What is the amount of Operational Risk Capital at Your Bank?

Civil Antitrust Lawsuits Reinstated Against 16 Banks in Libor Case
May 23, 2016 By Nicole Hong, WSJ
Appeals court restores private suits against Bank of America, J.P. Morgan Chase, Citigroup and others
The lawsuits accuse 16 major banks—including Citigroup, J.P. Morgan and Bank of America—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.

In a setback for some of the world’s largest financial institutions, a U.S. appeals court on Monday reinstated the private antitrust lawsuits filed against 16 banks for allegedly rigging Libor interest rates.

The ruling from the Court of Appeals for the Second Circuit reverses a lower court decision from 2013, in which U.S. District Judge Naomi Buchwald dismissed the claims because she said the banks’ alleged conduct did not violate federal antitrust laws.

The lawsuits accuse 16 major banks—including J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.

The plaintiffs, who owned various financial instruments that were affected by Libor, claim the returns on their investments were depressed by the banks’ collusion. The lawsuits were filed by several groups of plaintiffs, including the local governments of cities like Baltimore, San Diego and Houston.

Judge Buchwald had dismissed the antitrust claims, saying the plaintiffs failed to show they were injured by the alleged rate manipulation. She said that because setting Libor was a “cooperative endeavor,” there could be no anticompetitive harm to consumers.

But the appeals court Monday disagreed and kicked the case back to the lower court for further proceedings. A three-judge panel found that the plaintiffs did show an antitrust injury “by alleging that they paid artificially fixed higher prices.”

Judge Buchwald in 2013 had allowed other claims by the plaintiffs to proceed, including allegations that the banks breached commodities laws, but the antitrust claims were a central part of the litigation, as violations can require a defendant to pay triple damages.

The appellate judges noted that the plaintiffs will still have to prove at a later stage whether the allegedly corrupt Libor rate did have an influence on the prices of their financial investments.

If this litigation is ultimately successful, the potential total bill to banks could be in the billions, analysts have estimated.

A lawyer representing the banks declined to comment, while a lawyer for the plaintiffs did not immediately respond to a request for comment.

Libor, a widely used benchmark that helps set interest rates for everything from mortgages to corporate loans, is calculated daily for different currencies based on estimated borrowing rates submitted by banks on panels. The lawsuits are targeting banks on the panel that sets U.S. dollar rates under Libor.

These private lawsuits are separate from the sprawling criminal and civil probes around Libor rigging, which began in 2008 and have implicated traders around the world. Regulators have accused big banks of letting their traders and executives raise Libor rates up or down to benefit their trading positions.

About a dozen financial firms have settled charges of manipulating Libor, and many have pleaded guilty to criminal charges. The largest penalty imposed was the $2.5 billion paid by Deutsche Bank AG last year.

In total, U.K. and U.S. authorities have imposed sanctions of more than $6 billion in the Libor cases. A series of global investigations are still ongoing, but The Wall Street Journal reported in February that regulators in the U.S. and U.K. are preparing to bring a final round of civil charges against several banks in the probe.

Write to Nicole Hong at nicole.hong@wsj.com

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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.”
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Shale Output Is Falling Faster Than Expected (Bloomberg)By Joe Carroll – Apr 15, 2015, 12:00:03 AM

Shale Output Is Falling Faster Than Expected

Shale drillers will see production drop sooner than expected under a U.S. government forecast, a momentum change that hints at an eventual price rally.

Just five months after Saudi Arabia put the market into a tailspin by refusing to cut supply despite a global glut, the shale oil industry will record its first monthly dip since U.S. officials began weighing output in 2013.

The projected production drop is small, just 1 percent. Yet investors took note, pushing oilfield stocks to the top five spots in the Standard & Poor’s 500 Index on Tuesday, led by rig operators Ensco Plc and Diamond Offshore Drilling Inc. The decline lags the idling of rigs because of a backlog of already-drilled wells that have gradually been coming online.

“OPEC’s plan is playing out and price is correcting the oversupply,” said Michael Scialla, an analyst at Stifel Nicolaus & Co. in Denver, in a telephone interview.

West Texas Intermediate crude, the U.S. benchmark, climbed 3 percent to $53.47 a barrel at 2:03 p.m. in New York, extending the rising streak to a fourth trading session.

Shale fields make up about half of total U.S. production, which will continue growing this year and next, rising to 10.3 million barrels a day in 2025, according to a new longterm forecast by the Energy Department Tuesday.

Crude lost almost 60 percent of its value since late June, making some shale fields unprofitable to develop and forcing companies to cut back exploration prospects. Oil explorers were forced to shut down more than half the rigs drilling for crude in the U.S. since the Saudi statement in November, and canceled expansion plans to conserve cash.

