There’s only one way to combat the next financial crisis 

The Daily Reckoning, James Rickards
 Oct 26, 2016 | 6:02 PM ET

James Richards was chief counsel for Long Term Capital Management.

In my forthcoming book The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, I make a very simple point: In 1998 we were hours away from collapse and did everything wrong following that. In 2008, we were hours away from collapse and did the same thing. Each crisis is bigger than the one before.
The stock market today is not very far from where it was in November 2014. The stock market has had big ups and downs. A big crash in August 2015, a big crash in January 2016. Followed by big rallies back both times because the Fed went back to “happy talk,” but if you factor out that volatility, you’re about where you were 2 years ago.

People are not making any money in stocks. Hedge funds are not making money. Institutions are not making money. It’s one of the most difficult investing environments that I’ve ever seen in a very long time.

Again, the 2008 crisis is still fresh in people’s minds. People know a lot less about 1998, partly because it was almost 20 years ago. I was right in the middle of that crash. It was an international monetary crisis that started in Thailand in June of 1997, spread to Indonesia and Korea, and then finally Russia by August of ’98. Everyone was building a firewall around Brazil. It was exactly like dominoes falling.

Think of countries as dominoes where Thailand falls followed by Malaysia, Indonesia, Korea and then Russia. The next domino was going to be Brazil, and everyone (including the IMF and the United States) said, “Let’s build a firewall around Brazil and make sure Brazil doesn’t collapse.”

The Next Domino

Then came Long-Term Capital Management. The next domino was not a country. It was a hedge fund, although it was a hedge fund that was as big as a country in terms of its financial footings. I was the general counsel of that firm. I negotiated that bailout. I think a many of my readers might be familiar with my role there. The importance of that role is that I had a front-row seat.

I’m in the conference room, in the deal room, at a big New York law firm. There were hundreds of lawyers. There were 14 banks in the LTCM bailout fund. There were 19 other banks in a one billion dollar unsecured credit facility. Included were Treasury officials, Federal Reserve officials, other government officials, Long-Term Capital, our partners. It was a thundering herd of lawyers, but I was on point for one side of the deal and had to coordinate all that.

It was a 4 billion dollar all-cash deal, which we put together in 72 hours with no due diligence. Anyone who’s raised money for his or her company, or done deals can think about that and imagine how difficult it would be to get a group of banks to write you a check for 4 billion dollars in 3 days.

Those involved can say they bailed out Long-Term capital. They really bailed out themselves. If Long-Term Capital had failed, and it was on the way to failure, 1.3 trillion dollars of derivatives would’ve been flipped back to Wall Street.

The banks involved would’ve had to run out and cover that 1.3 trillion dollars in exposure, because they thought they were hedged. They had one side of the trade with Long-Term and had the other side of the trade with each other. When you create that kind of hole in everyone’s balance sheets and everyone has to run and cover, every market in the world would’ve been closed. Not just bond markets or stock markets. Banks would’ve failed sequentially. It would’ve been what came close to happening in 2008.

Very few people knew about this. There were a bunch of lawyers there, but we were all on 1 floor of a big New York law firm. The Fed was on the phone. We moved the money. We got it done. They issued a press release.

It was like foaming an airport runway. You’ve got a jet aircraft with a lot of passengers and 4 engines on flames, and you foam the runways. The fire trucks are standing by, and somehow you land it and put out the fire. Life went on.

Financial Crisis

After that, the Federal Reserve cut interest rates twice, once at a scheduled FOMC meeting on September 29, 1998, and again at an unscheduled meeting. The Fed can do that. The Fed doesn’t have to have a meeting. They can just do an executive committee-type meeting on the phone, and that’s what they did. That was the last time, in October 15, 1998, that the Fed cut interest rates outside of a scheduled meeting. Though it was done to “put out the fire.” Life went on.

Then 1999 was one of the best years in stock market history, and it peaked in 2000 and then crashed again. That was not a financial panic. It was just a stock market crash. My point is that in 1998, we came within hours of shutting every market in the world. There were a set of lessons that should’ve been learned from that, but they were not learned. The government went out and did the opposite of what you would do if you were trying to prevent it from happening again.

What they should’ve done was banned most derivatives, broken up big banks, had more transparency, etc. They didn’t. They did the opposite.

The government actually repealed swaps regulations, so you could have more derivative over-the-counter instead of trading them on exchanges. They repealed Glass-Steagall so the commercial banks could get into investment banking. The banks got bigger. The SEC changed the rules to allow more leverage by broker-dealers rather than less leverage.

Then Basel 2, coming out of the Bank for International Settlements in Basel, Switzerland, changed the bank capital rules so they could use these flawed value-at-risk models to increase their leverage. Everything, if you had a list of things that you should’ve done to prevent crises from happening again, they did the opposite. They let banks act like hedge funds. They let everybody trade more derivatives. They allowed more leverage, less regulation, bad models, etc.

