New From Credit Suisse: Bonds for Self-Inflicted Catastrophes

Sagacious LLC will help customize a similar program to save op risk regulatory capital at your institution. 

By ANUPREETA DAS and LESLIE SCISM
May 16, 2016 1:21 p.m. ET WSJ

Credit Suisse Group AG is going to give it a try in the bond market. The bank plans as early as this week to launch unusual new securities that would pay investors relatively high interest rates. The catch is Credit Suisse could take their principal if incidents like rogue trading, information-technology breakdowns or even accounting errors lead to massive losses for the bank, people familiar with the offering said.

The deal is a first-of-its-kind twist on the “catastrophe bonds” that insurers have used for years to lay off the risk of natural disasters like hurricanes. Credit Suisse’s offering covers self-inflicted disasters as well as external events and has been marketed to hedge funds and other big investors.

The insurance feature of the bonds would be triggered if Credit Suisse’s annual operational risk-related losses cross $3.5 billion. Buyers have a level of comfort, however, because it’s a “second-event” bond. The most any single event could contribute to the trigger is $3 billion, meaning it would take more than one event to cross the threshold. The odds of that are remote: Credit Suisse has put them at roughly 1 in 500, the people said.

A Credit Suisse spokeswoman declined to comment.
The appetite for such offerings in the capital markets, as persistently low interest rates send investors searching for higher yields, is encouraging Wall Street companies to test new uses for the structure.

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Heard on the Street: Credit Suisse Takes Out Insurance on Itself
Insurance-industry executives said that they haven’t previously seen a bank attempting to tap capital markets to cover this type of risk. The move has its roots in regulation. Under European bank rules, banks must calculate operational risk and may use insurance products as part of meeting their capital requirements, according to industry participants.

In general, operational risk is the possibility of losses resulting from insufficient internal controls, errant systems or rogue employees. The Credit Suisse offering doesn’t cover market losses from trading that is authorized by the bank, some of the people familiar with the matter said.

Paul Schultz, chief executive of the Aon Securities unit of global insurance brokerage Aon PLC, said an offering like Credit Suisse’s reflects “growing investor sophistication on the underwriting side and a general view that to continue to grow the asset class, investors are going to have to expand from simply writing property risk.”

Zurich-based Credit Suisse, via a Bermuda company called Operational Re, plans to issue a five-year bond of up to 630 million Swiss francs ($646 million) to qualified institutional buyers such as hedge funds, asset managers and firms that pool together capital from pension funds. The bonds are part of a planned package that includes an insurance policy of up to 700 million francs issued by Zurich Insurance Group. Most of the cost of any claim would be paid for by the bonds. The size of the bond offering and the policy limits ultimately will be determined by investor interest, the people said. A spokeswoman for Zurich said the company’s policy is not to comment on current or potential commercial relationships.

The coupon is expected to be in the “mid-single digits,” one of the people said—higher than what Credit Suisse was initially planning, in order to entice investors to buy the novel security.

Credit Suisse last week reported a first-quarter net loss of 302 million francs, compared with a profit of 1.05 billion francs in the same period last year. The bank’s new chief executive, Tidjane Thiam, has been retooling the bank away from its investment-banking business toward its more stable wealth-management unit.

European banks have long used insurance products to meet capital requirements set by regulators or to unload risk from their balance sheets. Before the financial crisis, giant insurer American International Group Inc. sold financial derivatives known as credit-default swaps to major European banks as insurance against losses in their holdings of subprime mortgage assets. AIG’s near collapse in 2008 in the wake of the housing-bubble burst was tied to the massive volume of credit-default swaps it had sold.

As for Credit Suisse’s new bond, the bank can’t call on the money to cover regulatory liabilities or government fines, the people said. Losses from rogue trading, which have hobbled large banks such as Société Générale and UBS Group AG in recent years, could be covered by the insurance provided by the bond, but any fines stemming from it wouldn’t be, they said.

Write to Anupreeta Das at anupreeta.das@wsj.com and Leslie Scism at leslie.scism@wsj.com

Sagacious LLC can customize a disaster bond for your institution.

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.

Most Banks Would Fail Real Stress Tests

From Bloomberg, Mar 19, 2014, 11:54:55 AM
This week, the Federal Reserve will present the results of stress tests designed to ensure that the largest U.S. banks won’t turn the next financial crisis into an economic disaster. There’s just one problem: If the tests were realistic, most of the banks would fail.

