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UBS Libor Manipulation Merits A Death Penalty

Dec. 24 (Bloomberg) — There is no point in mincing words: UBS AG, the Swiss global bank, has been disgracing the banking profession for years and needs to be shut down.

The regulators that allow it to do business in the U.S. — the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Office of Comptroller of the Currency — should see that the line in the sand was crossed last week. On Dec. 19, the bank paid $1.5 billion to global regulators — including $700 million paid to the CFTC, the largest fine in the agency’s history — to settle claims that for six years, the company’s traders and managers, specifically at its Japanese securities subsidiary, manipulated the London interbank offered rate and other borrowing standards.

Libor is a benchmark index rate, off which trillions of dollars of loans are priced on a daily basis. According to the Wall Street Journal, two of the many victims of the Libor fraud — a scandal that so far has nabbed Barclays plc and UBS but will probably include other large global banks — were the quasi-federal housing agencies Fannie Mae and Freddie Mac, which together claim to have lost more than $3 billion as a result of the manipulation.

The same day of UBS’s global settlement, which included the Japanese subsidiary pleading guilty to fraud, two former UBS traders, Tom Hayes and Roger Darin, were sued by the Justice Department and charged with “conspiring to manipulate” Libor.

“The alleged conspirators we’ve charged — along with others at UBS — manipulated the benchmark interest rate upon which many transactions and consumer financial products are based,” Attorney General Eric Holder said in a statement. “They defrauded the company’s counterparties of millions of dollars. And they did so primarily to reap increased profits, and secure bigger bonuses, for themselves.”

To see the level to which UBS employees descended, one need look no further than their written communications, as per U.S. prosecutors’ document dump. “Mate yur getting bloody good at this libor game,” one broker told a UBS derivatives trader. “Think of me when yur on yur yacht in monaco wont yu.”

But, then again, UBS and bad behavior have become nearly synonymous. During the financial crisis, UBS took writedowns totaling some $50 billion, prompting the company to produce a 76-page, single-spaced, Orwellian transparency report. “In the aftermath of the financial market crisis it was revealed,” the report said, “that UBS had taken a serious turn in the wrong direction under the leadership of the senior management then in charge of the bank. The result was an enormous loss of trust.”

In February 2009, UBS entered into a deferred-prosecution agreement with the Justice Department and admitted to helping American taxpayers defraud the Internal Revenue Service. UBS agreed to provide the names of some clients whom it had helped to avoid U.S. taxes and to pay a fine of $780 million.

Then, last month, came the conviction of former UBS “rogue” trader, Kweku Adoboli, on charges that he hid trading losses totaling more than $2.3 billion. The U.K.’s Financial Services Authority fined UBS some $47 million and charged that its oversight of London traders was too trusting. The bank seems more than a little out of control.

The latest example of the bank’s shameful behavior can be found in the false bravado of the traders who for years manipulated Libor and thought they could get away with it. The gruesome details can be found in the Dec. 19 report from Britain’s Financial Services Authority.

It found that unidentified UBS traders entered into “wash trades” — described as “risk-free trades that canceled each other out” and had no commercial rationale — in order to “facilitate corrupt brokerage payments” to three individual brokers at two other firms.

In a Sept. 18, 2008, telephone conversation, Hayes promised that if one broker kept the six-month Japanese yen Libor unchanged for the day, he would in exchange “pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.” Lovely.

We also find out that a year earlier, Hayes had a chat on his Bloomberg terminal with Darin in which he pushed to find out what rate for Japanese yen Libor UBS would submit to the governing body that set the rates. “Too early to say yet,” Darin replied, before estimating that 0.69 percent “would be our unbiased contribution.”

Hayes repeated his request for a “low” submission on the three-month Japanese yen Libor. Darin messaged back: “as i said before – i dun mind helping on your fixings, but i’m not setting libor 7 [basis points] away from the truth i’ll get ubs banned if i do that, no interest in that.” Darin eventually submitted a Libor rate two basis points less than the “unbiased” figure of 0.69 percent.

In levying the record $700 million fine, David Meister, the CFTC’s director of enforcement, said that “when a major bank brazenly games some of the world’s most important financial benchmarks, the CFTC will respond with the full force of its authority.” That’s good as far as it goes, and the CFTC is to be commended for rooting out the global Libor manipulation scandal.

But an even more emphatic message needs to be sent to UBS by its prudential regulator in the U.S.: You are finished in this country. We are padlocking your Stamford, Connecticut, and Manhattan offices. You need to pack up and leave. Now.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.)

Photo by “twicepix” via Flickr.com

Exactly Whose Money Did The London Whale Lose?

Sept. 24 (Bloomberg) — Whose $6 billion did JPMorgan Chase & Co. lose during the now-infamous London Whale debacle?

Was it depositors’ money or shareholders’ money? Or was no money lost at all? And was the whole thing the very “tempest in a teapot” that Chief Executive Officer Jamie Dimon originally called it?

What the bank has told us so far — during its news conference on May 10, in Dimon’s two rounds of testimony before Congress, and in the come-to-Jesus live presentation to analysts on July 13 — is that the man behind the trades, Bruno Iksil, aka the London Whale, worked in the company’s chief investment office. The CIO’s job, we have been told, is to invest the difference between the $1.1 trillion in deposits the bank has on hand from its customers and the $750 billion the bank has lent out to corporate borrowers.

That $350 billion — an awful lot of money even by Wall Street’s standards — was invested on a daily basis under the direction of a well-respected banker, Ina Drew, who was paid about $15 million a year for her services. Drew and her team invested the $350 billion in short-term, seemingly safe investments. The overall yield on the portfolio was about 2.6 percent, according to Dimon.

