Monday, December 17, 2012 - Unconnected Dots

Unconnected Dots

by Sinclair Noe

DOW + 100 = 13,235
SPX + 16 = 1430
NAS + 39 = 3010
10 YR YLD +.05 = 1.76%
OIL +.71 = 87.44
GOLD + 1.90 = 1699.10
SILV -.03 = 32.38

President Obama and House Speaker Boehner met at the White House today. Aides from both parties said they were optimistic that a deal could be reached in the coming days to avert the "fiscal cliff," as lawmakers set the stage for action before a year-end deadline.

A senior Republican aide said: "There's been too much progress at this point and neither guy wants to go over the cliff." Although both sides still had major differences, investors were cheered by signs of progress. Major market indices moved higher in the afternoon, and some of that was the feel good part of the news cycle; we certainly need some good news. Now, we sit back and see whether it was yet another rumor.

Boehner, the speaker of the Republican-controlled House of Representatives, has edged closer to Obama's demand to raise taxes on the wealthiest Americans. In return, Obama is considering a measure that would slow the rate of growth of Social Security retirement benefits by changing the way they are measured against inflation.

Boehner has put forward a tax increase for those earning over $1 million annually, while Obama wants that threshold set at $250,000. Republicans could probably stomach a tax hike on incomes above $500,000. Boehner could float the broad outlines of a deal with rank-and-file members on Tuesday. If there are no strong objections, he could try to finalize the deal on Wednesday, the Republican aide said.

Votes could be held in Congress next week. Both sides declined to say what Boehner and Obama discussed at the meeting, which was also attended by Treasury Secretary Timothy Geithner.

However, the White House said Boehner's latest proposal doesn't meet its standards. Republicans want substantial spending cuts in return for increased tax revenue, but any proposal to trim popular benefit programs like the Medicare health insurance plan for seniors will face fierce resistance. Obama could also face strong opposition from Democrats if he agrees to Boehner's proposal to slow the growth of Social Security benefits by changing the way the cost-of-living increases are measured against inflation, an approach that could save $200 billion over 10 years. Obama also wants to head off another confrontation over the government's debt limit, which will need to be raised in the coming months. Republicans insist that any increase in the government's $16.4 trillion borrowing authority must be paired with an equal reduction in spending. Apparently jobs were not a big talking point in the negotiations.

The National Credit Union Administration , the regulator of credit unions has sued JPMorgan Securities and Bear Stearns over $3.6 billion in mortgage securities the bank allegedly sold to credit unions that collapsed because of losses from the securities.

The lawsuit by the National Credit Union Administration is its second against JPMorgan involving losses to credit unions. In June 2011 the agency sued it over some $1.4 billion in securities in which JPMorgan was the underwriter and seller. That suit is still pending. The actions add to a growing list of cases JPMorgan fighting over conduct by Bear Stearns, which JPMorgan acquired in 2008. The New York Attorney General sued JPMorgan in October alleging that Bear Stearns deceived investors buying mortgage-backed securities in 2006 and 2007.

In today's lawsuit, the NCUA alleged that Bear Stearns made misrepresentations in connection with the underwriting and subsequent sale of mortgage-backed securities to U.S. Central, Western Corporate, Southwest Corporate and Members United Corporate federal credit unions. The lawsuit, filed in federal court in Kansas, is the largest such lawsuit the regulator has filed to date. A JPMorgan spokeswoman declined to comment.

In the past two years the agency has brought similar actions against Barclays Capital, Credit Suisse, Goldman Sachs, RBS Securities, UBS Securities, Wachovia and others. Most of the cases are pending, but it has settled claims against Citigroup, Deutsche Bank Securities and HSBC for around $170 million.

The credit union regulator has been trying to recover losses related to the failure of five institutions that it seized in 2009 and 2010 after they ran into trouble due to the crumbling housing market. The wholesale credit unions have experienced more troubles than their retail counterparts because they did not face the same restrictions on permitted investments, leading to big losses during the financial crisis.