To read the entire article, go to http://bv.ms/1kIpdZm
Sent from the Bloomberg iPhone application. Download the free application at http://itunes.apple.com/us/app/bloomberg/id281941097?mt=8

A breakthrough in quantum cryptography could make financial markets of the future cheat-proof

INSTEIN TO THE RESCUE

A breakthrough in quantum cryptography could make financial markets of the future cheat-proof

By Christopher Mims and Siraj Datoo 4 hours ago

A way to keep you safe not only from snooping enemies but from dishonest allies too. AP Photo/Francisco Seco

Demonstrating a feat that was until recently thought to be impossible, researchers in Geneva, Singapore, Cambridge and Waterloo, Ontario have “unconditionally guaranteed” the security and sanctity of a message transmitted between two points on earth. Their work (pdf) could lead to impenetrable communications networks for financial trading, online voting, or an endless variety of other tasks currently carried out on the internet.

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In this experiment the researchers solved a problem in secure networks known as “bit commitment.” Imagine that you’re playing a game of rock-paper-scissors by exchanging emails or instant messages. If your technology were fast enough, you could in theory cheat by waiting for your opponent’s answer to arrive (say, “rock”) and sending the response that would defeat it (i.e. “paper”) so quickly that it would look as if you had both made your choices at the same time. Bit commitment guarantees that a message sent at a stated time was in fact sent at that time and could not have been intercepted and changed along the way.

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To accomplish this feat the researchers had to combine two domains of basic physics that rarely intersect—quantum theory and Einstein’s special theory of relativity. The result is “relativistic quantum cryptography.” The key difference between this and ordinary quantum cryptography, the previous gold standard (in which, as we reported recently, there have also been some advances), is that the latter can make a message tamper-proof, but can’t eliminate the potential for cheating about when it was sent. That means it guarantees secure communications between two parties that trust each other (say, a country’s foreign ministry and one of its embassies), but could be exploited if one of the parties is dishonest (between two financial trading systems, for example). Relativistic quantum cryptography closes that loophole.

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Of course, even the most secure network has endpoints that are vulnerable to snooping. Messages sent between two computers using this system could not be tapped in transit, as the US National Security Agency reportedly accomplished with what were thought to be secure communications networks used by Google and Yahoo. But individual computers can always be compromised by attackers with sufficient determination. So keep using those strong passwords.

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Read this next: The complete guide to not being that idiot who got the company hacked

Why Thomson Reuters and Markit could give Bloomberg a run for its money

The privacy scandal that shook Bloomberg in May could be coming back to bite it. Today, Markit and Thomson Reuters formally announced their new messaging system for finance professionals, Market Collaboration Services. It seems designed to compete with the chat function on Bloomberg terminals, to which Bloomberg owes part of its dominance as a data provider. The two companies said today that Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley were all on board.

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We’ve written before that Thomson Reuters will have a hard time unseating Bloomberg. But traders, bankers, and other financial services professionals we’ve spoken to over the last few months have raised a number of points that lead us to believe that Thomson Reuters and Markit could be more successful than we thought:

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Concerns about snooping and data privacy really shook bankers up. In May, Bloomberg admitted that its reporters had access to information about its customers’ usage of their Bloomberg terminals, and there were complaints that they were using it to write stories. Though the fury may have faded, the message has not; third-party technology can pose a threat to the secrecy of the firm. The Markit/Thomson Reuters offering was created in close collaboration with banks and is more customizable, so it may enjoy a certain level of trust.

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Not everyone needs a Bloomberg. Bloomberg terminals cost around $20,000 per year, something Wall Street has long seen as a necessary evil. But maybe no longer. “For some big banks, it’s an incredibly expensive instant messaging device,” an executive at one market infrastructure company told the Financial Times (paywall). “They’re saying, ‘we’re spending $120m a year on Bloomberg. That needs to come down’.”

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Sharing is caring… about costs. Major banks have already made the decision that employees can share a terminal in some cases, and used the savings to buy cheaper plans from Thomson Reuters that can be customized to fit an employee’s role. A commodities trader, the thinking goes, doesn’t need all the same tools a banker advising on tech mergers does. By contrast, Bloomberg terminals are one-size-fits-all; if you buy a terminal, you have to take all the features it offers even if you don’t need them.