I was sitting there in 2005, 2006, even earlier, saying, “This is going to happen again, and it’s going to be worse.” I gave a series of lectures at Northwestern University. I was an advisor to the McCain campaign. I advised the U.S. Treasury. I warned everybody I could find.

This is all in the my upcoming book, The Road to Ruin. I don’t like making claims like that without backing it up, so if you read the book, I tell the stories. Hopefully, it’s an entertaining and readable, but it’s serious in the sense that I could see it coming a mile away.

Now, I didn’t say, “Oh gee, it’s going to be subprime mortgages here,” the kind of thing you saw if you saw the movie “The Big Short.” Obviously, there were some hedge fund operators who had sussed out the subprime mortgage. To me, it didn’t matter. When I say it didn’t matter, the point that I was looking at was the dynamic instability of the system as a whole.

I was looking at the buildup of scale, the buildup of derivatives, the dynamic processes and the fact that one spark could set the whole forest on fire. It didn’t matter what the spark was. It didn’t matter what the snowflake was. I knew the whole thing was going to collapse.

Too Big To Fail

Then, we come up to 2008. We were days, if not hours, from the sequential collapse of every major bank in the world. Think of the dominoes again. What had happened there? You had a banking crisis. It really started in the summer of ’07 with the failure of a couple of Bear Stearns hedge funds, not Bear Stearns itself at that stage but these Bear Stearns hedge funds that started a search.

There was one bailout by the sovereign wealth funds and the banks, but then beginning in March 2008, Bear Stearns failed. In June, July 2008, Fannie and Freddie failed. Followed by failures at Lehman and AIG. We were days away from Morgan Stanley being next, then Goldman Sachs, Citibank followed by Bank of America. JPMorgan might’ve been the last one standing, not to mention foreign banks (Deutsche Bank, etc.).

They all would’ve failed. They all would’ve been nationalized. Instead, the government intervened and bailed everybody out. Again, for the second time in 10 years. We came hours or days away from closing every market and every bank in the world.

For the everyday investor, what do you have? You’ve got a 401k. You’ve got a brokerage account. Maybe you’re with E-Trade or Charles Schwab or Merrill Lynch or any of those names. You could run a pizza parlor, an auto dealer. You could be a dentist, a doctor, a lawyer, anyone with a small business. You could be a successful investor or entrepreneur.

You’ve got money saved and you’re looking at all of that wealth being potentially wiped out as it almost was in 1998 and in 2008.

How many times do you want to roll the dice? It’s just like playing Russian Roulette. One of these times, and I think it’ll be the next time, it’s going to be a lot bigger and a lot worse.

To be specific, I said in 1998 the government, regulators and market participants on Wall Street did not learn their lesson. They did the opposite of what they should do. It was the same thing in 2008. Nobody learned their lesson. Nobody thought about what actually went wrong. What did they do instead? They passed Dodd-Frank, a 1,000-page monstrosity with 200 separate regulatory projects.

They say Dodd-Frank ended “too big to fail.” No, it didn’t. It institutionalized “too big to fail.” It made “too big to fail” the law of the land, because they haven’t made the banks smaller. The 5 biggest banks in the United States today are bigger than they were in 2008. They have a larger percentage of the banking assets. They have much larger derivatives books, much greater embedded risk.

People like to use the cliché “kick the can down the road.” I don’t like that cliché, but they haven’t kicked the can down the road. They’ve kicked the can upstairs to a higher level. From hedge funds to Wall Street, now the risk is on the balance sheet of the central banks.

World Money

Who has a clean balance sheet? Who could bail out the system? There’s only one organization left. It’s the International Monetary Fund (IMF). They’re leveraged about 3 to 1. The IMF also has a printing press. They can print money called Special Drawing Rights (SDR), or world money. They give it to countries but don’t give it directly to people. Then the countries can swap it for other currencies in the SDR basket and spend the money.

Here’s the difference. The next time there’s a financial crisis they’ll try to use SDR’s. But they’ll need time to do that. They’re not going to do it in advance and they’re not thinking ahead. They don’t see this coming.

What’s going to come is a crisis, and it’s going to come very quickly. They’re not going to be able to re-liquefy the system, at least not easily.

Read the original article on The Daily Reckoning. Copyright 2016.

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The Big Winner From London’s Brexit Exodus Isn’t Even in Europe – Bloomberg

New York capital, expertise, regulation key to luring talent

Banks may move non-essential staff to U.S., says one executive

The ultimate winner if Brexit forces banks to flee London may lie 3,500 miles away, far beyond the borders of Europe.

New York, even more than Frankfurt or Paris, is emerging as a top candidate to lure banking talent if London’s finance industry is damaged by Britain’s divorce from the European Union, according to politicians and industry executives.