With Drew’s authorization — but, Dimon insists, without his knowledge — Iksil took a $10 billion chunk of the $350 billion portfolio and made a proprietary bet in an obscure debt index. (JPMorgan Chase likes to call Iksil’s gamble a “hedge.”) For myriad reasons — among them that the bet was wrong and that Iksil had such a large position in the tranche that escape would have been extremely costly — JPMorgan Chase has lost $5.8 billion, and counting.

To my mind, the money that Iksil lost was depositors’ money. Iksil worked for the CIO, where depositors’ money is invested until it is lent out. The trade lost almost $6 billion in cash, which we know is real because hedge funds such as Saba Capital, run by wunderkind Boaz Weinstein, and Blue Mountain Capital staked out the other side of Iksil’s trade and made a fortune. How could there be any confusion that the money Iksil lost came from the bank’s depositors?

Not so fast, says JPMorgan Chase. When I wrote in passing last week that I believed JPMorgan Chase depositors lost their money as a result of the London Whale, Joseph Evangelisti, the bank’s head of communications, sandblasted me.

“That’s untrue,” he e-mailed. “We lost shareholder money, not depositor money. Depositors have never lost a penny from our institution.”

We debated it back and forth. Although I concede in this instance no individual depositor lost his or her money, it’s only because there was no run on the bank by depositors at the same time the London Whale was being harpooned. Had depositors suddenly lined up and wanted their $1.1 trillion back, not only would JPMorgan Chase be kaput, but those depositors with more than $250,000 in their accounts — that is, above the limits of the Federal Deposit Insurance Corp. — surely would have been left with losses.

Evangelisti wasn’t buying that either. He says the bank would have had more than enough assets to sell in liquidation mode to cover even those depositors with more than $250,000 in their accounts.

“Depositors did not lose money — that’s a fact,” he reiterated. “And by the way, the $350 billion portfolio is sitting on a $9 or $10 billion gain.” He added: “If what you say is true, we would be taking money out of depositors’ accounts.”

But taking money out of depositors’ accounts is exactly what banks do. People like you and me put money into banks because they are perceived as safer than a mattress. In return, we get access to our money whenever we want — assuming everyone doesn’t demand money at the same time — plus a tiny sliver of interest. (At the moment, checking deposits at Chase receive 0.01 percent annual interest, while savings deposits get a whopping 0.30 percent annual interest.)

In effect, depository banks such as JPMorgan Chase, Citigroup Inc. and Bank of America Corp. get our money for free and then turn around and use it for all sorts of things, including making loans to individuals and businesses that pay much higher rates of interest than the banks pay their depositors. This is banking 101. The London Whale fiasco also taught us that sometimes banks use that money to make crazy, proprietary bets on interest rates — and sometimes that money gets lost.

JPMorgan Chase wants us to believe that it was shareholders’ money that was lost, not depositors’ money. There is no question that JPMorgan Chase’s stock got hammered when the full extent of the London Whale losses became known; shareholders lost almost $25 billion, in addition to the $6 billion Iksil lost on his trades.

Now that the JPMorgan Chase stock has returned more or less to where it was trading before the scandal, it’s safe to say shareholders have lost nothing as a result of the London Whale (except the time value of money over the period it recovered what it had lost).

Evangelisti said depositors lost nothing and, in fact, the CIO account has an embedded $10 billion unrealized gain. This leaves me feeling a little like the casino executive in “Ocean’s Eleven” who, upon realizing the casino’s vault had just been robbed of close to $163 million, incredulously asks Andy Garcia’s casino-owner character: “I don’t understand. What happened to all that money?”

A month ago JPMorgan Chase announced that Lee Raymond, the no-nonsense former CEO of Exxon Mobil Corp., would lead another investigation by the board of directors into the London Whale fiasco. One thing he might try to pin down is an explanation, once and for all, of what exactly happened to all that money.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. His sister-in-law, Ellen Futter, is on JPMorgan Chase’s board of directors. The opinions expressed are his own.)

Photo credit: AP/Mark Lennihan

What’s The Secret Behind Romney’s Magical Multi-Million Dollar IRA?

July 16 (Bloomberg) — The most mysterious of the unexplained mysteries about Mitt Romney’s considerable wealth is how he was able to amass between $21 million and $102 million in his individual retirement account during the 15 years he was at Bain Capital LLC.

How did he do it, given the relatively small amounts that the law permits to be contributed to such a plan on an annual basis? Romney has not explained this conundrum, and seeing as he wants to become president, he would be wise to start talking — if for no other reason than there might be many Americans who would like to emulate what he did.

During Romney’s tenure at Bain Capital — from 1984 to 1999, although a recent Boston Globe article uncovered Romney having a role at Bain until 2002 — the firm used a so-called SEP-IRA, which is like a 401(k) retirement plan but is funded entirely by the employer and has a much higher maximum contribution: about $30,000 annually during the period Romney was at Bain. Assuming Romney maxed out these tax-deferred contributions, he would have invested roughly $450,000 in his SEP-IRA during his years at Bain.

While there are limits to the amount that can be contributed tax-deferred to an IRA, there are no restrictions on the amount of money that the contributed capital can earn and can continue to earn, on a tax-deferred basis, even after the contributions have stopped. (The Internal Revenue Service will get its pound of flesh from Romney when he takes the money out of the IRA.) The only limit is the skill, or luck, of the IRA’s owner. If you are the Warren Buffett of IRA investors, it is conceivable that you could turn $450,000 into as much as $102 million — an increase of 227 times — but not very likely, especially as in the last decade or so, the stock market has been a roller coaster. Mere investing mortals would be lucky to still have $450,000 in the account. (The median American family has $42,500 in traditional IRAs, according to the Investment Company Institute.)

