Monthly Archives: November 2015

Barclays Bankers Bilk Their Clients

By Barry Elias | Thursday, 19 Nov 2015 10:45 PM

“Obfuscate and stonewall.”

That was a June 2011 directive from a Barclays managing director and head of automated electronic foreign exchange (FX) trading. It was the recommended response to inquiries from clients, the sales department, or virtually anyone else regarding bank transactions related to its BATS Last Look functionality, according to the New York State Department of Financial Services (DFS).

The managing director further stressed in the email that one should “avoid mentioning the existence of the whole system.”

Barclays’ “Last Look” functionality enabled traders to cancel the execution of client foreign exchange orders if they were deemed unprofitable to the bank, even if they would be profitable to the client.

Milliseconds became the difference as to whether a trade was executed profitably. Since it could take this amount of time to transmit an order across the globe, the bankers were at a disadvantage relative to the high frequency traders, who can execute within nanoseconds. Instead of quoting greater buy/sell spreads to accommodate potential price movements, which would disenfranchise the algorithmic traders, Barclays opted to possess the right of first refusal for the trade on behalf of its client.

Clients and others were not told the trade terminations were the result of this business policy decision. Senior employees instructed traders and information technology employees not to inform the sales staff of Last Look and the underlying policy. Instead, the information conveyed was vague, misleading, or inaccurate – and sometimes they were not given any explanation. Blaming the malfunction on technical latency issues was a recommended strategy from management.

This case was unleashed during the forex rigging probe, for which Barclays agreed to pay about $2.4 billion to the DFS, the U.S. Justice Department, and other agencies, which included $485 million for its manipulation of forex spot trading. This settlement was part of the more than $5.6 billion agreement by six banks for manipulating the $5.3 trillion daily foreign exchange market. The other five banks include Bank of America, Chase, Citigroup, JPMorgan, Royal Bank of Scotland, and UBS.

Barclays recently agreed to pay $150 million to resolve the “Last Look” allegations of abuse in the foreign exchange market through its electronic trading platform: a very serious charge, since it intentionally sought unfair advantages over clients and counterparties through this venue. The DFS also required the bank to fire its global head of electronic fixed income, currencies and commodities automated flow trading. Barclays has not named the dismissed individual and has admitted to wrongdoing in this case.

This settlement will bring the total litigation provisions for Barclays Bank to about $13 billion since the beginning of the financial crisis. Litigation costs for all financial institutions since 2008 have reached nearly $219 billion, most of it borne by U.S. banks, led by Bank of America with about $70 billion, according to Moody’s, a rating agency. They expect more to come, especially from Deutsche Bank’s exposure to foreign exchange litigation and the Royal Bank of Scotland’s exposure to U.S. mortgage litigation.

Barclays is still not off the hook: It is being investigated for other potential misconduct, including possible manipulation of precious metals markets and payments to Qatari investors in its 2008 rights issue.

Even after the crisis, Barclays continued down the road not to be traveled.

© 2015 Newsmax Finance. All rights reserved.

Derivative Debacle Persists

By Barry Elias | Friday, 13 Nov 2015 06:53 AM

Taxpayers remain the backstop for risky swap derivative investments held by financial institutions.

In December 2014, the Congress rolled back provisions of the Dodd-Frank legislation as part of a must-pass government spending bill to prevent a total government shutdown. The original Dodd-Frank rules were designed to prevent future taxpayer bailouts of banks that arise from improper management of derivative contracts, including inadequate capital requirements for swaps.

The Federal Deposit Insurance Corporation (FDIC) recently estimated approximately $9.7 trillion of swap derivatives remain on the balance sheets of 15 banks that are registered as swap dealers. This represents roughly 4.4 percent of the total outstanding derivative contracts at these institutions and is comprised of $6.1 trillion in credit derivatives, $2.6 trillion in equities derivatives. and $1 trillion in commodity derivatives.