That’s because the largest U.S. city, rather than European finance hubs, is the place that rivals the depth of markets, breadth of expertise or regulatory appeal boasted by London. Continental Europe will win some bank operations to satisfy regional rules ensure time-zone-friendly access to its market, but more may eventually shift across the Atlantic to the only other one-stop shop for business.

“There is no way in the EU there is a center with the infrastructure or regulatory infrastructure to take the role London has,” particularly in capital markets, John Nelson, chairman of Lloyd’s of London, said in an interview. “There is only one city in the world that can, and that is New York.”

For many global investment banks, London is their largest or second-biggest headquarters. If the benefits of scale are diminished by having to move roles to Europe, banks may look to shrink their London operations even further by moving any workers able to do their job just as well from a different time zone, including global-facing roles in merger advisory, trading and back-office technology and finance.

Clearing Business

Additional jobs may move as specific trading activities seek a new epicenter. London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet was blunt, saying that if Brexit strips London of the ability to clear euro derivatives trades, the entire business would move to the only other city able to clear all 17 major currencies: New York.

“The big winner from Brexit is going to be New York and the U.S.,” said Morgan Stanley CEO James Gorman said at a conference in Washington this month. “You’ll see more business moving to New York.”

One major Wall Street bank has already begun reallocating U.K. headcount, and probably will end up moving many non-essential staff out of Europe altogether to the U.S. or Asia, said a senior banker at the firm, who asked not to be identified because the plan is private. New York, now mainly a hub for dollar-denominated securities, could lure trading desks that had used London as a base for macro trading, speculating on currencies, bonds and economic trends around the world, the executive said.

Lost Hope

Bank bosses have given up hope that British Prime Minister Theresa May will be able to strike a post-Brexit deal that preserves the right to sell goods and services freely around the EU, according to three people with knowledge of their contingency plans.

The problem they face is that it’s hard to match London’s advantages. Most local EU regulators are unlikely to be able to cope with an influx of investment-bank license applications, and many locations lack the necessary real estate, infrastructure or quality of life. When London this year topped the Z/Yen Group’s index for financial centers based on their attractiveness to workers in the sector, New York came second, ahead of 19th-place Frankfurt and Paris ranking 29th.

If the finance industry does leave London for elsewhere in the EU, it’s likely to fragment. That’s a particular problem for U.S. banks, which spent more than two decades centralizing European operations within the so-called Square Mile. The U.K. is home to 87 percent of U.S. investment banks’ EU staff and 78 percent of the region’s capital-markets activity, according to research firm New Financial.

Liquidity Trap

“The minute you move some businesses somewhere — create a legal entity someplace — you trap capital, you trap liquidity,” said Viswas Raghavan, JPMorgan Chase & Co.’s deputy CEO for Europe, the Middle East and Africa, said last month at Bloomberg Markets Most Influential Summit in London. “That brings inefficiencies. That drags down” profitability.

There are limits to a wholesale transplant of London’s finance industry. A big one is the need to be inside the European Economic Area to sell goods and services to its more than 450 million citizens. Another is time. It’s 3 a.m. on the Eastern seaboard when European markets open, and 9 p.m. in London when the New York Stock Exchange rings the closing bell.

Transplant Challenges

Culture also matters. A foreign bank may struggle to convince regional companies that it understands their businesses better than a domestic firm. Some companies would have little reason to raise capital or issue debt in dollars. And Asian financial hubs like Singapore and Hong Kong will also try to attract business at London’s expense.

Not all firms want to start spreading the news. One U.S. bank says it won’t be moving people back to the U.S. after Brexit, with an executive there saying it can win more business by maintaining its European presence as other lenders pull back.

Chancellor of the Exchequer Philip Hammond has cautioned European governments that attacking London’s financial heft in the Brexit talks could end up costing them by driving financial services elsewhere. Bank of England Deputy Governor Jon Cunliffe also last week listed New York as an attractive place to do business outside of Europe.

Open Europe’s Vincenzo Scarpetta echoed such warnings. In a report released today, he and colleagues urge the government to give banks maximum certainty about the future and show EU governments how they benefit from the City of London. 

“It’s not certain if banks move, they will move to another European hub,” said Scarpetta, a senior policy analyst at the London-based think tank. “New York, in particular, is a much bigger hub than Paris. If this happens Europe is worse off as a whole. This should be in everyone’s interest to avoid in the upcoming negotiations.”

* London * Brexit * Europe * New York

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Here is an Overview of Machine Leaning

http://www.superdatascience.com/2

Data Science and Machine Learning is somethings we all should be aware of. Attached is a podcast with a course overview I am taking to get started.

Instrutor Bios are below

 

Instructors

Kirill Eremenko
Data Scientist & Forex Systems Expert
My name is Kirill Eremenko and I am super-psyched that you are reading this!

