JPMorgan’s Dimon Says Violent Moves in Treasuries Are Possible – Bloomberg Business

Jamie Dimon, chairman and chief executive officer of JPMorgan Chase CEO says the Treasury market is one thing he worries about

Comments aren’t a prediction, just a possibility, Dimon says

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Jamie Dimon, JPMorgan Chase & Co.’s chief executive officer, said the bank will be prepared for the possibility that Treasury prices move violently when interest rates rise.
“The one thing I do worry a little bit about, by the way, is Treasuries,” Dimon said Friday at a conference in New York sponsored by Barclays Plc. “Interest rates have been so low, for so long,” he said, adding that some traders and their managers have never experienced a rising interest-rate environment.
The U.S. banking system is much safer now because of higher capital and business diversification, said Dimon, 59, responding to a question about whether the next U.S. credit downturn would come from banks or non-banks. In April, he called volatility in the Treasury market in late 2014 a “warning shot” to investors.
“So I wouldn’t be shocked to see 10-year Treasuries, when rates are going up, people change their mind, they change direction, that they will be violently volatile and go up much faster than people think,” Dimon said. “I’m not predicting that. I’m simply saying in the back of my mind, I think that’s a possibility.”
His comments followed the biggest single-day rally in six years for two-year Treasuries. After the Federal Reserve announced Thursday it would keep interest rates near zero, yields on the policy-sensitive note dropped by 13 basis points, the steepest decline since the central bank announced it would expand its bond-buying program in March 2009. The rate on 10-year notes fell 10 basis points to 2.19 percent.
JPMorgan has “about the same” third-quarter trading-revenue trends as other banks that have disclosed expectations at the conference, Dimon said. Executives from Bank of America Corp. and Citigroup Inc. have said they probably will report a 5 percent drop in third-quarter trading revenue.
“September is still to go, so who knows,” Dimon said. “I think people are massively over-focused on those numbers.”
Markets

James Dimon

JPMorgan Chase & Co

Interest Rates

New York

Barclays PLC

Flash Move Haunts Bond Traders Heeding Dimon’s Warning of Crisis

Flash Move Haunts Bond Traders Heeding Dimon’s Warning of Crisis

Jamie Dimon, Chief Executive Officer of JPMorgan Chase & Co. Photographer: Andrew Harrer/Bloomberg

Six months after an unexplained flash rally in Treasuries sent markets reeling, bond investors are bracing for it to happen again.

Prudential Investment Management is trading more futures because they’re both liquid and anonymous. State Street Corp. is making smaller bets. And Pioneer Investments is looking for returns in higher-quality securities that are easier to sell.

On Oct. 15, benchmark Treasury yields swung the most relative to overall yields since at least 2000, scarring debt investors who say they’re still trying to figure out why it happened. JPMorgan Chase & Co. chief Jamie Dimon called the move a “warning shot” last week, blaming it on central-bank hoarding of bonds along with regulations that have led dealers to retreat from making markets. Others say the rise of electronic trading is at fault.

Whatever the reason, those trends aren’t changing as the Federal Reserve prepares to raise interest rates for the first time since 2006. Bets on market swings suggest traders expect prices to fluctuate the most of any year since 2011, raising the risk of another flash move.

“There’s potential for extreme conditions in the marketplace when volatility really goes up,” said Steven Meier, head of cash, currency and fixed-income at Boston-based State Street’s money-management unit. “There’s still a lot of unanswered questions about what happened,” and no “clear explanation of what the drivers were.”

Yield Swings

Bond trading has been turbulent this year, driven by uneven economic data, currency moves and Fed changes to its interest-rate forecasts. Yields on 10-year Treasuries have swung from 1.64 percent to 2.26 percent.

Treasuries are the world’s haven asset during turmoil because the securities are supposed to be the most liquid. A market that’s more prone to gyrations has the potential to boost borrowing costs for taxpayers, consumers and companies — in addition to making it harder for the Fed to exit from its record stimulus.

Dimon isn’t the only one warning episodes such as the one on Oct. 15 may happen again. The Treasury Markets Practices Group — an advisory committee on bond-market integrity backed by the Fed Bank of New York — echoed the idea at its February meeting.