UBS will pay around $1.5 billion to settle charges that a group of traders at its Japanese unit rigged Libor interest rates. The fine, to be imposed by the United States and Britain, would be the latest blow to UBS after a $2.3-billion rogue trading loss in London last year, a $780-million fine after a U.S. tax investigation in 2009 and its near collapse in 2008 under the weight of losses on U.S. sub-prime mortgage lending.

UBS will admit that roughly 36 of its traders around the globe manipulated yen Libor between 2005 and 2010. The settlement talks are reportedly now centering on a fine in the region of $1.5 billion - somewhat higher than geusstimated last week and three times the $450 million levied on British bank Barclays Plc in June for similar manipulation of benchmark interest rates.

The fine against UBS would be the second-largest ever levied against a bank for wrongdoing, after Britain's HSBC last week agreed to pay $1.92 billion to settle a probe in the United States into laundering money for drug cartels.

UBS earned $4.6 billion in net profit last year and the bank has spent much of this year and last bolstering its capital. Paying $1.5 billion to settle the Libor probe would shave 50 basis points off UBS's capital ratios, but even after the fine, UBS would still be better capitalized than other banks.

UBS is expected admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euro yen contracts. Admitting to criminal wrongdoing can be fatal for a bank, as it can lose its license. But by admitting to wrongdoing only at its Japanese subsidiary, where UBS employs 1,000 staff, it effectively ring-fences the damage, sparing its bigger units.

Individuals are also being targeted, mainly lower-level traders, offered up as sacrificial lambs. The UBS investigation centers on former UBS trader Thomas Hayes, but also includes other UBS bankers. Hayes, who joined Citigroup after leaving UBS in 2009, is one of three British men arrested last week by London police but later released on bail.

More than a dozen banks have been caught in the international inquiry into Libor rates, with most of the focus being on how rates were set between 2005 and 2008.

Royal Bank of Scotland is also expected to shortly reach a settlement on Libor manipulation. The bank will receive a penalty of more than $564 million.

Morgan Stanley, the lead underwriter for Facebook's initial public offering, will pay a $5 million fine to Massachusetts for violating securities laws governing how investment research can be distributed.

Massachusetts' top securities regulator charged that a top Morgan Stanley banker had improperly coached Facebook on how to disclose sensitive financial information selectively, perpetuating an unlevel playing field between Wall Street and Main Street.

Morgan Stanley has faced criticism since Facebook went public in May for revealing revised earnings and revenue forecasts to select clients before the media company's $16 billion initial public offering. This is the first time a case stemming from Morgan Stanley's handling of the Facebook offering has been decided.

Facebook had privately told Wall Street research analysts about softer forecasts because of less robust mobile revenues. A top Morgan Stanley banker coached Facebook executives on how to get the message out.

A Morgan Stanley spokeswoman said the company is "pleased to have reached a settlement" and that it is "committed to robust compliance with both the letter and the spirit of all applicable regulations and laws." The company neither admitted nor denied any wrongdoing.

The investigation into the Facebook IPO is far from over and other banks were involved. Goldman Sachs and JP Morgan also acted as underwriters. The underwriting fee for all underwriters was reported to be $176 million.

The state said a Morgan Stanley banker helped a Facebook executive release new information and then guided the executive on how to speak with Wall Street analysts about it. The banker rehearsed with Facebook's Treasurer and wrote the bulk of the script Facebook's Treasurer used when calling the research analysts. A number of Wall Street analysts cut their growth estimates for Facebook in the days before the IPO after the company filed an amended prospectus. Facebook's treasurer then quickly called a number for Wall Street analysts providing even more information.

The banker "was not allowed to call research analysts himself, so he did everything he could to ensure research analysts received new revenue numbers which they then provided to institutional investors." The consent order also says that the banker spoke with company lawyers and then to Facebook's chief financial officer about how to prove an update "without creating the appearance of not providing the underlying trend information to all investors."

The banker and all others involved with the matter at Morgan Stanley are still employed by the company.

Retail investors were not given any similar information, just in case you ever wondered whether the market is rigged against you.

In light of the HSBC money laundering settlement last week it is worth reading a report I found in the Guardian entitled Arizona funnels business to CCA through its school-to-prison pipeline