I teach courses in two distinct Business areas on Udemy: Data Science and Forex Trading. I want you to be confident that I can deliver the best training there is, so below is some of my background in both these fields.

Data Science

Professionally, I am a Data Science management consultant with over five years of experience in finance, retail, transport and other industries. I was trained by the best analytics mentors at Deloitte Australia and today I leverage Big Data to drive business strategy, revamp customer experience and revolutionize existing operational processes.

From my courses you will straight away notice how I combine my real-life experience and academic background in Physics and Mathematics to deliver professional step-by-step coaching in the space of Data Science. I am also passionate about public speaking, and regularly present on Big Data at leading Australian universities and industry events.

Forex Trading

Since 2007 I have been actively involved in the Forex market as a trader as well as running programming courses in MQL4. Forex trading is something I really enjoy, because the Forex market can give you financial, and more importantly – personal freedom.

In my other life I am a Data Scientist – I study numbers to analyze patterns in business processes and human behaviour… Sound familiar? Yep! Coincidentally, I am a big fan of Algorithmic Trading 🙂 EAs, Forex Robots, Indicators, Scripts, MQL4, even java programming for Forex – Love It All!

Summary

To sum up, I am absolutely and utterly passionate about both Data Science and Forex Trading and I am looking forward to sharing my passion and knowledge with you!
Hadelin de Ponteves
Data Scientist
Hello ! Je m’appelle Hadelin de Ponteves et je suis un data scientist passionné !

Etant particulièrement sensible au domaine de l’éducation, je suis déterminé à y apporter de grandes contributions. J’ai déjà investi beaucoup de mon temps dans la sphère de l’éducation, à étudier et enseigner divers sujets scientifiques.

Aujourd’hui, je suis passionné de data sciences, d’intelligence artificielle et de deep learning. Et je ferai de mon mieux pour vous transmettre mes passions. Car c’est en étant passionné que l’on réussit le mieux dans un domaine, et que l’on est le plus heureux dans notre travail au quotidien.

J’ai acquis beaucoup d’expérience en data sciences. J’ai effectué mes études à l’école Centrale Paris, où j’ai suivi le parcours Data Sciences, en parallèle d’un master de recherche en machine learning à l’Ecole Normale Supérieure. Ma page étudiante s’est enchaînée avec une expérience chez Google où j’ai fait des data sciences pour résoudre des problèmes business. Puis j’ai réalisé que je passais la plupart de mon temps à analyser et je développais petit à petit un besoin de créer. Donc pour nourrir ma créativité, je suis devenu un entrepreneur.

Et justement, mes cours vont tous combiner ces deux dimensions d’analyse et de créativité, grâce auxquelles vous intégrerez toutes les compétences à avoir en data sciences, en les appliquant à des idées créatives.

J’ai hâte de vous retrouver dans mes cours et de partager mes passions avec vous !

Hi ! My name is Hadelin de Ponteves. Always eager to learn, I invested a lot of my time to learning and teaching, covering a wide range of different scientific topics. Today I am passionate about data science, artificial intelligence and deep learning. I will do my very best to convey my passion for data science to you. I have gained diverse experience in this field. I have an engineering master’s degree with a specialisation in data science. I spent one year doing research in machine learning, working on innovative and sexy projects. Then a work experience at Google where I implemented some machine learning models for business analytics. Eventually, I realised I spent most of my time doing analysis and I gradually needed to feed my creativity. So I became an entrepreneur. My courses will combine the two dimensions of analysis and creativity, allowing you to learn all the analytic skills required in data science, by applying it on creative ideas. Looking forward to working together !

Hadelin de Ponteves

Whistleblower in Deutsche Bank Case Says He Rejects $8 Million Award

Whistleblower in Deutsche Bank Case Says He Rejects $8 Million AwardAugust 19, 2016By Aruna Viswanatha WSJ

A whistleblower who is in line to receive $8 million for exposing alleged securities law violations at Deutsche Bank said that he is giving up the award because regulators only fined the company and didn’t go after the managers responsible.