Electronic Trading

“There is an increased potential for further episodes of volatility and impaired liquidity in the Treasury markets,” the meeting minutes said. The committee concluded that the move was exacerbated by the dealers’ pullback from the market and growth in electronic trading.

Last year, 48 percent of U.S. Treasury trading happened electronically, according to a survey from Greenwich Associates, up from 33 percent a decade ago. The TMPG said in a paper last week that the trend has improved liquidity, while creating added risks, too.

“In some cases, malfunctioning algorithms have interfered with market functioning, inundating trading venues with message traffic or creating sharp, short-lived spikes in prices,” the group said in an April 9 paper.

Calvert Investments money manager Matthew Duch said the mystery of the flash rally leaves him in a tough spot. He wants to buy more high-yield bonds, but said he’s worried about the possibility that a Treasury-market swing could spark broader volatility, making it tough to trade the speculative-grade debt.

Yield Starved

“Are you getting compensated for the risk? Uh, maybe not,” Duch, whose firm manages $13 billion, said in a telephone interview from his Bethesda, Maryland, office. “But in this yield-starved environment, it’s difficult to find other places to put your money.”

Part of the reason trading has gotten bumpier is that banks are stepping back from market-making, according to Jeffrey Snider, chief investment strategist at West Palm Beach, Florida-based Alhambra Investment Partners LLC.

That’s shown up in the market for short-term financing, known as repurchase agreements or repos, which help grease the wheels for bond trading. The amount of securities financed through a part of the market known as tri-party repo is down 15 percent since December 2012, and more than 41 percent from its 2008 high.

“Funding has just fallen off a cliff,” Snider said. “The system is searching for a stable state, but it hasn’t been able to find one yet.”

BlackRock View

Not everyone is worried that it’s too hard to trade debt these days.

“We feel pretty comfortable with the liquidity,” Michael Fredericks, head of retail multi-asset client solutions for New York-based BlackRock Inc., said by telephone. Fredericks, who manages the $11.5 billion BlackRock Multi-Asset Income Fund, said he’s more worried that investors have gotten complacent about long-term rates staying low.

State Street’s Meier said he is concerned about being able to efficiently trade his holdings, and is making smaller bond trades as a result. Last year, his company recommended clients build up their cash positions and consider derivatives bets, such as swaps and futures.

Interest-rate futures — which are essentially an agreement to buy or sell rates at a later date — have been getting more popular in part because they trade through a clearinghouse, reducing counterparty risk. Trading was up 12 percent in the first three months of the year from the same period in 2014, according to CME Group Inc.

Liquidity Drop

Erik Schiller, a money manager for Prudential’s $533 billion fixed-income unit, said he’s been using futures more because they offer fast and anonymous trade execution during big market swings.

“There’s the potential for these types of moves to happen,” he said. “The liquidity providers in the bond market are less now than they’ve ever been.”

One measure of Treasury dealers’ trading activity has fallen closer to its financial-crisis levels. Deutsche Bank AG’s index that gauges liquidity by comparing the three-month average size of dealer trades against moves in the 10-year note’s yield fell to about 25 in February. It was above 500 in 2005, and reached as low as 19 in 2009 during the depths of the financial crisis.

“If liquidity is as bad as it is now, what’s going to happen when things really get adverse?” said Richard Schlanger, who co-manages about $30 billion in bonds as vice president at Pioneer Investments in Boston. “That’s why we’re trying to get in front of this and buy really good, liquid names.”

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JPMorgan Chase Chief Says ‘Banks Are Under Assault’

By NATHANIEL POPPER
JANUARY 14, 2015

As JPMorgan Chase reported sluggish earnings and potential new legal costs on Wednesday, its chief executive, Jamie Dimon, lashed out at regulators and analysts, including some who are calling for the breakup of what is the nation’s largest bank.

The bank announced that both its revenue and profit were down during the fourth quarter of 2014, with few bright spots across its many business lines.

The bank’s profits were also dragged down by $1 billion it put aside to deal with a government investigation of wrongdoing on its foreign currency trading desks. The bank has also begun preparing for new rules that are expected to be tougher on JPMorgan than any other financial firm.

During conference calls with reporters and analysts, Mr. Dimon sounded like a chief executive under siege.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

JPMorgan’s enormous consumer bank also had a drop in revenue in several areas, including credit cards and mortgages, which has slowed down as the national housing market has cooled off.

