Bank of America Corp. and other large banks may have colluded to manipulate interest rates in their favor, allege the U.S. Justice Department and SEC. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

The Wall Street Journal reports that the U.S. Justice Department and Securities and Exchange Commission are examining whether a group of the world’s largest banks – led by Bank of America Corp, Citigroup Inc. and UBS – colluded to manipulate the London Interbank Offered Rate of interest (LIBOR) on trillions of dollars in loans and derivatives before and during the global financial crisis. LIBOR represents the rate at which banks borrow funds from each other. It is the world’s most widely used benchmark interest rate and is applied to everything from adjustable rate mortgages (ARMs) to corporate bonds and car loans.

LIBOR collusion investigation ongoing for past year

Law enforcement officials have been investigating whether banks have intentionally been understating their own borrowing costs to benefit a secret global banking cartel. It is suspected that such LIBOR interest rate manipulation occurred in excess between 2006 and 2008. If banks that were secretly struggling with bad debt and liquidity had reported borrowing at higher interest rates then peers, the plight would have been revealed to the public.

Currently, the LIBOR collusion case is being handled by antitrust and anti-fraud prosecutors, according to insiders close to the situation. Investigators are searching for signs of collusion like price fixing and bid rigging. Legal experts note that corporate collusion cases are difficult to prove without email evidence or bank insider testimony.

James Rill, the former assistant attorney general of the Justice Department’s Antitrust Division, told the WSJ that the prosecution will ideally need the assistance of at least two witnesses or hard evidence to make collusion charges stick.

‘Remarkably similar costs’

In 2008, a study conducted by the WSJ found that bank borrowing costs remained “remarkably similar,” despite the fact that each bank faced different kinds of financial trouble. In the first quarter of that year, the three-month borrowing rates for 16 banks remained within a 0.06 percentage-point range, compared to the average LIBOR of 3.18 percent.

At the time, economists at the Bank for International Settlements questioned whether LIBOR was being manipulated. The economists noted that if enough banks colluded, the impact upon LIBOR would be significant.

Class action suits waiting in the wings

In the event that the Justice Department and SEC can prove LIBOR collusion in the antitrust case, the banking consortium would likely be exposed to numerous class-action lawsuits by private plaintiffs harmed by interest rate manipulation. If successful in their suits, plaintiffs would be awarded triple the normal amount of damages, said former Justice Department antitrust lawyer Michael Volkov.

Sources

Bankrate.com

Investopedia

Wall Street Journal

Wikipedia

A LIBOR primer

Hedge fund billionaire John Paulson made mad money betting against the housing market. (Photo Credit: CC BY-ND/Global Astrology Blog)

Hedge fund manager John Paulson bet against the health of the U.S. housing market by funneling money into credit default swaps against subprime mortgages, which effectively ensured that as homeowners defaulted he would receive a massive cash advance on his investment in failure. Thanks to the bursting of the U.S. housing bubble and some shrewd choices with U.S. financials, John Paulson is a billionaire.

John Paulson and the Citigroup venture

To some, hedge fund manager John Paulson represents all of what’s wrong with Wall Street. After earning approximately $15 billion betting against the U.S. housing market in 2007 – and being labeled a “guru” for doing so – John Paulson moved to the other side of the investment speculation fence. He bet that the U.S. economy would soon rebound. This involved a series of investments in various indexes, as well as an “after the fall” outlay in favor of rebounding house prices and a bet on high gold prices. Paulson’s stake in Citigroup earned his hedge fund investors utilizing Paulson & Co. about $1 billion in 2010. Over the past year, Citigroup’s share price shot up 50 percent.

Paulson & Co. is currently responsible for $35 billion in investments. Where most hedge funds eschewed the more volatile elements of the market last year, Reuters reports that John Paulson and company took small financial lumps early in 2010, yet managed to swing things around into double-digit gains. The Paulson Advantage Plus Fund rose 17 percent for the year, while Paulson’s gold investments jumped 35 percent in 2010.

Is 17 percent all that special?

The Globe and Mail might have a reasonable point regarding the scope of John Paulson’s success when it claims that the Paulson Advantage Plus Fund’s 17 percent gain isn’t all that different than the 15 percent gain experienced by the S&P 500. But the Canadian newspaper’s viewpoint could just as easily be considered sour grapes. While it may be true that John Paulson’s “against-the-bubble” investing strategy undermined the economy at the expense of millions, the investments were made in a Wild West-style climate where federal regulators were about as effective at cleaning up the town as the milk-and-cookies sheriff who hesitates before firing. Yet few except the excuse.

Sources

The Guardian

The Globe and Mail

Reuters

Wikipedia

John Paulson and Joe Stiglitz on the mispricing of risk

Some people think the installment loans lent in the bailouts weren't worth it, but Treasury Secretary Tim Geithner disagrees. Image from Wikimedia Commons.