A whistleblower who is in line to receive $8 million for exposing alleged securities law violations at Deutsche Bank AG said on Thursday that he is giving up his award because regulators only fined the company and didn’t go after the managers responsible for the misconduct.
“I will not join the looting of the very people I was hired to protect,” the whistleblower Eric Ben-Artzi said in an unusual op-ed in the Financial Times entitled “We must protect shareholders from executive wrongdoing.”
In May, the bank agreed to pay $55 million to settle U.S. Securities and Exchange Commission allegations that it hid paper losses of more than $1.5 billion during the financial crisis. The agency didn’t charge any executives in connection with the case.
A whistleblower at the time alleged the bank didn’t update the market value of certain credit default swap transactions, known as super senior trades. The whistleblower alleged the bank thus masked mounting losses as the market value sank.
In his op-ed, Mr. Ben-Artzi said he had been a risk officer at Deutsche Bank and one of three whistleblowers who reported the practice to the bank and to regulators. He wrote that he “just got word” from the SEC that he is to receive “half of a $16.5m whistleblower award.”
He said he was refusing it and asked that it “be given to Deutsche and its stakeholders, and the award money clawed back from the bonuses paid to the Deutsche executives.”
The SEC whistleblower program, put in place in 2011 as part of the Dodd-Frank financial-overhaul law, allows tipsters to collect between 10% and 30% of any penalties the government collects. The program is shrouded in secrecy, and the agency provides few details on the awards it grants other than the rough amount. It doesn’t identify the case in which any award was granted.
An SEC spokesman declined to comment on Mr. Ben-Artzi’s op-ed, citing the confidentiality requirements of the whistleblower law. SEC enforcement director Andrew Ceresney said of the Deutsche Bank case: “We brought all of the charges supported by the evidence and the law, which were unanimously approved by the Commission.” A Deutsche Bank spokeswoman declined to comment.
Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com

PwC faces 3 major trials that threaten its business

Philip Merrill’s notes:

1) Do Auditors need to be seasoned professionals in the businesses they audit?

2) Or, CPA’s that have to take the customers word for accuracy in financial statement representation including notes.

By Francine McKenna

Published: Aug 15, 2016 12:32 p.m. ET

The Big Four global audit firms go to court all the time but are rarely put on trial.

PricewaterhouseCoopers LLP, the U.S. member of the global professional-services giant, is currently facing not one, not two, but three significant trials for allegedly negligent audits. An unfavorable verdict in the trial currently playing out in a Florida state court could inflict a significant monetary wound. That, combined with a possible unfavorable judgment in another trial scheduled for federal court in Alabama in February of 2017, and a third in a Manhattan federal court within the next year, may be fatal.

The case against PwC brought by the Taylor Bean and Whitaker bankruptcy trustee is quite unusual, said Tom Rohback, an attorney with Axinn Veltrop & Harkrider. That’s because it is one of the few cases from the credit crisis seeking to hold auditors responsible for crisis-era losses to actually go to trial.

“Beyond the $5.5 billion sought, the case is unusual because the plaintiff is the trustee of the entity that committed the fraud and is suing not its own audit firm but the audit firm of the institution it defrauded,” he said. “

Settlements preferred

In the U.S. the Big Four audit firms have, in recent history, almost always settled because of the fear that one catastrophic jury verdict could shut them down for good. In addition, trials show the public just how often auditors fail to detect fraud. Settlements prevent the public from hearing that in open court and typically put partners’ pretrial testimony under confidential court seal forever.

‘The trial has the potential to influence public perception of auditors, as well as strategies used by the plaintiff lawyers that try cases against them, regardless of the eventual verdict.’

Tom Rohback, Axinn Veltrop and Harkrider

The bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., once the 12th-largest U.S. mortgage lender, sued PwC for $5.5 billion in damages in 2012 after the bank went bankrupt in August 2009. Federal regulators, not the bank’s auditor, Deloitte, uncovered a $3 billion fraud involving fake mortgage assets. The bankruptcy trustee for Taylor, however, alleges that PwC was negligent in not spotting the fraud from its perch as auditor of Colonial Bank, which bought the allegedly fake mortgages that Taylor Bean had originated and that made Taylor Bean’s losses worse.

Beth Tanis, the lead attorney for PwC from the firm King & Spalding, issued a statement at the beginning of the trial: “PricewaterhouseCoopers did not audit or perform any other services for Taylor Bean. With regard to the services performed for Colonial Bancgroup, one of the targets of Taylor Bean’s fraud, PricewaterhouseCoopers did its job,” said Tanis. “As the professional audit standards make clear, even a properly designed and executed audit may not detect fraud, especially in instances when there is collusion, fabrication of documents, and the override of controls, as there was at Colonial Bank. We are confident that a jury will understand the applicable rules and standards in this case and decide accordingly.”

A spokeswoman for PwC declined to provide further comment.

Six Taylor Bean executives went to jail for their roles in the fraud. The bank’s former chairman, Lee Farkas, was sentenced to 30 years in prison. Taylor Bean auditor Deloitte settled with the trustee for an undisclosed amount in 2013.

The bankruptcy route

Colonial Bank, a Montgomery, Ala., institution with $25 billion in assets, also filed for bankruptcy in 2009. The Colonial Bank bankruptcy trustee and the Federal Deposit Insurance Corp. brought a lawsuit in 2012 against PwC for negligence as the auditor of Colonial Bank, claiming $1 billion in damages. That case is scheduled to go to trial in February.