The bank has been able to attribute some of its disappointing results in recent years to the enormous fines that it has had to pay for wrongdoing before and during the financial crisis.

But while those legal expenses were expected to eventually recede, they have kept coming. This quarter, JPMorgan set aside $1.1 billion — $990 million after taxes — to deal primarily with an industrywide investigation of manipulation in the foreign currency markets. It set aside a similar amount in the previous quarter, but the potential severity of the wrongdoing appears to have increased since then.

Mr. Dimon said that the bank was still bracing for more fines. “It’s going to cost us several billion dollars more somehow plus or minus another couple billion before we get to normal.”

Mr. Dimon said the bank took responsibility for some of the problems that have led to penalties, but he complained that it had been unfair when multiple regulators had come after the bank for the same issue.

The more enduring challenge for the bank, though, may be the new requirements that the bank maintain higher levels of capital than other banks because of its size.

A Federal Reserve official said in December that JPMorgan would most likely to have to raise over $20 billion of new capital, either by holding on to profits or selling more shares to investors. The bank is the only one that is expected to have to raise significant amounts of new capital.

A bank analyst at Goldman Sachs said this month that because of the price that JPMorgan was paying for its size, it may be worth less in its current form than it would be if it was broken apart. On Wednesday, multiple analysts said that regulators seemed to want JPMorgan to be smaller.

Mr. Dimon acknowledged that there could be a point when the additional costs could force it to spin off some businesses. “If the regulators at the end of the day want JPMorgan to be split up, then that’s what will have to happen,” he said. “We can’t fight the federal government if that’s their intent.”

But Mr. Dimon said that his team was confident that the bank would manage to comply with the rules as they have currently been outlined without any major changes. Invoking patriotism, he warned that if his company was forced to shrink, it could open the door for foreign competitors, especially those from China.

“America has been the leader in global capital markets for the last 50, 100 years,” he said. “I look at it as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase be a Chinese company.”

JIM ROGERS: I Warned You The Swiss Central Bank’s Currency Policy Would End Disastrously

JIM ROGERS: I Warned You The Swiss Central Bank’s Currency Policy Would End Disastrously
Business Insider

Global currency markets are roiling in the aftermath of Thursday’s surprise decision by Switzerland’s central bank to end a 3-year policy that limited the franc from appreciating too much against the euro.

The move sent the franc soaring, triggering hundreds of millions of dollars of losses at banks including Barclays and Deutsche Bank, and bankrupted several currency brokers overnight. Many financial observers have lambasted the Swiss central bank for failing to signal the move was coming.

Jim Rogers, however, saw all of this coming, and he wrote about it in his 2013 book Street Smarts.

“I explained carefully and at length that it was coming and why,” he said in an email to Business Insider. “I am still astonished they would ever have done something so foolish, but politicians throughout history have always done some amazingly foolish things.”

Here’s the excerpt from the book:

Some of Switzerland’s most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established.

Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels.

Switzerland, traditionally, has been unconditional in its offer of bank secrecy. Of course, all banks are supposed to keep your affairs quiet. If you put your money in a bank in Chicago fifty years ago, you would have done so with the assumption that it was confidential. In America, as we have seen, that is no longer the case. The government can look into your bank account, your bedroom, your mail … anywhere it wants. And in much the way that our privacy has been taken away from us, the Swiss have recently surrendered some of theirs, succumbing to pressure from the United States. Bank secrecy in Switzerland is not as sacrosanct as it once was.

Nonetheless, the first thing people look for when seeking monetary refuge is safety. They want stability. They want the security of knowing they will get their money back, and that they will get back at least as much as they put there in the first place. That depends entirely on a sound currency. And that is something the Swiss franc has always offered. The question, now, is whether that is going to last.

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 percent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

Here’s the excerpt from the book:

Some of Switzerland’s most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established.

Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels.

Switzerland, traditionally, has been unconditional in its offer of bank secrecy. Of course, all banks are supposed to keep your affairs quiet. If you put your money in a bank in Chicago fifty years ago, you would have done so with the assumption that it was confidential. In America, as we have seen, that is no longer the case. The government can look into your bank account, your bedroom, your mail … anywhere it wants. And in much the way that our privacy has been taken away from us, the Swiss have recently surrendered some of theirs, succumbing to pressure from the United States. Bank secrecy in Switzerland is not as sacrosanct as it once was.