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This is already happening; one banker who was not authorized to speak on his bank’s behalf said his team had seen its number of Bloomberg terminals cut down to one, replaced by Thomson Reuters Eikon terminals. The team shares the remaining Bloomberg terminal.

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A stand-alone chat function makes a lot of sense. In an email, Thomson Reuters said it “aims to create the largest financial markets messaging community and remove barriers to cross-market communication.” This means installing the messaging service on as many machines as possible, even ones that don’t even receive data feeds. Therefore, employees across the business could have access to the secure chat feature. If fewer bankers have their own Bloomberg terminals, they will need an alternative chat service to communicate with those colleagues that don’t have them.

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Clearly, this isn’t a transition that will happen overnight. But with cost pressures mounting and reception already warm, Markit and Thomson Reuters seem to have a better shot at taking on Bloomberg than you might think.

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Bloomberg declined to comment.

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Reforming banking’s risk culture requires breaking “accountability firewall”

Reforming banking’s risk culture requires breaking “accountability firewall”

September 11, 2013 @ 8:09 pm

By Guest Contributor

By Henry Engler, Compliance Complete

NEW YORK, Sept. 11 (Thomson Reuters Accelus) – If there is one part of the cultural makeup of Wall Street that remains firmly in place despite the financial crisis and subsequent avalanche of regulations, it is the reticence among those who lose money to come clean early.

Many of the most spectacular losses in recent years — whether the JPMorgan “London Whale” episode, the UBS “rogue trader” incident, or Jerome Kerviel’s manipulation of internal systems at Société Générale — have all had one thing in common: concealment of trades gone badly wrong, or at a minimum, a lack of transparency and early acknowledgement of losses. And if one can point to a single reason for such behavior, it is the well-known fact that raising the red flag would mean the individual responsible would be shown the door.

The blowup at JPMorgan was noteworthy not just for the size of the loss ($6.2 billion), coming in a unit that was supposed to hedge risk, but also for senior management’s role in cultivating a culture that discouraged individuals to identify problems.

“Ina (Drew) never wanted to hear bad news,” said a JPMorgan bank executive familiar with the management style of the former Chief Investment Officer where the loss was incurred.

In a lengthy piece by the New York Times [1] last year that examined the failure of controls at JPMorgan, CEO Jamie Dimon said: “Honestly, I don’t care what second-guessers say in life If anyone in the company knew, they should have said something. No one came to us beforehand and said we have a problem we should be looking at.”

Dimon’s comment could well have been made by other chief executives. In a scathing review of banking practices by the UK Parliamentary Committee on Banking Standards [2] earlier this year, the panel highlighted a disturbing lack of awareness and accountability by senior managers:

“Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making… Ignorance was offered as the main excuse. It was not always accidental. Those who should have been exercising supervisory or leadership roles benefited from an accountability firewall between themselves and individual misconduct, and demonstrated poor, perhaps deliberately poor, understanding of the front line.”

The “accountability firewall” might well have been facilitated by management practices that hindered the type of information flow necessary in an effective risk culture. In a separate survey [3] by the London School of Economics, the findings of which are due to be updated in coming weeks, researchers pointed to the fear of punitive action as a primary concern. The study quoted one individual who summarized the views of many:

“One of the things that helps greatly with the flow of information through the organization is how it’s reacted to when it gets to the next level. So being able to report risks openly and honestly without getting your head bitten off from the second that’s done is crucial […] For example, if I told you something that might be happening you do not want your directors on your back saying ‘What have you told them? Why?’ So managing the flow of information through an organization to ensure key stakeholders are properly engaged is quite important […] to avoid the wrong reaction happening.”

What has led us to this state of affairs? And how might it be corrected?

Excesses of short-termism

Establishing a robust risk culture is a subject that management consultants have written volumes on. And when one scours the long list of recommendations, embedding risk awareness across the organization and fostering an environment in which people are comfortable challenging others without fear of retribution are critical components.

But this ideal state would appear far from the current reality at many institutions. In understanding what has led us to an environment of fear and lack of accountability, some argue that the finance sector has taken short-termism to the extreme. The enormous pressures that individuals are under to meet their financial targets, and how those goals are wrapped-up in the quest to meet quarterly revenue and profit objectives, create disincentives to identify risk events early.