In the financial crisis of the last few years, billions of dollars in installment loans to huge firms were lent in bailouts. Many have preached loudly about the waste involved and corporate favoritism. However, it may not cost as much as some think.

Rage at installment loans to big business

In 2008, the financial world was in turmoil, and the government moved to get some installment loans out to head off a collapse. Billions were lent to banks and investment houses from New York, New York, to Kansas City, Missouri, and the largest domestic auto manufacturers were given some enormous advance cash bundles to keep them afloat. Conservatives and liberals alike have raged about the bailout loans, but Treasury Secretary Timothy Geithner thinks the outrage is unfairly directed his way, according to the New York Times. Though officials, of course, don’t go out of their way to agree with their critics, he has a point.

Emergency loans could turn a profit

The emergency loans made to huge businesses could be justified. Geithner has maintained that the $25 billion estimated as losses by the Congressional Budget Office are estimates. He also has maintained losses will only come from bank loans and mortgages gone bad, but everything else will turn out. For instance, if the Treasury holds onto shares in GM and sells them over time, the loans GM received could eventually turn a profit on the long term. Citigroup, which received more than $45 billion in aid, turned a profit of more than $10 billion for the taxpayers already.

Proof will be in the pudding

Though it certainly seems ridiculous to only aid to the parties that created the economic problems in the first place when the people that have been hurt could use the help more, there may be an upside after the fact. If the profits realized from bailing out huge firms are more than the losses of bailing out Fannie and Freddie, then a rational basis for bailouts in dire straits will have appeared.

Sources

New York Times

Taxpayers should realize a profit when the government sells its remaining shares in Citigroup. Image from Wikimedia Commons.

After being lent billions in emergency loans, Citigroup may be the model that firms receiving bailouts should follow. Citigroup will end up turning a profit for taxpayers when the Treasury sells its shares. The company stands to have produced a net gain of $12 billion or more for the government.

Emergency loans to Citigroup pay off

More than two years ago, Citigroup asked the U.S. Treasury for some hefty emergency loans, saying it direly needed some instant cash or the firm would perish. The bailouts, and the Troubled Asset Relief Program or TARP, have been the subject of a lot of controversy. However, a recent announcement ought to please even the most ardent fiscal conservative. The Treasury will be selling the rest of its shares in Citigroup; it holds more than 2 billion common shares in the company, according to USA Today. The shares were given to the Treasury as a condition of receiving secured loans. If everything goes according to plan, taxpayers stand to profit about $12 billion from the loans to Citigroup.

Citigroup would net Treasury a 27 percent profit

The government held about 7.7 billion shares in Citigroup as a result of the bailout. The Treasury had sold 5.3 billion of those shares as of Monday. The remaining 2.4 billion shares are worth about $4.35 a piece as of Monday, and the sale of those remaining shares should net a quick payday of about $31.8 billion, plus another $2.9 billion in interest and dividends. Combined with the payments Citigroup has already made, more than $20 billion, the Treasury should take in an estimated $57 billion for the $45 billion in loan cash and guarantees to Citigroup. That’s a simple profit of about 26.7 percent.

Model bailout

If the sale of Citigroup shares by the Treasury does result in a profit of that much, or even close, that would make Citigroup a model bailout company.  Ideally, the shares of other bailed out firms, such as GM, will have a similar outcome.

Sources

USA Today

Musician Lily Allen is just one of the many big-name artists on the embattled EMI label. Image: Wikimedia Commons

In 2007, investment firm Terra Firma purchased control of music giant Electric and Musical Industries Ltd. After losing more than $2.5 billion on the investment, Guy Hands of Terra Firma’s decided to sue Citibank. A jury has found, however, that Citibank did not defraud Terra Firma in the purchase of EMI, as was accused.

Terra Firma purchase of EMI

In August 2007, investment company Terra Firma made a $6.8 billion purchase of British company EMI. Citigroup funded the purchase, just before credit markets seized in October of 2007. Since that purchase, Guy Hands, who controls the Terra Firma fund, has lost billions in the company. He has also been the target of frustrated investors who are not happy with the fact two-thirds of the fund is tied up in the quickly shrinking EMI.

Terra Firma takes Citigroup to court

Citigroup, which funded the Terra Firma purchase of EMI, has been on the defensive. Terra Firma sued Citigroup, claiming, among other things, that the company defrauded Terra Firma in the EMI purchase. Terra Firma apparently believed that it was in a “bidding war” for EMI, when it was not. A jury unanimously found that Citigroup did not defraud Terra Firma in the purchase.

What is next for EMI?

