially like any good intelligence agent recruiting an asset. These assets have insider information of their employers, the publicly traded corporations. The analyst develops a rapport with the employee or exploits an existing tie. The analyst shows the employee a very good time – a taste of how good his life can be if he plays ball. But the analyst doesn’t make any explicit promises or deals. (In the case decided by the Second Circuit others cutouts earlier in the insider trading chain made the corrupt payments to the employees.) The Wall Street senior officers who grow wealthy by trading the insider information will make sure that the analysts are well cared for – discretely and at a later date.
The analyst then has to do one thing and avoid doing a second. Both are simple. The analyst needs to signal to his superior that the information is reliable. The government complaint against SAC show one the innumerable means of sending that signal. The government’s appellate brief contains the text of an email in which an analyst explicitly conveyed the reliable track record of the leakers of the inside information to the senior traders so that they could be sure they had a “sure thing” by investing on the basis of the inside information.
The analyst needs not to explicitly tell the senior officer conducting the trade that the insider information was the product of a deal in which the employee who leaks the insider information was explicitly promised a quid pro quo to the leaker. Again, the government complaint against SAC and the government appellate brief in the case reversed by the Second Circuit show in detail how simple it is to design systems of not making these matters explicit. That is why the Second Circuit ruling imperils prosecutions in every case in which the insider trading scheme was done with even modest cleverness.
………
The Second Circuit’s reasoning has the perverse effect that the more corrupt individuals engaged in the insider trading scheme the more likely the scheme is to be declared lawful as long as the traders use their corrupt colleagues as cutouts. Note that the Second Circuit reasoning does not simply make it harder to prosecute sophisticated insider trading schemes – it holds that the actions of the elite traders who know that they are achieving the “sure thing” of immense insider trading profits on the basis of deliberate leaks of that information are not unlawful and cannot be prosecuted. The Second Circuit has created the perfect crime and publicized how to shape the scheme to insure wealth and impunity through creating widespread chains designed to corrupt the markets, employees of the publicly traded corporations, and the Wall Street firms.
The tone of the opinion is particularly galling. The Second Circuit is not even mildly distressed by the result. It expresses disdain for the idea that Wall Street elites should not be able to enrich themselves with complete impunity from the laws through corrupt arrangements such as those proven at the trial. The opinion consciously deliberately creates a straw man argument designed to hide the fact that insider trading schemes of this make it impossible for honest competitors to prevail through skill and hard work.
I’m hoping that someone manages to take them down before the banksters destroy us all.