The FDIC’s suit was its first against an auditor for a financial-crisis-era bank fraud or failure. Crowe Horwath LLP, Colonial’s outsourced internal audit firm, is also named in the Colonial suit. (Remember Arthur Andersen internal and external auditor for Enron?)

Tanis, in her opening statement at the trial on Aug. 9, said that no one at Taylor Bean relied on PwC’s audit of Colonial Bank, even though Colonial was Taylor Bean’s biggest mortgage buyer.

“There will be no document showing you that these directors or anybody else at Taylor Bean ever received these Pricewaterhouse audit reports, actually read these Pricewaterhouse audit reports and relied on them,” she said.

Largest Banking Regulatory Fines (2008 – 2015)

Bank

Date

Fine Amount

Description

Bank of America

August 2014

$16,650,000,000

Settlement to resolve allegations of misselling mortgage-backed securities. The … Show More

Bank of America

February 2012

$11,820

Part of the National Mortgage Settlement; $8.6bn paid as relief to borrowers, $3 … Show More

Bank of America

January 2013

$11,600

Settlement resolving repurchase requests of faulty mortgage sales. Bank agreed t … Show More

Bank of America

March 2014

$9,330

Settled charges of misleading investors over mortgage backed securities.

Citigroup

July 2014

$7,000,000,000

Settled charges of misleading investors over mortgage backed securities. $4bn pa … Show More

JPMorgan Chase

November 2013

$13,000,000,000

Part of $13bn settlement; $4bn paid as relief to consumers, $2bn paid as civil penalty

Wells Fargo

February 2012

$5,350

Part of the National Mortgage Settlement; $4.3bn paid as relief to borrowers, $1 … Show More

JPMorgan Chase

February 2012

$5,290

Part of the National Mortgage Settlement; $4.2bn paid as relief to borrowers and … Show More

JPMorgan Chase

October 2013

$4,000

Part of $13bn settlement; settles federal and state claims by FHFA.

JPMorgan Chase

October 2013

$4,000

Settlement over securities laws violations in connection with mortgage-backed se … Show More

Bank

Date

Fine Amount

Description

Data collected from the Financial Times on May 20, 2015.

See more details ›

Taylor Bean’s employees, customers and creditors, who all lost something when the firm went bankrupt, were relying on Colonial Bank to operate as an honest business partner that was accurately reflecting its financial obligations to Taylor Bean, a point emphasized by Steve Thomas, the attorney for the Taylor Bean trustee, in his opening statement on Tuesday.

Thomas told the jury that PricewaterhouseCooper’s failure mattered, because many people were counting on it to do its job. “PwC was lending credibility to Colonial’s financial statements. PwC’s failure mattered because Taylor Bean and Whitaker, and others, relied on PwC to do its job,” he said.

‘PwC was lending credibility to Colonial’s financial statements. PwC’s failure mattered because Taylor Bean and Whitaker, and others, relied on PwC to do its job.’

Steve Thomas, attorney for Taylor Bean trustee

PwC and the other Big Four accounting firms all had major clients that failed, were bailed out or were effectively nationalized during the crisis. None of those cases went to trial. Ernst & Young LLP paid $99 million to investors and $10 million to the New York attorney general’s office for its role as auditor of Lehman Brothers Holdings Inc. KPMG settled its exposures early, and within a week of each other in 2010 settled for an undisclosed amount for its audit of New Century, another big mortgage originator, and paid $24 million for its audits of Countrywide Bank, which was distressed when it was sold to Bank of America BAC, +0.74% .

Deloitte settled its exposure as auditor of Bear Stearns for $19.9 million. Bear Stearns was bought for a relative pittance by J.P. Morgan JPM, +0.61%  during the crisis. Deloitte was also the auditor of Washington Mutual and contributed $18.5 million to a settlement with investors for its negligent audits. Deloitte went on to earn hundreds of millions of dollars reviewing J.P. Morgan’s exposure to foreclosure fraud claims for Bear Stearns and Washington Mutual mortgages it inherited as part of those purchases.

The litigation hit

Those settlements pale in comparison to the total of $6.5 billion that Taylor Bean and Colonial Bank trustees are looking for from PwC. On Aug. 5 U.S. District Judge Victor Marrero in Manhattan rejected PwC’s request to dismiss MF Global’s lawsuit alleging professional malpractice that contributed to the October 2011 bankruptcy of the brokerage firm once run by former New Jersey Gov. Jon Corzine. That suit is seeking $1 billion in damages, bringing the total potential claims PwC is facing over a very short period to $7.5 billion.

Jim Peterson, a former in-house attorney for Arthur Andersen and the author of the book “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms,” has periodically asked the question on his blog: “How big is the ‘worst case’ litigation hit that would disintegrate one of the surviving Big Four?”