Nonetheless, the first thing people look for when seeking monetary refuge is safety. They want stability. They want the security of knowing they will get their money back, and that they will get back at least as much as they put there in the first place. That depends entirely on a sound currency. And that is something the Swiss franc has always offered. The question, now, is whether that is going to last.

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 percent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

In the first scenario, the market will continue to buy Swiss francs, which means that the Swiss National Bank will just have to keep printing and printing and printing, and that will of course debase the currency. Now, there are major exporters in Switzerland who might benefit, but the largest industry in Switzerland, the single largest business, is finance. The economy rises or falls on the nation’s ability to attract capital. And the reason people put their money there is their trust in the soundness of the currency- they not that their money will be there when they want it, and that it will not be worth significantly less than when they put it there in the first place.

But people will stop rushing to put their money into a country where the value of the currency is deliberately being driven down. After the Second World War and for the next thirty years, people took their money out of the United Kingdom because the currency plummeted. (Politicians blamed it on the gnomes of Zurich.) London ceased to be the world’s reserve financial center because Britain’s money was no good. Similarly, if you debase the franc, eventually nobody will want it. You will have eroded its value, not simply as a medium of exchange, but also a monetary refuge. The money will move to Singapore or Hong Kong, and the Swiss finance industry will wither up and disappear.

The alternative scenario is what happened in July 2010, the last time the Swiss tried to weaken their currency. They did so by buying up foreign currencies to hold against the franc-selling the franc to keep the price down. But the market just kept buying the francs, and the Swiss central bank, after quadrupling its foreign currency holdings, abandoned the effort. At that point, when the bank stopped selling it, the Swiss franc rose in value, all the currencies the Swiss had bought (and were now holding) declined in value, and the country lost $21 billion. In the end, the market had more money than the bank, and market forces inevitably prevailed.

In the late 1970s when everyone was rushing to the franc, the Swiss National Bank, to stem the tide, imposed negative interest rates on foreign depositors. The government levied a tax on anybody who bought the currency. It was their form of exchange controls back then. If you bought 100 Swiss francs, you wound up with 70 in your pocket. Today, with the rush on again, The Economist has described the Swiss currency as “an innocent bystander in a world where the eurozone’s politicians have failed to sort out their sovereign-debt crisis, America’s economic policy seems intent on spooking investors and the Japanese have intervened to hold down the value of the yen.”

All of which is true, but I think the problem runs deeper than that. The Swiss for decades had a semi monopoly on finance. And as a result they have become less and less competent. The entire economy has been overprotected. The reason Swiss Air went bankrupt is because it never really had to compete. Any monopoly eventually destroys itself, and Switzerland, in predictable fashion, is corroding from within. As a result, other financial centers have been rising: London, Lichtenstein, Vienna, Singapore, Dubai, Hong Kong.

I still have those original Swiss francs that I bought in 1970, and since then the franc is up about 400 percent. Granted, it has been over forty years, but 400 percent is nothing to sneeze at. Plus I have been collecting interest. Had I kept the money in an American savings account, it would have gone down 80 percent against the franc.

Reprinted from “Street Smarts” Copyright © 2013 by Jim Rogers. Published by Crown Business, an imprint of The Crown Publishing Group, a division Random House LLC, a Penguin Random House Company.

Deutsche Bank, Barclays Seen Losing Millions Amid Swiss Rout

Bloomberg Jan 16, 2015

Deutsche Bank AG and Barclays Plc (BARC ▼ -1.58% 224.35), two of the world’s largest currency dealers, were among the first banks to suffer losses after the Swiss central bank’s surprise decision to abandon a cap on the franc, people with knowledge of the matter said.

Deutsche Bank lost $150 million on Thursday amid an unexpected surge in the Swiss franc, said one of the people, who asked not to be identified because the figure hasn’t been made public. Barclays’s losses were less than $100 million, another person said. The losses are still being calculated, and may spread to other asset classes, including equities, one of the people said.