So how did Romney do it? Of course, we don’t know, but there have been several theories propagated to fill the considerable gap in knowledge left by Romney’s ongoing silence. Mark Maremont, a Pulitzer Prize-winning reporter at the Wall Street Journal (and a former classmate of mine at journalism school), has suggested that — perfectly legally — Romney contributed to his IRA using the low-basis, low-value stock he received as a partner at Bain Capital in the various buyouts the firm did while Romney was there.

For instance, after Bain bought Domino’s Pizza in 1998 for $1.1 billion, Bain partners (and the limited partners who went in on the deal) were able to get a slice of the equity of the company. Given the high leverage put into the pizza maker to finance its purchase, it’s a safe bet there was very little equity value at the start, meaning that shares with little book value could be contributed to the IRA.

If Romney put $30,000 worth of Domino’s Pizza stock into his 1998 SEP-IRA, it is conceivable that it would be worth many times that amount when Domino’s went public in 2004. If Romney did the same thing over and over again during the 15 years he was at Bain doing leveraged buyouts, it is conceivable that the $450,000 would increase greatly in value.

Of course, not every deal Bain did worked out. But let’s say Romney was prescient and put into this hypothetical IRA only the stock of the buyout companies that did well, returning to investors a whopping 10 times their money. (This is very rare but conceivable.) Even so, that would turn Romney’s $450,000 into $4.5 million. If the money was also compounded and reinvested over the years and became, say, $10 million, that would still leave another $11 million to $92 million of unexplained value sitting in the presumptive Republican Party presidential nominee’s IRA.

This great mystery seems to have troubled others, as well. On July 3, Current TV host Jennifer Granholm, a former Democratic governor of Michigan, invited Edward Kleinbard, a law professor at the University of Southern California, on her show to discuss how Romney could have accomplished this remarkable feat. There were “only two possibilities,” Kleinbard told Granholm. Either “from a little acorn, a mighty oak grew very, very quickly, extraordinarily so,” Kleinbard explained, causing Granholm to interject, “What little acorn could grow to be $101 million? I want to get some of that acorn!”

The other possibility, Kleinbard suggested, was not dissimilar to what Maremont theorized: that Romney contributed limited-partnership interests in Bain’s buyouts to his IRA. What was “quite troubling” to Kleinbard is that he suspected Romney may have contributed these interests to his IRA at a fraction of their market value — “pennies on the dollar” — and well below what he might have charged you or me. When the buyouts became successful, Kleinbard proposed, the pennies on the dollar were suddenly worth real dollars.

“What’s very frustrating to me about all this is that we can only talk in abstractions and generalities because, again, of the lack of disclosure,” Kleinbard said.

Without mentioning the heroics Romney has accomplished in his IRA, the New York Times editorialized on July 10 that the rest of Romney’s opaque “tax avoidance” schemes — including overseas shelters in the Cayman Islands, Switzerland and elsewhere — amount to nothing short of a “financial black hole” that he would be well advised to explain to the public. He should put explaining his magical IRA at the top of the list.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

How Wall Street Scams Counties Into Bankruptcy

July 2 (Bloomberg) — Lord knows we’ve had more than enough scandals ginned up by Wall Street over the years, and the message that banking executives proclaim after each is: “Don’t worry, we’ve learned that lesson, and it will never happen again.”

Which is how we got to the recent spectacle of Jamie Dimon, the chief executive officer of JPMorgan Chase & Co., testifying twice before Congress that although the bank’s chief investment office was taking huge proprietary risks with some $350 billion of its depositors money — and lost $3 billion (and counting) by making a bunch of risky bets on an obscure, thinly traded derivatives contract — everything is now fine and dandy because the unjustifiable gambling has been stopped dead in its tracks.

We were, of course, told pretty much the same thing after the collapse of the junk-bond market in the 1980s, the collapse of the Internet initial-public-offering market in the 1990s, the collapse of the telecom debt market in the early 2000s, not to mention the scandals over IPO spinning and laddering and the ones involving the trading of favorable corporate research for investment-banking fees.

We are told repeatedly that when Wall Street’s deeply flawed incentive system leads to one bad outcome after another, year after year, it will never happen again. Yet it does. And you can add this vital business to the list: The way state and local government officials hire Wall Street firms to raise the billions of dollars their municipalities need to build schools, hospitals, airports and sewers, and provide other essential services.


For some reason, Wall Street never seems to get the message that bribing government officials — and paying each other off — to get access to lucrative municipal-bond underwriting business is illegal. Wall Street has never learned this lesson because the miniscule price it ends up having to pay for misbehaving has absolutely no deterrent value whatsoever.

Indeed, what the cartel of the major banks does over and over again to win underwriting business from local government officials, and the way the cartel then sorts out among itself who gets what fees, is a microcosm of a much wider problem of the increasing power that the Wall Street survivors of the financial crisis have over the rest of us.

As I described in my book “The Last Tycoons,” about Lazard Freres & Co., the firm in the early 1990s surprisingly became a force in the underwriting of bond sales for state and local governments, even though Lazard was basically a mergers- and-acquisitions shop. Lazard’s prowess came after it hired two senior bankers: Mark Ferber and Richard Poirier.

Over time, the how and why of the firm’s success revealed itself. Poirier seduced state officials where he did business — New Jersey, Kentucky, Louisiana and Georgia — while Ferber did the same with government officials in Massachusetts. Ferber also took more than $1 million in payoffs from Merrill Lynch in order that Ferber would recommend Merrill as the underwriter to Massachusetts state officials. Eventually, Lazard and Merrill settled Securities and Exchange Commission charges against the firms for $12 million each — without admitting or denying responsibility, of course — and Ferber and Poirier left Lazard.

