Dimon Lambastes Loans and Expresses His Devotion to Derivatives

[hvactec]

By William K. Black

The ongoing U.S. crisis was driven largely by financial derivatives. Nine of America’s systemically dangerous institutions (SDIs) failed or had to be bailed out – Bear Stearns, Lehman, Merrill Lynch, Fannie, Freddie, AIG, Countrywide, Wachovia, and Washington Mutual (WaMu). The SDI failures were primarily due to losses caused or aided by the sale and purchase of enormous amounts of fraudulent derivatives, and deregulation, desupervision, and de facto decriminalization proved exceptionally criminogenic. The Commodities Futures Modernization Act of 2000 and the Gramm, Leach, Bliley Act of 1999, respectively, made credit default swaps (CDS) into a regulatory black hole and repealed the Glass-Steagall Act’s prohibition against banks mixing commercial and investment banking.

The Dodd-Frank bill should have repealed the two deregulatory acts passed near the end of Clinton’s term with broad bipartisan support, but the Obama administration never tried to go back to the legal governance system for finance that worked brilliantly for nearly a half-century and Jamie Dimon and JPMorgan led the lobbying blitz that ensured that the Dodd-Frank Act would have the taste, depth, and substance of light beer made by an enormous commercial American brewery. The Volcker rule was intended to partially restore the Glass-Steagall Act by restricting banks’ proprietary derivatives investments to hedging. The rationale was that there is no public policy basis for providing federal subsidies to banks to speculate in financial derivatives. That public policy argument against subsidizing dangerous bets by banks in derivatives is compelling and cuts across all political spectrums. Among banks, only the SDIs are massive users and issuers of financial derivatives. The largest SDIs love financial derivatives. Merrill Lynch failed because it was the largest purchaser of its own “green slime” derivatives, particularly collateralized debt obligations (CDOs) “backed” largely by endemically fraudulent liar’s loans. Such purchases were guaranteed to swiftly make Merrill’s investment officers wealthy and destroy the firm. My most recent columns have quoted Dimon’s dictum about accounting control fraud:

“Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.”

READ MORE Dimon Lambastes Loans and Expresses His Devotion to Derivatives | | New Economic PerspectivesNew Economic Perspectives

 

[waltky]

Wonder if any of `em are going to jail?...

Seven big banks settle U.S. rate-rigging lawsuit for $324 million
Tue May 3, 2016 - Seven of the world's biggest banks have agreed to pay $324 million to settle a private U.S. lawsuit accusing them of rigging an interest rate benchmark used in the $553 trillion derivatives market.

The settlement made public on Tuesday, which requires court approval, resolves antitrust claims against Bank of America Corp (BAC.N), Barclays Plc (BARC.L), Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.S), Deutsche Bank AG (DBKGn.DE), JPMorgan Chase & Co (JPM.N) and Royal Bank of Scotland Group Plc (RBS.L). Several pension funds and municipalities accused 14 banks, including those that settled, of conspiring to rig the "ISDAfix" benchmark for their own gain from at least 2009 to 2012. Companies and investors use ISDAfix to price swaps transactions, commercial real estate mortgages and structured debt securities. The alleged illegal activity included the execution of rapid trades just before the rate was set each day, called "banging the close," causing the British brokerage ICAP Plc (IAP.L) to delay trades until they moved ISDAfix where they wanted, and posting rates that did not reflect market activity.

Under the settlement, payments would include $52 million from JPMorgan; $50 million each from Bank of America, Credit Suisse, Deutsche Bank and RBS; $42 million from Citigroup and $30 million from Barclays. The remaining defendants are BNP Paribas SA (BNPP.PA), Goldman Sachs Group Inc (GS.N), HSBC Holdings Plc (HSBA.L), Morgan Stanley (MS.N), Nomura Holdings Inc (8604.T), UBS AG (UBSG.S), Wells Fargo & Co (WFC.N) and ICAP, lawyers for the plaintiffs said. Spokespeople for BNP Paribas, HSBC, Morgan Stanley and UBS declined to comment. The other non-settling defendants did not immediately respond to requests for comment.

Tuesday's accord came five weeks after U.S. District Judge Jesse Furman in Manhattan refused to dismiss the lawsuit. U.S. and European regulators have also examined whether ISDAfix was set properly, and Barclays agreed last May to pay a $115 million fine to settle a U.S. Commodity Futures Trading Commission probe. The private lawsuit is one of many pending in Manhattan federal court accusing banks of conspiring to rig rate benchmarks, securities prices or commodities prices. The case is Alaska Electrical Pension Fund et al v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 14-07126.

Seven big banks settle U.S. rate-rigging lawsuit for $324 million

 

[there4eyeM]

Derivatives menace the entire financial structure.
This may, perversely, turn out to be a 'blessing', as total destruction of that structure may lead to healthy reappraisal of the human situation and its subservience to materialism.

 

[jwoodie]

The Community Reinvestment Act (CRA, P.L. 95-128, 91 Stat. 1147, title VIII of the Housing and Community Development Act of 1977, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4][5]

The Act instructs the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.)[6] -Wikipedia

This encouraged banks to make "subprime" loans which were then bought by Fannie Mae and Freddy Mac, thereby creating a market for these non-investment grade instruments. As more money flowed into the housing market a 20 year boom in real estate prices ensued, thus allowing borrowers to avoid foreclosure by selling at a profit.

Based on this false sense of security, more and more of these loans were made and sold as private securities through a number of investment vehicles. Lots of money was being made, and credit rating agencies were all to happy to give their blessings to these loans, which were buoyed by ever increasing real estate values. It became a world wide phenomenon.

Finally, the point of impossibility on this asymptotic curve finally became obvious to everyone and a frantic sell-off of these non-credit worthy securities began. Hardest hit were the large financial institutions who had eagerly participated in return for federal approval of multi-billion dollar expansions and mergers. New accounting rules required them to assess their reserves at current market value, which was now in free fall. As a result, they had to call in existing loans and not make any new ones in order to maintain their required asset ratios.

This caused a drastic reduction in the money supply in our economy and around the world, leading to the worst economic meltdown since the Great Depression.