The Swiss National Bank’s decision to scrap the three-year-old ceiling sent the franc up as much as 41 percent versus the euro, while climbing more than 15 percent against all of the more than 150 currencies tracked by Bloomberg. Two brokers, Global Brokers NZ Ltd. and Alpari (UK) Ltd., said they were forced to shut down amid continuing market turmoil.

Barclays’s losses won’t have a material impact on results and the London-based bank is able to fulfill all spot Swiss currency trades made, said the person.

Hoeing: Too-Big-to-Fail May Lead to US Bank Pay Rules

U.S. lawmakers may follow their European counterparts and regulate bankers’ pay if reforms aimed at ending government bailouts for lenders stall, Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig said.

Regulatory focus on bankers’ pay “will become more of an issue in the U.S. if we don’t solve the too-big-to-fail problem,” Hoenig said in an interview in Amsterdam today. “If we focus on that and get that solved, then the remuneration issue will become less significant and we’ll just see how that plays.”

U.S. lawmakers have so far avoided imposing limits on bankers’ pay, while regulators in the European Union this year cracked down on discretionary payments, known as allowances, which were used to sidestep rules banning bonuses that exceed fixed salary.

“I think it could change — there is some legislation where compensation is an area where there could be a focus, compensation methods and so forth,” Hoenig said. “The reason there’s a little recalcitrance is it’s so unlike the U.S., where you think of markets and if you’re successful then you get rewarded.”

Regulators on the Financial Stability Board last month proposed that the world’s largest banks hold buffers of loss-absorbing liabilities to be written down in a crisis, forcing losses on to bank creditors rather than relying on government bailouts to avoid economic catastrophe. Final rules on the so-called TLAC measures are due next year.

Restrictions on U.S. banker pay may “catch if the reform doesn’t proceed,” Hoenig said. “Americans intuitively think markets are good if they’re symmetric. If we bring that balance back, they don’t care about the pay so much.”

To contact the reporter on this story: Ben Moshinsky in Amsterdam at bmoshinsky@bloomberg.net

To contact the editors responsible for this story: Patrick Henry at phenry8@bloomberg.net Zoe Schneeweiss

Goldman-Led Group of Firms Buys Perzo to Form Instant-Messaging Company

Fourteen Financial Firms Invest $66 Million

By JUSTIN BAER WSJ
Fourteen of the world’s biggest financial-services firms bought Perzo Inc., an instant-messaging software company, and formed a new technology company that aims to change the way traders communicate.
Led by Goldman Sachs Group Inc., the consortium invested $66 million in the venture, called Symphony Communication Services Holdings LLC, according to a statement from Symphony.

Symphony in turn acquired Perzo, a two-year-old startup founded by veteran communications-software executive David Gurle. Goldman contributed its in-house messaging developments to the new company, which Mr. Gurle will lead as chief executive.

The deal, announced Wednesday, capped months of negotiations that had widened recently to include additional banks. In addition to Goldman, Bank of America Corp., Bank of New York Mellon Corp., BlackRock Inc., Citadel LLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, J.P. Morgan Chase & Co., Jefferies LLC, Maverick Capital Ltd., Morgan Stanley, Nomura Holdings Inc. and Wells Fargo & Co. invested in Symphony.

In the statement, Symphony said it expected that many of the financial firms would be early users of the company’s messaging platform.
“Symphony responds to a pressing need across the industry for better methods of communication and collaboration,” Darren Cohen, global co-head of the Goldman principal-investing arm that spearheaded the talks, said in the statement.
The group’s breadth underlined an industrywide push for software that lets employees trade messages instantly and securely. It also highlights Wall Street’s desire to put pressure on one of its biggest vendors, Bloomberg LP. Bloomberg’s communications services remain a ubiquitous presence on trading floors, and the price the data company charges for its terminal—some $20,000 a year—continues to vex bank executives charged with wringing costs out of their trading businesses.
A Bloomberg spokesman declined to comment.

The deal is also a reunion of sorts for Mr. Gurle, who worked with Goldman and other banks during previous career stops at Microsoft Corp., Thomson Reuters Inc. and Skype. He founded Palo Alto, Calif.-based Perzo in late 2012.