In August 1996, Ferber was convicted on 58 counts of fraud and then was sentenced to 33 months in federal prison and fined $1 million. The nub of the problem, according to the Boston Globe, was that the arrangement between Lazard and Merrill was “a symptom of an under-regulated municipal finance industry, where political connections can often bring more dividends than the substance of an underwriter’s proposal and where hidden conflicts often abound.”


As for Poirier, he was later convicted on fraud charges in Fulton County, Georgia, for paying a bribe to an intermediary at a regional investment bank in exchange for underwriting business. “This crime involved significant planning from both defendants,” an appellate court wrote of Poirier’s actions. In 1995, Lazard got out of the municipal-finance business.

So, what lessons did Wall Street learn from Lazard, Ferber and Poirier about bribery, conspiracy and back-room dealing in municipal finance? Unsurprisingly, none. In 2009, the Securities and Exchange Commission charged that two bankers at Dimon’s JPMorgan, Charles LeCroy and Douglas MacFaddin, had in 2002 and 2003 privately agreed with “certain” county commissioners in Jefferson County, Alabama, to pay more than $8.2 million to “close friends of the commissioners who either owned or worked at local broker-dealers” that had been hired to advise the county commissioners on awarding underwriting business.

The purpose of the payments, the SEC alleged, was to make sure the commissioners hired JPMorgan as the underwriter of municipal-bond sales and swaps contracts. The SEC caught LeCroy and MacFaddin on tape saying the payments were “payoffs,” “giving away free money” and “the price of doing business.” (Attorneys for LeCroy and MacFaddin disputed the SEC charges, which they are still fighting.)

The best part, according to a suit filed by the county, was that JPMorgan even agreed to pay Goldman Sachs Group Inc. $3 million if it wouldn’t compete for a $1.1 billion interest-rate swap that JPMorgan entered into with Jefferson County. The payments were all undisclosed — the Goldman money, the suit claimed, was shuffled through a separate derivatives contract created just to make the payment — and decreased the proceeds the county received from the offerings.

To settle the charges with the SEC, JPMorgan neither admitted nor denied wrongdoing — of course — but paid $722 million, including forgiving $647 million in fees that the county would have had to pay to unwind the swap deals. Last November, Jefferson County filed for bankruptcy protection, largely a result of the deals JPMorgan Chase put together.


But still the lesson has not been learned. Just read the latest shocking investigation by Rolling Stone’s Matt Taibbi, which recounts a just-concluded case in a Manhattan federal court, U.S. v. Carollo. In a nutshell, it explains how three bankers at General Electric Co.’s finance arm, GE Capital — as well as a bunch of ne’er-do-wells at an intermediary brokerage, which supposedly vetted potential underwriting firms — were doing the exact same things bankers at Lazard, JPMorgan and Merrill did in years past: paying and taking bribes in exchange for business “in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America,” according to Taibbi.

The details are nauseating — Taibbi aptly compares the whole scam to the Mafia. It leads one to believe that Wall Street big shots are like scorpions, which sting because that’s what they are on Earth to do, they just can’t help themselves.

“One of the biggest lies in capitalism,” former New York Governor Eliot Spitzer, who made his name prosecuting Wall Street misdeeds, told Taibbi, “is that companies like competition. They don’t. Nobody likes competition.” Spitzer could have added that this hatred of competition is ever-keener on Wall Street, which today, with its ranks thinned by the financial collapse, operates more like a cartel than ever.

The three GE bankers — Dominick Carollo, Steven Goldberg and Peter Grimm — were convicted on May 11 of conspiracy to commit fraud. Will Wall Street finally learn its lesson? It would certainly help if the federal judge in the case, Harold Baer, throws away the keys to the cells the three men are set to inhabit.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

Dimon In DC Preserves Wall Street’s Black Box

June 14 (Bloomberg) — Did Jamie Dimon, the chairman and chief executive officer of JPMorgan Chase & Co., put too much blind faith in Ina Drew, the former leader of the bank’s Chief Investment Office who was responsible for a proprietary trade that cost the firm $3 billion and counting?

That is the central question that occurs to me after listening to Dimon alternately deflect questions from and charm the pants off the Senate Banking Committee on Wednesday in Washington.

Dimon, of course, did not address that question directly. But knowing how intently he has focused on risk-taking in JPMorgan’s investment bank, regularly attending its risk- committee meetings, and how indifferent he seemed to what Drew was doing — apparently never attending one of her group’s risk- committee meetings — one wonders whether he was too much in the thrall of his $15-million-a-year chief investment officer.

“I think the first error we made,” Dimon testified, “was that the CIO unit had done so well for so long” — making billions in dollars of profit over the years — “that I think there was a little bit of complacency about what was taking place there, and maybe there was overconfidence.”

He told the senators that the CIO had its own risk committee, which was “supposed to properly overview and vet all the risks,” but clearly that did not happen in the particular “synthetic credit portfolio” that incurred the losses. He said the synthetic credit portfolio should have “had more scrutiny. It was higher risk. It was marked to market. It should have had more scrutiny and different limits right from the start.”

We now know this did not happen. When Bloomberg News first reported on April 6 about the so-called London Whale — the nickname given to Bruno Iksil, the trader in JPMorgan Chase’s London CIO office who had constructed the fateful synthetic credit trade — Dimon dismissed the reporting as a “tempest in a teapot.” At the Senate hearing, on this point he was contrite: “Let me first say, when I made that statement, I was dead wrong.”