EMI is one of Britian’s largest music labels. Musicians as diverse as Lilly Allen and the Rolling Stones have been or are on the EMI label. When Terra Firma and Guy Hands took over the label in 2007, spending was slashed at every corner almost immediately. Many large acts, including as the Rolling Stones, decided to leave the label. Despite the cost-cutting, however, Hands is claiming that EMI has cost him more than $8 billion. Hands may very well be removed as the head of Terra Firma, as well as EMI. Citigroup has said that, because of the lawsuit, the company is “much less likely” to be willing to discuss refinancing for EMI. This could leave the musical industry giant ripe for takeover or purchase by yet another company.

Source

Business Week

This was the headline today as a trading error left the DJIA reeling. Image from Flickr.

Any trader watching the stock market today just about needed a shock to the heart as the DJIA – Dow Jones Industrial Average – plummeted almost 1,000 points because of a trading error. The DJIA nosedive, set off by a Proctor and Gamble sell-off, reverberated through the New York Stock Exchange as well. Talk about a big trading error; perhaps some Citigroup individual is about to start looking for internet loans — or a new job?

The DJIA and NYSE drops raise trading error questions

In just a few short hours today, because of a trading error, the Dow Jones Industrial Average and New York Stock Exchange both lost almost 1,000 point – nearly 10 percent of their value. Between about 2 p.m. and 3 p.m. today, the plunge triggered worries about market volatility, financial downfall and more in a market already shaky from the economic downturn. This DJIA drop was due mostly to a huge sale of Proctor & Gamble stock. So what happened?

Trading error to blame for DJIA tumble

Many financial news sources are now saying that the stock market today was reacting to one wrong letter in a trading error. A Citigroup employee erroneously entered a “b” rather than an “m” in a trading program – selling off billions (rather than millions) of Proctor & Gamble stock futures. In just two minutes, 16 billion futures were sold.

Citigroup denies DJIA trading error

Citigroup, which is launching an investigation into the DJIA trading error, has said “At this point we have no evidence that Citi was involved in any erroneous transaction.” Whether Citigroup was involved or not, the center of the Dow Jones’ plummet today was definitely the falling Proctor & Gamble stock.

Electronic trading exacerbated trading error

The trading error, in and of itself, was bad enough to send the DJIA into a tailspin. What made the NYSE and Nasdaq join in the all-out tumble, though, is a story of automated trading. While there is still plenty of stock trading that happens on the floor of the New York Stock Exchange, most trades are electronic, and many are automated. When the price of Proctor and Gamble stocks started to nosedive, automated trading programs jumped on the bandwagon. Programmed to sell when a stock hits a particular price, these programs started selling off hundreds of millions of shares.

Trading error heightens fear of DIJA fall

Though the tumbling DJIA today was the result of a trading error, it is heightening fear of another financial crisis. Riots in Greece combined with doubts about global economic recovery are leaving many investors very nervous. In the end, the trading error may have been a human error – but it is one that doesn’t do much to restore confidence in the financial industry.

Sources:

CNBC
CNBC

Citibank sent the letters on February 16

The company is calling it a “processing error,” according to the Chicago Tribune. The numbers appear at the lower edge of the envelope with other numbers and letters. So it isn’t as obvious as problem flatulence, but it is definitely a bit of a brain fart on the part of Citibank, Citigroup and everyone else in the Citi family. But don’t worry; Citibank Client Services Director Norman Wright sent letters to all 600,000 customers in an effort to clean up the mess. He extended an offer for free credit monitoring for 180 days. Unfortunately, now that forgers know to wait 180 days, perhaps that isn’t enough. They could be using your Social Security number to take out money loans.

The error produced “little to no risk” to Citibank customers?

Talk about spin control by Citibank. Citigroup and its board of directors must be proud, and shareholders must be exceedingly happy that the company is so deftly handling the situation. In Wright’s apology letter he says as much, that there is “little or no risk.” Isn’t it comforting to know that your bank is actively lying to you, Citibank customers? How could there be little or no risk if unauthorized people are getting hold of your Social Security number?

If you’re a Citibank customer, are you satisfied with their offer?

Personal Money Market would love to know your thoughts on the matter.

(Photo Credit: http://www.flickr.com/photos/kiwanja/ / CC BY 2.0)

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Banks have suffered through the recession with huge mortgage industry defaults, but a new fear that credit cards will do the same is looming. Ken Lewis, Bank of America CEO, stated he believes that despite the government’s $700 billion rescue program, it will be “an awful year” for credit cards and companies that issue them.

It’s estimated there are almost $76 billion in credit card loans, and more than half of that debt is held by Bank of America, JPMorgan Chase and Citigroup.