‘Hyperbolic Decline’

“The question on everyone’s mind was would we see it in the second or third quarter, and I’m not surprised it’s happening in the earlier part of that range,” said David Pitts, chief financial officer at Houston-based producer Carrizo Oil & Gas Inc.

Wells extracting oil from dense shale rock experience “hyperbolic decline rates,” Pitts said by telephone.

Comstock Resources Inc. halted all crude drilling at the start of the year and expects the oil production decline to begin in its third-and fourth-quarter results, said Gary Guyton, the Frisco, Texas-based company’s director of planning.

“Shale is a treadmill, so if you’re not drilling, you’re not producing,” Guyton said in a telephone interview. Overall, the production decline “might not be hugely significant but at least it won’t be growing.”

The flexibility to ramp operations up and down quickly makes shale fields especially attractive to oil companies coping with volatile fluctuations in world oil markets, said ConocoPhillips CEO Ryan Lance last week in an interview at Bloomberg headquarters in New York.

Resilience Matters

“We think we’re going into a world that’s going to be characterized by lower, gradually rising prices, but a lot of volatility,” Lance said. “When you have that volatility, what you want is the ability to be flexible and resilient and be able to flex your programs up and down.”

Shale producers such as EOG Resources Inc. have been predicting U.S. output would decline by the end of the year. In February, the Houston-based company said its own production would reach a nadir during the second and third quarters.

Lance said he expected U.S. output to fall in the second half of the year, helping prices to recover to as high as $80 a barrel in the next three years.

“There is a supply response happening. You don’t see it in the first half of the year because of the investments that we made over the last two years,” he said. “The reductions in capital that the industry has made are substantial. That’s going to start to materialize in the back half of this year.”

OPEC Role

Saudi Arabia, the dominant member of the Organization of Petroleum Exporting Countries, squelched efforts by some in the cartel to curb output in November, accelerating a fall in oil prices prompted by oversupplies. Saudi crude has been displaced from some U.S. markets as the flood of domestic shale oil offered refiners a cheaper alternative.

The five major U.S. shale oil regions will pump an average of 5.561 million barrels a day in May, down from this month’s estimated 5.618 million, the Energy Department said in a report released Monday.

The Niobrara formation northeast of Denver will lead the decline with a 3.3 percent drop, according to the Energy Department in Washington.

In the Niobrara formation, which lies beneath northeast Colorado and the edges of Kansas and Wyoming, the production fall-off will be sharper than in other regions because explorers were quicker to idle rigs, said Andrew Cosgrove, an analyst at Bloomberg Intelligence. Compared to other shale-oil areas, individual wells in the Niobrara don’t produce as much crude, reducing profitability, he said.

Hedge Help

The two biggest operators in the Niobrara — Anadarko Petroleum Corp. and Noble Energy Inc. — have been slowing activity and deferring work, according to Scialla, the Stifel Nicolaus analyst.

Only one of the primary producers in the formation — Denver-based PDC Energy Inc. — hasn’t slowed down, and that’s because they locked in cash flow prior to the oil market’s crash with financial instruments called hedges, Scialla said in a telephone interview.

“The Niobrara wells are cheaper and shallower than in the other shale plays but they’re not as prolific either,” he said. “They cost about half as much as a typical well in the Eagle Ford or the Bakken but they also only produce about half as much.”

Permian Rising

After the Niobrara, the Eagle Ford shale in Texas and the Bakken formation in North Dakota will register the next biggest month-over-month production declines in May, with 1.9 percent and 1.7 percent, respectively.

In the other two major U.S. shale oil regions — the Permian in Texas and the Utica in Ohio — output is expected to rise in May, the Energy Department said.

Explorers will be cautious about resuming their old pace of drilling out of fear that rising production would deflate prices again, Carrizo’s Pitts said.

“There would have to be a pretty significant bump up in prices for people to start picking up rigs again,” Pitts said.

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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.

Oil Crash Exposes New Risks for U.S. Shale Drillers

Photographer: Andrew Burton/Getty Images

U.S. shale oil production.

Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash.

At least six companies, including Pioneer Natural Resources Co. (PXD) and Noble Energy Inc. (NBL), used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines.

“Producers are inherently bullish,” said Mike Corley, the founder of Mercatus Energy Advisors, a Houston-based firm that advises companies on hedging strategies. “It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”

Oil Prices

The three-way hedges risk exacerbating a cash squeeze for companies trying to cope with the biggest plunge in oil prices this decade. West Texas Intermediate crude, the U.S. benchmark, dropped about 50 percent since June amid a worldwide glut. The Organization of Petroleum Exporting Countries decided Nov. 27 to hold production steady as the 12-member group competes for market share against U.S. shale drillers that have pushed domestic output to the highest since at least 1983.