It turned out that Dimon had been traveling at the time, and called in to Drew as well as Doug Braunstein, the chief financial officer, and John Hogan, then the chief risk officer at the bank, and was told that they “were looking into it.” He told the senators, “I was assured by them, and I have a right to rely on them, that they thought this was an isolated small issue and that it wasn’t a big problem.”

Later in the hearing, after Senator Sherrod Brown, an Ohio Democrat, asked Dimon whether he monitored the CIO, he replied that generally he did. When Brown asked whether he approved of the CIO’s trading strategy, Dimon said, incredibly, “No. I was aware of it, but I did not approve it.”

This answer strains credulity. Dimon has a reputation as being a hands-on manager, even going so far as canceling the company’s use of black sedans for employees working late during the financial crisis. He micromanaged traders at Salomon Smith Barney back in the 1990s when he ran that business for his longtime mentor Sandy Weill, one of the architects of Citigroup.

How could Dimon not have closely monitored what Drew and her traders were doing in this $350 billion proprietary portfolio that was managing the firm’s excess cash on a daily basis? Did he really have such blind faith in Drew — or did he actually know much more than he is admitting, especially since Drew and two of her London traders have taken the fall for the bad bets?

These are questions that perhaps the House can take up on June 19 when Dimon returns to Washington for more testimony on the matter. In the meantime, what remains abundantly clear is that way too much of what continues to happen on Wall Street takes place in a financial black box. The Securities and Exchange Commission and the Commodity Futures Trading Commission need to wrestle the Dodd-Frank rule making apparatus — specifically as it pertains to derivatives and proprietary risk- taking — away from the clever Wall Street lawyers and lobbyists and back to the representatives of the American people, because we are the ones who always end up having to clean up Wall Street’s messes.

At one point early on in the hearing, Senator Richard Shelby, an Alabama Republican, asked Dimon what he had learned from “this debacle.” The smooth-as-silk Dimon answered: “I think no matter how good you are, how competent people are, never get complacent in risk. Challenge everything. Make sure people on risk committees are always asking questions.”

He added: “In the rest of the company, we have those disciplines in place. We didn’t have it here. And that’s what caused the problem.”

The lingering question for Dimon is why he let Ina Drew’s CIO get away with a lower level of oversight than everyone else.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. His sister-in-law, Ellen Futter, is on JPMorgan Chase’s board of directors. The opinions expressed are his own.)

Bankers Are Finally Burning Out

Ever since March, when the New York Times decided to make a cause celebre out of the resignation of Greg Smith, a vice president at Goldman Sachs Group Inc., a cottage industry of first-person Wall Street departure stories has sprung up across the print media and blogosphere.

For instance, the Guardian in London has run a series of 60 columns — titled “Voices of Finance” — that give current and former Wall Street bankers and traders a chance to anonymously describe what their jobs are really like or why they decided to leave. One London-based equity derivatives salesman, who had a job similar to Greg Smith’s but not at Goldman Sachs, wrote on the Guardian blog that doing the right thing on Wall Street is a directive that must come from the top.

“For me,” he wrote, “it goes back to the values in an organization. If you could sell your product for double the price, would you do it? I would say, in business, that’s legitimate, provided your clients have adequate information.” He continued: “This is an important rule with structured derivatives that clients ignore at their peril. You have got to read the small print. You need to bring in a lawyer who explains it to you before you buy these things — otherwise there is information asymmetry.”

These anonymous postings are valuable insomuch as they give a reader a healthy dose of the flavor of what it is like to work on Wall Street. But they can’t hold a candle to a full-throated, no-holds-barred repudiation of an industry that is expert at seducing the world’s best and brightest with promises of glamour and riches.

Such is the power of the prose of former banker Stephen Ridley, who survived as a junior investment banker at a “top tier” European investment bank for all of 16 months before throwing in the towel on his finance career in October 2011. Having since been reconstituted as a singer/songwriter and pianist — and a damn fine one at that — in the mold of Coldplay’s Chris Martin, Ridley decided last month to go public with his tale of investment-banking woe. He tells a powerful story that anyone considering a Wall Street career would do well to read before falling into the investment-banking black hole.

Ridley writes that he graduated from a top British university — he doesn’t say which one — in 2010 with a degree in philosophy, politics and economics. The summer before graduation, he interned in the “European” bank he joined a year later (despite knowing firsthand from his internship just how “brutal” the life of an investment banker was). His sole motivation was to make as much money as possible. He assumed having a lot of money would make him happy and earn him the respect of the people around him.

“I wanted to be a somebody in the eyes of myself and others,” he wrote on the blog Wall Street Oasis. “But most of all, I wanted money. Why? Because money is freedom. Money means I can wear what I want, live where I want, go where I want, eat what I want, be who I want. Money would make me happy. Right?”

Wrong. Ridley explains: “In fact, money didn’t seem to make any of the bankers happy. Not one person in the roughly 200 I got to know in banking were happy. Yet all earned multiples of the national average salary.”

He then explained why he was so unhappy. “Like everyone there, I worked my ass to the bone, working mind-numbingly boring work,” he continued. “15 hour days were a minimum, 16-17 were normal, 20+ were frequent and once or twice a month there would be the dreaded all-nighter. I worked around 2 out of every 4 weekends in some form. I was never free, I always had my blackberry with me, and thus I could never truly detach myself from the job.”

What about the perks, the lavish lifestyle? “These are the objective facts, contrary to what any ’baller’ wants to tell you,” writes Ridley. “The only models were Excel models, the only bottles were Coca Cola, which I drank a lot of to stay awake.” Once Ridley realized that he was happier “backpacking around South America on a shoestring” than he was in the supposedly glamorous world of investment banking, he gave it up to pursue his passion for singing.