In a blog post on Symphony’s website, Mr. Gurle wrote that the new company’s messaging platform “is intended to be used by some of the most time-conscious firms on the planet who are regularly corresponding high-value information—where a delay of a few seconds can have significant cost implications.”
He wrote that Symphony would be available to all financial firms by mid-2015.

The Wall Street Journal reported last week that the bank group was also in talks with one of Mr. Gurle’s former employers, Thomson Reuters, over ways to integrate their messaging platforms.

On Wednesday, a Thomson Reuters spokesman confirmed the data company had held discussions with Symphony.

The news services of Bloomberg and Thomson Reuters compete with Dow Jones & Co., publisher of The Journal.
Write to Justin Baer at justin.baer@wsj.com

5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives

5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives
SEPTEMBER 25, 2014 AT 9:11 PM
Zero Hedge / Tyler Durden
Submitted by Michael Snyder of The Economic Collapse blog,

When is the U.S. banking system going to crash? I can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five “too big to fail” banks in the United States that each have more than 40 trillion dollars in exposure to derivatives. Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable. And unlike stocks and bonds, these derivatives do not represent “investments” in anything. They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future. The truth is that derivatives trading is not too different from betting on baseball or football games. Trading in derivatives is basically just a form of legalized gambling, and the “too big to fail” banks have transformed Wall Street into the largest casino in the history of the planet. When this derivatives bubble bursts (and as surely as I am writing this it will), the pain that it will cause the global economy will be greater than words can describe.

If derivatives trading is so risky, then why do our big banks do it?

The answer to that question comes down to just one thing.

Greed.

The “too big to fail” banks run up enormous profits from their derivatives trading. According to the New York Times, U.S. banks “have nearly $280 trillion of derivatives on their books” even though the financial crisis of 2008 demonstrated how dangerous they could be…

American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them. But the 2008 crisis revealed how flaws in the market had allowed for dangerous buildups of risk at large Wall Street firms and worsened the run on the banking system.

The big banks have sophisticated computer models which are supposed to keep the system stable and help them manage these risks.

But all computer models are based on assumptions.

And all of those assumptions were originally made by flesh and blood people.

When a “black swan event” comes along such as a war, a major pandemic, an apocalyptic natural disaster or a collapse of a very large financial institution, these models can often break down very rapidly.

For example, the following is a brief excerpt from a Forbes article that describes what happened to the derivatives market when Lehman Brothers collapsed back in 2008…

Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why?

The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.

After the last financial crisis, we were promised that this would be fixed.

But instead the problem has become much larger.

When the housing bubble burst back in 2007, the total notional value of derivatives contracts around the world had risen to about 500 trillion dollars.

According to the Bank for International Settlements, today the total notional value of derivatives contracts around the world has ballooned to a staggering 710 trillion dollars ($710,000,000,000,000).

And of course the heart of this derivatives bubble can be found on Wall Street.

What I am about to share with you is very troubling information.

I have shared similar numbers in the past, but for this article I went and got the very latest numbers from the OCC’s most recent quarterly report. As I mentioned above, there are now five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives…

JPMorgan Chase

Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)

Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)

Citibank

Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)

Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)

Goldman Sachs

Total Assets: $915,705,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)

Bank Of America

Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $831,381,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)

And it isn’t just U.S. banks that are engaged in this type of behavior.

As Zero Hedge recently detailed, German banking giant Deutsche Bank has more exposure to derivatives than any of the American banks listed above…

Deutsche has a total derivative exposure that amounts to €55 trillion or just about $75 trillion. That’s a trillion with a T, and is about 100 times greater than the €522 billion in deposits the bank has. It is also 5x greater than the GDP of Europe and more or less the same as the GDP of… the world.

For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.

At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.

It is like a patient with an extremely advanced case of cancer.

Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.

The same thing could be said about our relationship with the “too big to fail” banks. If they fail, so do the rest of us.

We were told that something would be done about the “too big to fail” problem after the last crisis, but it never happened.

In fact, as I have written about previously, the “too big to fail” banks have collectively gotten 37 percent larger since the last recession.

At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.

If those banks were to disappear tomorrow, we would not have much of an economy left.

But as you have just read about in this article, they are being more reckless than ever before.

We are steamrolling toward the greatest financial disaster in world history, and nobody is doing much of anything to stop it.