If the taxpayers did not insure these swap products, counterparties would require banks to hold more collateral to offset potential losses, and this would undermine bank profit margins. Swap trades enable financial institutions to exchange payment streams, typically to lower interest rates or currency risks.

Sheila Bair, the former chair of the FDIC, has stated the swaps repeal represented a “classic backroom deal.” “There’s no way this would have passed muster if people had openly debated it, so [the banks] had to sneak it on to a must-pass funding bill. For an industry that purports to want to regain public trust, it was an extraordinary thing to do,” said Bair.

The net worth of the financial industry has been negative for most of the past 20 years, reaching a nadir of negative $1.46 trillion in April 2007 prior to the financial crisis. Following an injection of approximately $29 trillion in credit by the federal government in the form of asset purchases, guarantees, and loans during the crisis, the financial industry reached a peak net worth of $1.93 trillion in March 2009, only to see it plummet with the end of quantitative easing: It stood at negative $809 billion in June 2015.

The financial industry has been greatly subsidized by the taxpayers for many decades. It’s time we implement the bank bail-in rather than the bank bail-out.

© 2015 Newsmax Finance. All rights reserved.

Bank Bail-In Rather Than Bail-Out

By Barry Elias | Friday, 06 Nov 2015 07:02 AM

The Federal Reserve plans to rein in the extraordinary bank mismanagement that lead to the financial and economic collapse in 2008.

In a recent 5-0 ruling, the Fed will require 30 of the largest banks worldwide –global systemically important banks (GSIBs) – to maintain significantly more capital on their balance sheets to weather potential losses. The Fed recommends total loss absorbing capital, or TLAC, be set at or near 20 percent of assets, with half coming from equity and the other half from long-term debt provided by investors, which can then be converted to equity.

GSIBs are considered so large and interconnected that each could seriously threaten the solvency of the global financial system if it were to fail.

The thinking here: If some assets, such as loans, turn sour, and if equity capital is insufficient to cover the losses, the investor class will absorb the differential instead of the taxpayers-at-large: hence, a “bail-in” rather than a “bail-out.” As compensation for this added risk, the investors will command a higher rate of interest for lending funds to these financial institutions.

The GSIBs include U.S. subsidiaries of the largest global banks and eight U.S. banks: Bank of America, Bank of New York Mellon Corp., Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street Corp., and Wells Fargo. The Fed estimates these banks will need to issue an additional $120 billion in long-term debt to meet the new requirement. An analysis by Barclays Bank suggests Goldman Sachs and Morgan Stanley have already meet this standard, while Wells Fargo may need to issue as much as $86 billion in bonds to conform.

The ruling also requires banks to post collateral to cover losses for derivative trading that are conducted outside exchanges or clearinghouses. Many policymakers blame the $600 trillion global derivative market, which was deregulated by President Clinton in 2000, for hastening the financial implosion due to inadequate margin requirements and a high degree of speculation.

The proposed rule would also apply to the U.S. operations of foreign GSIBs. In this case, the U.S. entity would issue new long-term debt to (or borrow from) the foreign parent rather than selling bonds to external investors. Should a bank fail, the holding company would be seized by the federal authorities, but the subsidiaries would be permitted to continue operations.

If formally adopted, most of the requirements would take effect in 2019, with the remainder in 2022.

This new ruling comes on the heels of rules adopted by the Fed in July for the eight banks to increase their financial assets by about $200 billion in additional capital. This is also above and beyond the 2014 rules directing all large banks to hold adequate quantities of high-quality assets to survive a severe market fall. The banks are also required to pass “financial stress tests” and provide a “living will” that demonstrates how they could declare and proceed through a potential bankruptcy without taxpayer assistance.

The previous rulings have been characterized as the “belt” holding up the pants of the bank, while the new ruling represents the “suspenders” in the event the belt fails.

This policy is a prudent approach that should be implemented immediately.

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