Given the shrinking investment-banking pie and dramatic changes to the way the industry is going to be regulated, we have come to an important, paradigm-shifting moment for Wall Street. As Stephen Ridley, and many others, have discovered, Wall Street is no longer a fun — or necessarily lucrative — place to work.

And guess what? This is the best news to come around in a generation. Now, instead of being sucked into Wall Street by default or after digesting a fantasy about fame and untold riches, maybe our best and brightest graduates will pursue their passions. If they do, we will all be better off.

As Ridley says: “Life is short — you’re young, you’re old, you’re dead. React to that knowledge. You have nothing to lose!”

William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.
Copyright Bloomberg 2012

The Great Goldman Succession Battle

More often than not during the past 100 years, succession to the top job at Goldman Sachs (GS) has been a blood sport.

A careful reading of former Goldman employee Greg Smith’s infamous New York Times op-ed article — along with a twist of conspiracy theory — suggests that the jockeying to replace Lloyd Blankfein, who has been Goldman’s chief executive officer since June 2006, is well under way.

It’s also possible that Smith may have unwittingly, or perhaps wittingly, given a boost to one candidate previously thought to have been out of the running: J. Michael Evans, head of the firm’s global growth markets.

Despite what Goldman would have you believe about how carefully orchestrated its leadership changes have always been, the firm has rarely had an orderly succession. Consider the exit of Waddill Catchings, the first person from outside the family to run Goldman Sachs. In 1930, partners Sidney Weinberg and Walter Sachs decided that Catchings, whose creation of the Goldman Sachs Trading Corporation had by then cost the firm $13 million and nearly put it out of business, had to go.

Sachs first met with Catchings in Chicago to clip his wings, and Catchings apologized for having taken gambles without the approval of all partners. A few months later, Sachs and his brother Arthur decided to buy Catchings out of his contract for $250,000. “We had made up our minds to ask him to retire,” Walter Sachs recalled in an oral history in the 1950s. “This was because it had become clear to us that we just didn’t think alike, that he had come as near ruining the name and the reputation of the firm as any man could do.”

The Sachses selected Weinberg to be the senior partner, and he went on to become one of the greatest investment bankers of his generation. Yet he, too, refused to leave the stage gracefully in favor of his successor, Gus Levy. So in the mid-1960s, Levy forced Weinberg to move from Goldman’s headquarters in downtown Manhattan to an office in the Seagram’s Building in Midtown. But even kept out of the day-to-day flow, Weinberg would not go quietly, and until his death in 1969 he made sure Levy knew that he was still responsible for pay and promotions at Goldman.

After Levy’s sudden death in 1976 — he suffered a stroke at a Port Authority board meeting — the “Two Johns” (John Whitehead and John Weinberg, son of Sidney) succeeded him, although Whitehead thought he should have had the position alone. Things went fairly smoothly after Whitehead retired and joined the State Department, with Weinberg running the firm alone beginning at the end of 1984.

Yet by the end of the decade, Weinberg — like his father before him — was sent packing to the Seagram’s Building to make way for Robert Rubin and Steve Friedman to lead Goldman, in December 1990. Rubin and Friedman had grown impatient that Weinberg would not leave gracefully. That partnership worked fine until Rubin left in January 1993 to join the Bill Clinton administration, and then Friedman abdicated his position for health reasons. This set off a week of ferocious infighting in 1994 at Goldman Sachs, with Jon Corzine being named senior partner and Hank Paulson becoming his No. 2.

But Corzine and Paulson never got along. Corzine seemed eager to merge Goldman with another Wall Street firm, an idea Paulson resisted. Eventually, in January 1999, Paulson seized his opportunity to get the four votes he needed on Goldman’s five-member executive committee to remove Corzine, a swift coup- d’etat. Two of the four votes came from partners John Thornton and John Thain — a longtime Corzine ally. In exchange, Paulson promised the men that they would succeed him one day.

But Paulson reneged on that promise, deciding in the end that neither man had the right stuff to lead Goldman. When Paulson became Treasury secretary in 2006, he thought Blankfein, who had come from the trading floor, would be the better choice to lead a firm so heavily dependent on trading revenue and
profit.

The machinations inside Goldman to succeed Blankfein are no less Kremlin-like than at other times in its history. Lately, Goldman insiders have been positioning Gary Cohn, Goldman’s 51-year-old president and a longtime Blankfein ally, as the obvious candidate to succeed Blankfein when the time comes. This is a relatively new development because many thought that promoting Cohn, another former trader, would conflict with Goldman’s supposed new priority on being client-friendly and a corporate good citizen. But insiders note that Cohn has become much more statesmanlike in the past year, and point to his high-profile
appearance at the in Davos, Switzerland, in January as evidence.

No doubt Cohn’s renaissance has miffed the uber-competitive Evans, a former Olympic gold-medalist (in rowing) and a Goldman vice chairman. Evans had been a serious contender for the top job, and in 2010 was made co-chairman of Goldman’s internal Business Standards review committee, which published a report on the firm’s role in the financial meltdown in January 2011. However, insiders tell me, Evans’s ambitions and sharp elbows had upset a number of important colleagues, and his star was falling.

Enter Greg Smith with his bombshell. Evans has spent much of his Goldman career at the London office, where Smith worked, and they certainly knew each other. In his op-ed article, Smith specifically cited Blankfein and Cohn as responsible for the deterioration of Goldman’s culture during his almost 12 years at the firm. Smith made no mention of Evans.