Back in September 2006, a report by the consulting firm London Economics to the EU markets commissioner modeled the collapse of a Big Four partnership in the U.K. That model quantified the level, according to Peterson, “of personal sacrifice, beyond which the owner-partners would lose confidence, withdraw their loyalty and their capital, and vote with their feet.”

Peterson’s analysis concluded that critical numbers of partners would defect and put a firm into a death spiral, if they faced a partner-income-distribution reduction of 15% to 20% that extended over three or four years. Peterson extended the figures to the global level to calculate breakup figures for the Big Four. That brought the number down from an optimistic maximum of about $7 billion to about $3 billion.

However, global numbers assume that a Big Four network under deadly financial threat could hold it together and count on the support of its member firms and partners around the world. But that’s not what happened to Arthur Andersen after the bankruptcy of client Enron and an indictment for obstruction of justice in 2001. Instead, Andersen’s non-U.S. member firms flew the coop in 2002, and the firm itself was forced to fold.

Based on the experience of Arthur Andersen, it is unlikely, Peterson told MarketWatch, that PwC’s non-U.S. member firms would pitch in to pay a U.S.-based catastrophic court judgment or a series of them. Peterson’s most recent update of his tipping-point calculation, completed in early 2015, assumes the U.S. firm is left to pay its own way out, as was Andersen’s U.S. firm. The worst-case tipping points for the U.S. practices shrinks from the $3 billion global number down to $900 million for the most financially vulnerable of the four firms.

These numbers matter, according to Peterson, because the loss of another Big Four firm would throw the entire system into chaos.“There is no contingency plan or readiness among the three survivors to stay in an even more risky business or take on the failed firm’s risky clients or outstanding litigation claims,” he said.

The Petrobras angle

The three lawsuits against PwC that are on trial or going to trial in the next year all name only the U.S. firm as a defendant. Another large case names PwC’s Brazil member firm for its allegedly negligent audits and failure to detect a multibillion-dollar bribery and corruption fraud at the state-sponsored oil company Petrobras.

Those plaintiffs, which include the Bill Gates Foundation, could decide to name PwC U.S. as a defendant or eventually require the U.S. firm to ante up to pay a verdict that would otherwise knock out the Brazilian firm, a key cog in its service network for multinational clients.

MarketWatch asked Rohback why PwC would choose to go to trial given the stakes. “Oh, they probably didn’t choose to try the case. They just haven’t hit on a settlement number they can stomach yet,” he said.

PwC has few options at this point, Rohback said. “There’s still time to settle, and they could win it. If they lose, they can ask the judge for a stay in enforcing any judgment until an appeal can be heard.”

Florida law prohibits judgments that would bankrupt a defendant. PwC would probably be reluctant to go to court and open its books to prove it was too poor to pay a judgment. However, in a previous case against an audit firm in Florida tried by Taylor Bean trustee attorney Thomas, the court allowed audit-firm partners to be paid “profits” each year before considering claims of any parties damaged by the firm’s frauds or gross negligence.

Audit firms have no duty to reserve for or disclose serious legal contingencies, since they are partnerships. Thomas had to file a motion to force discovery because he suspected that while the case was under appeal “assets have been or are being dissipated or diverted while such a stay is in place.”

Francine McKenna

Francine McKenna is a MarketWatch reporter based in Washington.

Email Francine at fmckenna@marketwatch.com

Commercial disputes that cross borders could be a major headache after Brexit

Commercial disputes that cross borders could be a major headache after BrexitAUGUST 9, 2016 AT 2:21 AM

Business Insider
Picture the situation where a British company does business with another company somewhere else in the EU.
Let’s say, for example, that a German manufacturer supplies vital components for a British maker of boat engines.
The British company has a big order coming up from the US that has to be satisfied by such and such date but the Germans fail to deliver.
It costs the Brits a seven-figure sum in lost business and in the end, they decide to sue.
Providing a UK court finds in its favour, the company currently has an excellent chance of recouping the damage. This is because all UK businesses and citizens enjoy access to an EU system known as the Brussels Ia regulation that automatically allows court judgments in one member state to be enforced in another.

Perhaps 100 to 150 commercial cases are underpinned by this system each year, affecting what is almost certainly many millions of pounds in business. Once the UK leaves the EU, however, it is set to lose access to the system. It is a problem that is in danger of being overlooked and needs serious consideration as part of the Brexit negotiations.

As lawyers swiftly learn, it is one thing to win a case and a judgment but quite another to get the money that the judgment says you should receive – especially when the other side and its assets are located abroad.

As things stand inside the EU, there is no need for a UK company with a favourable judgment to ask another EU court for permission to enforce it: you just present the foreign bailiffs or other enforcement officials with the judgment and a standard form and they enforce it for you. In our example, the judgment by the British court would have more or less the same effect as if it had been reached in Germany.