WTI for January delivery rose $2.41, or 4.5 percent, to settle at $56.52 a barrel today on the New York Mercantile Exchange.

Debt Price

Shares of oil companies are also dropping, with a 49 percent decline in the 76-member Bloomberg Intelligence North America E&P Valuation Peers index from this year’s peak in June. The drilling had been driven by high oil prices and low-cost financing. Companies spent $1.30 for every dollar earned selling oil and gas in the third quarter, according to data compiled by Bloomberg on 56 of the U.S.-listed companies in the E&P index.

Financing costs are now rising as prices sink. The average borrowing cost for energy companies in the U.S. high-yield debt market has almost doubled to 10.43 percent from an all-time low of 5.68 percent in June, Bank of America Merrill Lynch data show.

Locking in a minimum price for crude reassures investors that companies will have the cash to keep expanding and lenders that debt can be repaid. While several companies such as Anadarko Petroleum Corp. (APC), Bonanza Creek (BCEI) Energy Inc., Callon Petroleum Co., Carrizo Oil & Gas Inc. and Parsley Energy Inc., use three-way collars, Pioneer uses more than its competitors, company records show.

‘Best Hedges’

Scott Sheffield, Pioneer’s chairman and chief executive officer, said during a Nov. 5 earnings call that his company has “probably the best hedges in place among the industry.” Having pumped 89,000 barrels a day in the third quarter, Pioneer is one of the biggest oil producers in U.S. shale.

Pioneer used three-ways to cover 85 percent of its projected 2015 output, the company’sDecember investor presentation shows. The strategy capped the upside price at $99.36 a barrel and guaranteed a minimum, or floor, of $87.98. By themselves, those positions would ensure almost $34 a barrel more than yesterday’s price.

However, Pioneer added a third element by selling a put option, sometimes called a subfloor, at $73.54. That gives the buyer the right to sell oil at that price by a specific date.

Below that threshold, Pioneer is no longer entitled to the floor of $87.98, only the difference between the floor and the subfloor, or $14.44 on top of the market price. So at yesterday’s price of $54.11, Pioneer would realize $68.55 a barrel.

‘Better Upside’

David Leaverton, a spokesman for Irving, Texas-based Pioneer, declined to comment on the company’s hedging strategy. The company said in its December investor presentation that “three-way collars protect downside while providing better upside exposure than traditional collars or swaps.”

The company hedged 95,767 barrels a day next year using the three-ways. If yesterday’s prices persist through the first quarter, Pioneer would realize $1.86 million less every day than it would have using the collar with the floor of $87.98. That would add up to more than $167 million in the first quarter, equal to about 14 percent of Pioneer’s third-quarter revenue.

Exposure Cost

The strategy ensures that the bulk of Pioneer’s production will earn more than yesterday’s market price. The three-ways will also prove valuable if oil rises above the subfloor.

“What they have is much better than nothing,” said Tim Revzan, an analyst with Sterne Agee Group Inc. in New York. “But they left some money on the table that they could have locked in at a better price.”

Noble Energy used three-ways to hedge 33,000 barrels a day, according to third-quarter SEC filings. Assuming yesterday’s prices persist, Houston-based Noble will bring in $50 million less in the first quarter than it would have by locking in the floor prices.

Bonanza Creek, based in Denver, Colorado, set up three-ways with a floor of $84.32 and a subfloor of $68.08, SEC records show. If prices stay where they are, the company will realize $8.1 million less in the first quarter than it would have by just using the floor.

Ryan Zorn, Bonanza Creek’s senior vice president of finance, said that the comparison doesn’t take into account the advantages of the strategy. The proceeds from selling the $68.08 puts helped pay for the protection at $84.32, without which Bonanza Creek would likely have purchased cheaper options with a lower floor.

’Much Better’

“The other comparison is if we’d done nothing,” Zorn said. “I view it as being much better than being unhedged.”

Representatives for Anadarko, Noble, Carrizo and Parsley didn’t return e-mails and phone calls seeking comment.

“Because we’ve had high energy prices for so long, it could have given them a false sense of confidence,” said Ray Carbone, president of Paramount Options Inc. in New York. “They picked a price they thought it wouldn’t go below. It has turned out to be very expensive.”

Callon (CPE)’s first-quarter three-ways cover 158,000 barrels with a floor of $90 and a subfloor of $75, company filings show. Callon, based in Natchez, Mississippi, will get $3.3 million less that it would have realized by using the $90 floor, assuming prices stay where they are.

“Certainly, if we’d had the foresight to know prices were going to crater, you’d want to be in the swap instead of the three-way,” said Eric Williams, a spokesman for Callon. “Swaps make more sense if you knew prices were going to go down the way they did, but a few months ago everyone was bullish.”

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net Richard Stubbe