Things could have turned out very differently, but now we will reap the consequences for the very foolish decisions that we have made.

U.S. Regulator Flags Concerns About Growing Auto-Loan Market

 

WASHINGTON — A U.S. financial regulator is growing worried about increasingly risky practices in the auto-lending market, an area of growth for banks.

The Office of the Comptroller of the Currency, in a report released Wednesday, singled out concerns in the “indirect” auto lending market, in which banks buy up loans originated by car dealers. The regulator said it’s concerned about signs of loosening lending standards, including more loans to borrowers with weaker credit.

“These early signs of easing terms and increasing risk are noteworthy,” the banking regulator said.

Associated Press

Banks saw auto lending grow nearly 13% compared with a year earlier in the fourth quarter of last year and the OCC said it’s worried about growing losses in the industry. Average losses per vehicle have “risen substantially in the past two years.”

The average loss on a defaulted auto loan rose to more than $8,500 in the first quarter of this year, compared with $7,400 a year earlier, according to a May report by Experian PLC.EXPGY +0.18%

Auto lending has been a big area of growth for banks as demand for credit cards and other consumer loans has remained tepid.

U.S. Bancorp USB +0.14%, the largest U.S. regional bank by assets, has been “moving more aggressively in auto loans,” Chief Executive Richard Davis said during an investor conference earlier this month.

Wells Fargo WFC +0.21% & Co., the fourth-largest U.S. bank by assets, has expanded its auto-lending business significantly. The San Francisco-based bank’s auto-loan portfolio increased 11.3% in the first quarter to $52.6 billion.

Wells Fargo has improved its credit quality in the auto-lending business in recent years, Thomas Wolfe, executive vice president of consumer credit solutions for the bank, said during an investor presentation in May. “We have moved upstream slightly,” he said, adding that the bank does “a lot more prime financing than we do non-prime or subprime financing.”

Total outstanding U.S. auto loans have risen to $875 billion in the first quarter of 2014, the highest level in more than a decade, according to Federal Reserve Bank of New York data.

Earlier this month, General Motors Financial Co. sold off its largest bond backed by subprime auto loans since 2007, garnering the lowest yields in more than a year compared with an interest rate benchmark.

Bond investors have gravitated to auto loans because delinquencies are low and the bond deals weathered the financial crisis with few rating downgrades, a stark difference from bonds backed by home mortgages.

The auto-lending market faces regulatory inquiries as well, The Justice Department and Consumer Financial Protection Bureau have been investigating whether lenders’ practices have led to discrimination against women and minorities.

 

Moody’s: Risky Borrowers Default at Higher Rates

 

Senior Editor WSJ

Lenders beware: junk-rated companies that borrow with few strings attached are defaulting at higher-than-average rates.

Analysts at Moody’s Investors Service MCO -0.22% studied 423 U.S. companies that borrowed money on easy terms between 2005 through the first quarter of 2014. By tracking their default rates over three-year intervals, the analysts discovered that the average default rate totaled 18.8%, compared with a 13.4% rate for all high-yield loan borrowers.

More companies are getting access to those so-called covenant-lite loans. More than half of loans in the $750 billion junk loan market lacked financial covenants, according to a recent analysis by S&P Capital IQ.

Recently, pest-control and cleaning company Servicemaster Global Holdings Inc., borrowed $1.83 billion in a covenant-lite loan. Other recent borrowers included designer fashion house Kate Spade & Co. and nut specialist Diamond Foods Inc.DMND +0.29%

Covenants are triggers that could force borrowers to shore up their financial health. Those triggers usually involve periodic tests of overall debt levels and cash flow to cover scheduled interest payments.

Moody’s study also found that the covenant-lite loans are becoming a larger part of companies’ capital structures.

“It’s a worrisome trend,” said Moody’s analyst Julia Chursin. She noted that a smaller debt cushion means that lenders will take bigger losses in a default, because there are fewer lenders behind them in the capital structure to absorb losses.

Moody’s analysts found that covenant-lite lenders recovered less: 79 cents on the dollar versus 82 cents for all lenders in their database.

The growth in riskier loans is starting to concern regulators. The Office of the Comptroller of the Currency released a report on Wednesday, which cited the growth of risky high-yielding loans with looser underwriting standards as an area of “supervisory concern.”