There is no risk of a costly foreign rehearing of the original case. The options open to the other party to resist enforcement are deliberately extremely limited and very rarely succeed – not to mention that they bear the costs of challenge.

What is more, because the rules are designed to help you to enforce your judgment on equal terms throughout the entire EU, your judgment is also enforceable in any other EU country and you can confidently expect that country to enforce it on your behalf as well.

Once Brexit takes place, our British engine maker would be faced with the considerable uncertainty and expense of first trying to determine what judgment enforcement possibilities exist in Germany and then trying to get their judgment enforced. Comparatively long-winded and expensive foreign proceedings may be required to obtain a decision, and enforcement is much more likely to be refused for “local policy reasons”

To some extent the EU has emulated the internal American arrangement, in which individual US states automatically enforce court judgments from any other US state. Yet things are far less straightforward in situations when a US judgment goes abroad or the judgment comes from outside the US. A business that has obtained a UK court judgment against a US company essentially faces the same practical problems and extra costs of getting it enforced as our British engine maker will face in Germany after Brexit.

Previously the US and Europe tried to fix this drawback to trade by creating a global Hague judgments convention. The negotiations ran from 1996 to 2001 but collapsed in failure because EU agreement was conditional on restricting the circumstances when US courts could hear cases with an international aspect. The goal of a global judgments convention was recently revived at the Hague and negotiations are ongoing; its prospects though are uncertain. Even if successful, it will take many years to come into any kind of global operation.

The immediate reality is that if a commercial contract with a company in another EU country is more difficult to enforce, it will make quite a difference to its profitability. Business people ought to be finding out from their lawyers what that difference looks like, and price it into existing contracts and any future commercial negotiations.

In the meantime the UK government needs to consider as a matter of urgency ahead of the Brexit negotiations how best to resolve these uncertainties now and in the medium to long-term. One partial solution would be to sign up to the enforcement system with EU countries that is used by Norway, Switzerland and Iceland. They currently use an older and less efficient version of the current EU system dating from 2007, though they have to accept that the EU’s Court of Justice in Luxembourg has the final say on its interpretation.

It is technically up to the EU to decide whether or not to permit the UK to sign up like this. For the UK the major stumbling block would be having to accept the involvement of the European Court of Justice in Luxembourg.

Whether this is politically possible will depend on the type of Brexit the UK opts for. Ultimately the commercial benefits may outweigh the relatively small surrender of sovereignty involved: this will be a matter to watch as the negotiations proceed.
Jonathan Fitchen, Senior Lecturer, University of Aberdeen

The recession hiding behind Wall Street’s record highs – The Washington Post

Wall Street may have set new record highs this week, but the rally is masking an uncomfortable truth: Corporate America is still in the midst of recession.

Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits in the Standard & Poor’s 500-stock index will fall 5.6 percent compared with a year ago — the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.”

[Dow follows S&P to record high]

Corporate earnings are supposed to be the bedrock of stock market value, but at the moment, they appear to be pointing in opposite directions. Energy companies have been devastated by falling oil prices. Multinationals have been hamstrung by the stronger dollar. Banks have been hammered by ultralow interest rates.

The gloomy reality comes amid growing warnings that the risk of a full-blown recession is rising — not only for the United States, but also the broader global economy. Britain’s decision to leave the European Union is also sowing uncertainty in financial markets and threatening to undermine the recovery in the United Kingdom. One of the most pessimistic forecasts came from Deustche Bank this month, predicting a 60 percent chance of a downturn in the United States over the next year.

That all sounds pretty dismal, and it makes the record highs set this week by both the S&P 500 and the blue-chip Dow Jones industrial average even more perplexing. At least part of the rally — and, some analysts argue, most of it — is the result of the signals from the world’s central banks that the era of easy money is far from over. But investors are also betting that corporate America and the broader economy are turning a corner, if they’re not already back on track.

Many analysts think the earnings contraction that started in the second quarter of 2015 bottomed out early this year. Profits fell 6.7 percent in the first quarter compared with a year ago, which makes the 5.6 percent estimate for this quarter look a little rosier. The outlook for the third quarter is even better, with analysts forecasting a milder decline as oil prices and the U.S. dollar stabilize.
Then there was a blockbuster report from the Labor Department showing rock-solid job growth of 287,000 jobs in June. That gave many investors confidence that the U.S. economy was weathering the global storm, especially after the exceptionally weak addition of just 11,000 jobs in May. On top of that, a new prime minister has been selected in Britain, a step toward resolving the political turmoil that has roiled markets.

[Opinion: Theresa May must contain the Brexit damage — and more]

Anthony Valeri, investment strategist for LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely.

Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985, which he notes are periods in which the federal deficit was increasing, rather than decreasing as it is now.

The third is the one we’re in right now, and it is not done playing out.