The charge-off rate

Already setting the stage for disaster is the banking industry’s estimate that  their charge-off accounts have reached a historic high of 7.73 percent. Most experts anticipate that figure will increase, as the unemployment rate is still dangerously high.  This rate is commonly accepted as the most accurate indicator of future losses in the banking, mortgage and credit card industries.

Analyst Mike Taiano believes that the charge-off rate could be higher than 10 percent by year’s end. “With the economy the way it is, most consumers are still struggling. … Though there are some indicators that we are through the recession, there is still a long way to go to recover,” he said.

Bracing for the loss

Unlike the recession of the ’80s, when unemployment rates ran high also, this generation brings its own set of problems. First, new proposed legislation is set to allow consumers to request their banks reduce their mortgage debt if they have filed bankruptcy. Experts are fearful that this will cause more people to file bankruptcy so they can default on credit cards and other outstanding debts.

On the brighter side

David Robertson, publisher of the Nilson Report, stated that it’s “encouraging” that banks are adept at maneuvering recessionary periods after “years of practice.” When facing credit card losses, they know what cautionary actions to take.

For example, banks are slashing limits already and raising interest rates to bring in as much revenue as possible.  They are also working their customer service teams exceptionally hard, encouraging communication with customers. American Express is a leader in the mitigation process and recently offered their credit card holding customers a $300 cash-back return if they paid their account balances off and the closed their accounts before April.

Citibank

There is also news that Citibank is joining the ranks of a banks coming up with strategies to mitigate loss.  The company is looking to work out a joint venture for its private credit card division that serves retailers, as a way of moving out of the credit card business altogether.  However, experts say Citibank is alone in wanting to distance themselves from the credit card industry.

Most banks know they will have a difficult time attracting a completely new set of customers and would rather work hard to keep the ones they have, while easing their own risk.  Stuart Gunn, director of Bridge Strategy Group, stated: “If you want to be the retail bank of choice, it means you have to have CDs, debit cards, home equity loans and credit cards. Do you really want to exit one of the major lines of business?”

The Economic Stress Index predicts that debt relief may be on its way for beleaguered consumers. (Photo: debtreliefday.com)

Debt relief may be on the way according to a new AP poll called the Economic Stress Index.  This index is a calculation that ranges from 1 to 100 and is based on the nation’s approximately rates of unemployment, foreclosures and bankruptcy totals.  The lower the score, the less economic stress the country as a whole is under.  The Index was 10.3 in March 2009 and 9.7 in April.  Mark Vitner, a Wachovia economist, has stated that the resulting dip of 0.6 in the Economic Stress Index “[shows that] we are very close to the low point in this recession… the worst is past, but that doesn’t mean the troubles are over.”

Further assessment shows that any county with a Stress Index of over 11 is considered “highly stressful” and more than 40 percent of the nation’s counties are at that level.  The highest scoring counties were in California, northern Indiana and North Carolina.  Each one saw their Stress Index well into the teens.  Vitner confirmed that “the biggest stressor is unemployment…because it has been felt all throughout the nation, it is bringing any financial calculations way down and giving us a grim report of the economy.”

Future Hope

Despite the numbers, many analysts are claiming that the economy is seeing its low-point.  They are hopeful that the drastic highs of unemployment, foreclosure and bankruptcy are on the swing downward and will bring the economy to normalcy soon.  Gerald Daughterly, financial analyst for Citigroup, stated, “We aren’t totally out of the woods yet, but the numbers are showing a slight leveling off…that doesn’t mean things aren’t difficult, but it means they most likely won’t get any worse.”

Many consumers are welcoming any sign of an economic recovery and hoping it will benefit their stressed financial states.  While banks and credit cards may not be lending just yet, many Americans hope that the stabilizing economy will open the door to debt relief once again.  They are looking for lenders to start underwriting and allowing them to put money back into the economy, instead of pinching pennies.  Single mother of three Anne Newirth of San Francisco, California stated, “I want to start putting money back into the economy like the government is urging us to do…but I can’t do it without the fall-back plan of credit cards. I know that once those are back in place, I can start living like I normally do and splurging a little.”

Will Lenders Bite?

The biggest question remains, will lenders return to normalcy?  Many experts say that the reforms on credit card policy will make it difficult for potential borrowers with compromised credit.  Only those with great credit will benefit from future credit lenders.  Brandy McNamara, economist for Businessweek.com stated, “The credit card and mortgage lending industries will not return to normal, regardless of what offers are out there. Read the fine print and you’ll see how many new rules there are to having credit.  They are protecting themselves and won’t fall back into lending patterns they held before the recession.”  McNamara is not alone in her analysis and proof is in the new contracts many credit applicants will have to sort through prior to getting funds.  Debt relief will be difficult for everyone due to lenders’ cautious new policies.

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