“The connection that hasn’t been made is how short-termism invites corrupt behaviour — lawful, but corrupt” says Malcolm Salter of the Harvard Business School, who has written extensively on institutional corruption [4] on Wall Street. In order to rectify the problems, many banks have taken a much closer look at compensation policies, but this may not be enough. “Who is modeling the behavior at the banks?” asks Salter. “There is the cultural aspect of the business: how do you change that culture short of the firm having a breakdown.”

In the UK, the Committee on Banking Standards proposed a series of sweeping reforms aimed at establishing much great accountability on senior management. Among these would be the “replacement of the statements of principles and the associated codes of practice, which are incomplete and unclear in their application, with a single set of banking standards rules to be drawn up by the regulators. These rules would apply to both senior persons and licensed bank staff and a breach would constitute grounds for enforcement action by the regulators.”

The rules proposed, and which have been embraced by the UK government, are intended to shift the burden of proof of management failure away from the regulator and onto senior management, who will have to “demonstrate that they took all reasonable steps to prevent or offset the effects of a specified failing.” But the new regulatory standards are only UK-specific. International coordination is needed to guard against regulatory arbitrage.

Indeed, what Salter and others see within the industry are ongoing attempts to “game” the system, and legally circumvent many of the regulations that have been piled on since the 2008 crisis. It is this legal gaming, if you will, that remains problematic when envisioning an enhanced risk culture and ethical banking environment. To change that type of behavior requires the type of leadership from the top that we have yet to see, and a regulatory environment that enforces accountability.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus [5]. Compliance Complete provides a single source [6] for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus [7])

[1] New York Times: http://www.nytimes.com/2012/10/07/magazine/ina-drew-jamie-dimon-jpmorgan-chase.html?pagewanted=all&_r=0

[2] UK Parliamentary Committee on Banking Standards: http://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf

[3] separate survey: http://www.lse.ac.uk/researchAndExpertise/units/CARR/pdf/Risk-culture-interim-report.pdf

[4] institutional corruption: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2247545&download=yes##

[5] Thomson Reuters Accelus: http://accelus.thomsonreuters.com/

[6] provides a single source: http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/

[7] @GRC_Accelus: https://twitter.com/GRC_Accelus

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Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

JP Morgan fined $920m and admits wrongdoing over ‘London Whale’

US’s biggest bank to pay penalties to US and UK regulators for ‘unsound practices’ relating to $6.2bn losses last year

JP Morgan has agreed to pay about $920m in penalties to US and UK regulators over the “unsafe and unsound practices” that led to its $6.2bn London Whale losses last year.

The US’s biggest bank will pay $300m to the US office of the comptroller of the currency, $200m to Federal Reserve, $200m to the securities and exchange commission (SEC) and £137.6m ($219.74m) to the UK’s financial conduct authority.

JP Morgan admitted wrongdoing as part of the settlement, an unusual step for a finance firm in the crosshairs of multiple legal actions.

“JP Morgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,” co-director of the SEC’s division of enforcement, George Canellos, said.

“While grappling with how to fix its internal control breakdowns, JP Morgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”

In a statement the OCC blamed “unsafe and unsound practices related to derivatives trading activities conducted on behalf of the bank by the chief investment office (CIO)”, for the fine.

The OCC said its inquiries had found inadequate oversight and governance to protect the bank from material risk, inadequate risk management, inadequate control over pricing of trades, inadequate development and implementation of models used by the bank, and inadequate internal audit processes.

The US authorities are still pursuing JP Morgan. The Justice Department is pursuing criminal charges against some of the bankers responsible for the massive loss. In an indictment unsealed in federal court this week Javier Martin-Artajo, who oversaw trading strategy at the bank’s London office, and Julien Grout, a trader who worked for him, were charged with securities fraud, conspiracy, filing false books and records, wire fraud and making false filings to the SEC.

Grout’s lawyer said this week that his client was being “unjustly played as a pawn in the government’s attempt to settle its highly politicized case against JP Morgan Chase”.

The bank also faces another fine from the commodity futures trading commission which is still investigating whether the bank is guilty of market manipulation.