The logical question is, who benefits from Smith’s embarrassing public indictment of Goldman’s culture under the leadership of Blankfein and Cohn? How about the Machiavellian Evans, a former protege of Paulson’s who can be presented to the Goldman board — and to the public — as a worldly, client- oriented, cleaner-than-clean savior and return of the old-school style investment-banker at Goldman?

“Why doesn’t anyone call the Greg Smith story what it is, the next round of alpha war at the top of GS?” one observer recently e-mailed me. Why not, indeed.

(William D. Cohan , a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

Big Reason To Shut SEC, Start Over

Aug. 30 (Bloomberg) — Thanks to Darcy Flynn, a longtime attorney at the Securities and Exchange Commission, we now have all the ammunition we need to do what should have been done years ago: terminate the SEC, with extreme prejudice, and in its place construct a new regulatory watchdog for Wall Street free of obvious conflicts of interest.

Flynn’s courage has almost been lost in all the recent apocalyptic talk of earthquakes and hurricanes, but a few weeks back he did something remarkable. After raising concerns internally at the SEC last year — and getting nowhere — Flynn went public and alleged in a formal whistleblower complaint that for at least 17 years the SEC “followed a policy of systematically destroying documents” related to what are known as Matters Under Investigation, or MUIs, most of which were focused on possibly illicit or illegal behavior at Wall Street firms. MUIs are the first step in investigating a case that may lead to a formal SEC inquiry.

Flynn alleged the MUIs were destroyed after the cases were closed when they should have been retained. He catalogued his complaints in a letter to Senator Charles Grassley, an Iowa Republican and the ranking member of the Senate Judiciary Committee. Grassley wrote to Mary Schapiro, the head of the SEC, asking her to respond to him about Flynn’s allegations by tomorrow. She hasn’t yet done so as of yesterday.

In his letter to Grassley, Flynn alleged that the SEC had destroyed documents related to MUIs involving Bernard Madoff; Goldman Sachs Group Inc.’s trading in the credit-default swaps of insurer American International Group Inc.; “financial fraud” at Wells Fargo & Co. and Bank of America Corp.; and “insider-trading investigations” at Deutsche Bank AG, Lehman Brothers Holdings Inc. and SAC Capital Advisors LP.

‘Doesn’t Make Sense’

“It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence,” Grassley said in a press release that accompanied his letter to Schapiro. “If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”

This case alone is reason enough to shut the SEC and design a new agency worthy of its budget of more than $1 billion. But, of course, there are many more instances of the ineptitude that makes the SEC so infuriating and ineffectual. Top among them is the agency’s abject failure during the leadership of former Representative Christopher Cox to hold Wall Street the slightest bit accountable for its actions.

Cox Run Amok

Cox came to define laissez-faire regulation run amok, allowing the financial industry to get away with an excess of abuses, the extent of which may never be fully known, thanks partly to the SEC’s alleged document destruction. Then there is William H. Donaldson, Cox’s predecessor. How could Donaldson and the other SEC commissioners have blithely ruled in 2004 that the biggest securities firms could dramatically increase the leverage on their balance sheets without thinking through the possible ramifications of such enhanced risk — where a mere 2 percent decline in asset values could wipe out a firm’s equity cushion? No doubt that decision helped lead to the downfall of Bear Stearns Cos., Lehman Brothers and Merrill Lynch & Co., and to the near-failure of both Morgan Stanley and Goldman Sachs. Thanks, Bill.

The SEC has long had a too-cozy relationship with Wall Street. Witness Robert Khuzami, the SEC’s director of enforcement, who used to be the general counsel for the Americas at Deutsche Bank in New York, a firm that issued one fatally flawed mortgage-backed security and collateralized-debt obligation after another during the early part of the last decade. (A Senate subcommittee report on the financial crisis devotes 45 pages to Deutsche Bank’s squirrelly securities business and the role it played in fomenting the meltdown.)

Targeting Goldman

Is it any surprise that Khuzami set his sights on Goldman Sachs, rather than on his old company, in trying to create some accountability for the mortgage mess? Deutsche Bank was a bigger player in the mortgage-securitization and CDO markets than Goldman Sachs was, yet it was Goldman that the SEC ended up going after in April 2010 when the agency filed — to great fanfare — a politically useful civil suit related to a synthetic CDO that Goldman created and sold in April 2007. (Deutsche Bank did many similar deals.) Goldman Sachs settled the accusations in July 2010 for $550 million, more to make the bad publicity go away than because it did anything different from any other Wall Street firm.

Obvious Conflict

There’s no evidence of impropriety on Khuzami’s part, but it should hardly give investors confidence that someone with such an obvious conflict of interest could bring a suit against a competitor of his old employer. (Schapiro, meanwhile, was previously head of the Financial Industry Regulatory Authority, and was paid almost $9 million when she left to join the SEC.) It goes both ways: For years, top SEC officials have been turning in their regulatory credentials for compensation bonanzas at the very companies they were once charged with overseeing.

Then there’s the SEC’s ongoing obfuscation when it comes to Freedom of Information Act requests. The SEC is the black hole of such applications, hanging them up for years and ultimately ignoring them. This is a violation of trust that threatens our democracy and makes it difficult for journalists and historians to figure out what went wrong. Maybe that’s the point.

In Rolling Stone’s Sept. 1 issue, Matt Taibbi broke the story of Darcy Flynn’s complaint against the SEC. It’s worth reading for its rich detail about what Flynn alleges the SEC has been doing for decades. And it only reinforces the idea that the agency is unsalvageable — and needs to be replaced.