Jamie Dimon, the bank’s chairman and chief executive, initially dismissed the mounting losses at the bank’s London offices as a “tempest in a teapot”. In a statement Dimon said: “We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them. Since these losses occurred, we have made numerous changes that have made us a stronger, smarter, better company.”

This week in a letter to staff he warned: “Unfortunately, we are all well aware of the news around the legal and regulatory issues facing our company, and in the coming weeks and months we need to be braced for more to come.”

The admission of wrongdoing is a major victory for the SEC. US judges in recent years have questioned fines where banks were allowed to neither admit nor deny wrongdoing. Judge Jed Rakoff blocked a 2011 SEC settlement with Citigroup because he said the lack of an admission of wrongdoing made it impossible for him to determine whether the fine was “fair, reasonable, adequate and in the public interest”.

 

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Dimon: JPM ‘Simplifying’ Its Business, Improving Compliance

 

Dimon: JPM ‘Simplifying’ Its Business, Improving Compliance

SEP 17, 2013 10:42am ET
 

WASHINGTON — JPMorgan Chase (JPM) is focusing on simplifying its businesses and improving compliance with regulatory requirements, Jamie Dimon said in an e-mail to employees on Tuesday.

The bank’s chairman and chief executive said that its recent exit from the student lending business and elimination of its physical commodities sales and trading businesses was an attempt to “refocus our priorities.”

“We have been asking our senior people to eliminate products and services that are not essential to serving our customers and are not core to our business,” Dimon wrote.

In the lengthy e-mail, Dimon said the bank is also working to confront the regulatory challenges facing it, including reviewing its foreign correspondent banking business, improving oversight of outside vendors, and adding regulatory compliance staff.

The e-mail comes as JPMorgan Chase nears a $750 million to $800 million settlement with regulators related to last year’s “London Whale” trading scandal. An announcement could come as early as this week.

It also is yet another sign of a newly resurgent Dimon who, after the criticism he took over the Whale incident, successfully fought off an attempt by shareholders to strip him of his chairman title earlier this summer. Since then, he has become more outspoken about the issues facing the industry and his institution.

The regulatory settlement is expected to include an admission of wrongdoing by the bank. Although Dimon did not reference it directly, he said in his e-mail that if “you don’t acknowledge mistakes, you can’t fix them and learn from them.”

“So now, as in the past, we are recognizing our problems, rolling up our sleeves and fixing them,” Dimon wrote.

That includes a renewed focus on the bank’s foreign correspondent banking business, an area that has gotten several large banks, including HSBC and Standard Chartered, into trouble recently with U.S. regulators.

JPMorgan Chase was slapped with a consent order from the Office of the Comptroller of the Currency in January over “critical deficiencies” with respect to its anti-money laundering practices. Many observers expect regulators to impose a monetary penalty on the bank soon over those failures.

Dimon said JPMorgan Chase is strengthening its internal controls “particularly around ‘Know Your Customer’ and transaction monitoring.”

He also said the bank is stepping up supervision of outside vendors, yet another area that has tripped up the bank.

“If a vendor or partner engages with our customers, we need to be as vigilant about their practices as we are about our own, particularly if they interact directly with customers,” Dimon wrote. “We are also proactively trying to decrease the number of vendors we have, which reduces complexity in our business and creates more jobs internally.”

Earlier this summer, JPMorgan Chase halted most sales to third-party collectors of credit card debts amid regulatory concerns over how it pursues payments from customers who are delinquent.

Dimon said that the bank has significantly boosted compliance resources, adding roughly 3,000 employees this year that are dedicated to risk, compliance and control efforts. The bank has also provided 750,000 hours of regulatory and control-related training related to topics like anti-money laundering and Dodd-Frank implementation, he said.

Dimon added that he has also tried to build a “more open and transparent relationship with our regulators.” He held town halls for examiners with the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corp. in May and June. He also held a corporate town hall with bank employees who “regularly interact with regulators.”

“We discussed our culture of transparency, stressing the necessity of fully and accurately reporting material issues to our regulators in a timely manner and responding promptly to their requests,” Dimon said.

Dimon concluded by pledging to create a “best-in-class operating system” for the bank.

“Never before have we focused so much time, effort, brainpower, technological power and money on a single, enterprise-wide objective,” Dimon wrote. “Make no mistake — we are going to get this right.”