Remade SEC

A new SEC would pay its top officials much higher salaries (in line with top private-sector attorneys) but not allow any of them to have previously worked on Wall Street or to go there for five years after they leave the agency. It would have genuine law-enforcement power, as opposed to the SEC’s civil-suit-only mandate, and be able to indict a firm and its top executives for wrongdoing. In other words, the agency would have the chops to regulate a powerful industry badly in need of it, free of conflicts of interest.

It’s now crystal clear — and beyond unconscionable — that the SEC stopped doing its job long ago. We need to rebuild it on a more secure foundation.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

Copyright 2011 Bloomberg

Bond Markets Brace for Panic As Congress Bickers Over Debt Ceiling

Hold on for just a New York minute now and consider the powerfully serious message the bond market sent last week about the political dithering in Washington and in Europe’s capitals. “Pay attention folks,” as the investor Gifford Combs e-mailed me on Friday. “This is not a drill.”

Here are the facts: The yield on Greek sovereign debt is now at record highs for the euro era. Last week’s state-managed bond auction in Italy almost failed. And, while few seem to have noticed, the overnight repurchase market — for short-term, secured, corporate debt obligations — nearly seized up amid what Combs described as “an almost panicky scramble” for less- risky paper.

Indeed, investors’ manic desire for safety last week reached levels not seen since the most acute days of the financial crisis in September and October 2008. Ironically, though, given the pathetic display in Washington and the country’s ongoing fiscal troubles, people turned in droves to the perceived security of the U.S. Treasury market, even though it has never looked shakier.

Remember the days of negative yields on short-term U.S. paper — when effectively investors paid the government to keep their money safe? Warren Buffett considered that happenstance so rare that two years ago at the Berkshire Hathaway Inc. annual meeting he flashed a slide of a Treasury sale transaction ticket to his legion of followers.

Negative Yields Return

Well, it seems those days are back. U.S. Treasury bills shorter than three months in duration traded at negative yields last week. Three-month bills were trading a yield of 1 basis point. Six-month bills traded to yield 4 basis points and one- year U.S. Treasuries were trading to yield 13 basis points.

In short, demand for the perceived security of the debt obligations of the U.S. government was so intense that “it was virtually impossible to find ANY amount of certain maturities of short duration Treasury bills,” Combs informed me. He ended up buying what he could of the one-year notes and paying big time for the privilege (resulting in that minuscule 13 basis-point yield).

Not everyone, however, seems to have so much faith in the U.S. The Saudis appear to be so concerned that Congress and President Barack Obama will not be able to reach a resolution on increasing the debt-ceiling by Aug. 2 — pushing the Treasury to possible default on the nation’s obligations for the first time — that, according to market insiders, last week they Hoovered up euros as a possible hedge. This helps to explain why the European currency has managed to more than hold its own against the dollar despite the continent’s economic woes.

Money-Market Worries

At the same time, it’s an open secret on Wall Street that the Federal Reserve Bank of New York has become increasingly concerned about the state of U.S. money-market funds. With as little fanfare as possible — understandably, so as not to cause a panic — the New York Fed has been urging domestic money- market funds to reduce their exposure to European banks, where the funds have turned to increase yields not available in the U.S. because of rock-bottom interest rates.

The Fed is said to be terribly worried that — because of provisions in the Dodd-Frank law — it will no longer be able to rescue a money-market fund if it “breaks the buck,” as the Fed did famously the day after Lehman Brothers Holdings Inc. filed for bankruptcy.

Threat of Downgrades

As if all this were not enough, last week both Moody’s and Standard & Poor’s put the U.S. itself on credit watch, with negative implications about a possible downgrade. S&P said that while it expected an agreement regarding the debt ceiling, it was worried that the country’s fiscal house will remain in disarray.

“Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues,” it stated in its Bastille Day note. “Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.”

Additionally, on Friday, S&P put the six AAA-rated insurers — including New York Life Insurance Co. and Northwestern Mutual Life Insurance Co. — on the watch list for a possible downgrade because of their significant holdings of U.S. Treasury and agency securities. None of this is even remotely good news.

Charade in Washington

What is the bond market telling us? Combs, a founder of Dalton Investments LLC in Los Angeles, likens the panic in the bond market to the unambiguous message the stock market sent on Sept. 29, 2008 — when the Dow Jones Industrial Average dropped 780 points, the largest one-day point drop ever — after Congress voted down the first version of the TARP bill. That’s how concerned the bond market is now about the charade going on in Washington.

Combs worries, though, because of how inherently more difficult it is for people to understand the machinations of the bond market than those of the stock market, that the message this time is not getting through to the politicians in Washington, who seem intent on taking a nonchalant approach to the potential Aug. 2 deadline for raising the debt ceiling. (Some politicians — hello, Michele Bachmann — have actually claimed that defaulting on our obligations would be good for the country.)

Politicians Don’t Understand

His concern is that politicians don’t understand how intimately tied transactions are on a worldwide basis to U.S. Treasury securities, and that if Treasuries were no longer accepted as collateral, the resulting market turmoil would make the “collapse of Lehman Brothers look like a walk in the park.”

Combs said he believes a default on U.S. Treasuries would set off “an unholy scramble” for what constitutes “good and valid” collateral, creating a huge problem in the worldwide payments system: “It’s a situation no one has ever faced before — that people stop accepting Treasury bills as collateral.”

Even though, incredibly, the politicians in Washington took the weekend off from their negotiations, a bunch of them still found the time to appear on the Sunday morning political talk shows to make the case that a compromise will be found before Aug. 2. We’ll see if they are correct — but bond traders are going to be increasingly less likely to bet on it.

William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.

Copyright 2011 Bloomberg.