Posts Tagged ‘Lehman Brothers’

How Did a Rogue UBS Trader Lose $2 Billion?

Tuesday, October 18th, 2011

The strange saga of how a rogue UBS trader lost $2 billion and who has since been fired and charged with fraud and false accounting in a London court has raised questions about the bank’s stability and whether it will retain its clients.  Ghana-born trader Kweku Adoboli was perceived as a polite and snappily dressed young man who mixed grueling hours in London’s financial district with a lavish social life in the capital’s nightspots.  But even the 31-year-old Adoboli appeared to foresee his work-hard, play-hard lifestyle coming undone.  “Need a miracle,” he posted on his Facebook page, just hours before his arrest.

Analysts and regulators questioned why the Swiss banking giant UBS and its monitoring systems had failed to spot Adoboli’s alleged fraud.  “Nobody blames the tiger for stalking its prey, but you do blame the zookeeper for leaving the tiger’s cage open,” said Stephen Brown, professor of finance at New York University’s Stern School of Business.  “These top banks hire the best and brightest ambitious young people and when they outperform everyone else the bankers want to believe in their brilliance so they look the other way.  That’s exactly what happened at UBS.”

Said a London based private banker at a rival global institution, “We don’t want to gloat because there but for the grace of God.  But it’s likely to be the kind of thing that if we were in competition with them for a pitch it would help us because it would be another question mark in people’s minds,” he said. 

Peter Thorne, an analyst at Helvea said this crisis is less serious than UBS’ previous woes and is unlikely to result in a similar stampede.  “I can’t believe they’re not going to do their utmost to maintain their clients. Also, if you’ve been through the financial crisis and you stuck with UBS you must love them, so I’m not sure you’re going to jump ship,” he said.

The Wall Street Journal’s David Weidner compares this case to that of Nick Leeson.  “Consider the story of Nick Leeson, the first trader to bring down a bank.  He racked up $1 billion in losses and was sentenced to six years in jail.  Barings Bank collapsed under the weight of the exposure.  Leeson said exceptional risk-taking was common.  He actually used an account that his team had set up to cover losses of a junior trader.  And as many accused rogues have argued, Leeson said the bank tacitly approved.  The number of rogue traders — there have been at least 11 since 1995 who have lost roughly $10 billion combined – suggests that Leeson may be right.  So, why is trading beyond internal limits allowed?  Because of the winners.  Enter Philipp Meyer, a former UBS derivatives trader who left the business a few years ago and wrote about the excess of the business.  To be clear, Meyer never said he made unauthorized trades, but he did offer this observation about trading.  ‘It was pretty clear what The Market didn’t like.  It didn’t like being closely watched. It didn’t like rules that governed its behavior.’”

Writing for Business Week, William D. Cohan says that “Whether UBS is shown to have been aware of Adoboli’s trading is almost beside the point.  If the bank was aware of it and did not stop it, then its failure to do so is unconscionable. If it was not aware of the trades, then its compliance and risk management departments’ failure to prevent them from happening in the first place is equally appalling.  In the post-Lehman, Dodd-Frank, Basel-III era, it is nearly unfathomable that a global bank of UBS’s heft, wealth and importance could allow this kind of loss to occur.  Where were the adults?  There will almost certainly be regulatory consequences for the rest of Wall Street as a result of this ill-timed debacle.  The banks will howl, but tighter rules could actually help protect the rest of us from their bad behavior.”

Happily for the United States and the Dodd-Frank laws, it’s less likely that a rogue trader could topple a major U.S. financial institution.  One section of the Dodd-Frank legislation is the Volcker Rule, named after former Federal Reserve chairman Paul Volcker, which limits American banks’ ability to trade their own funds.  That wasn’t true in 2008, when losses from bad bets that banks made on mortgages led to the meltdown of Bear Stearns and Lehman Brothers.  Full implementation of the Volcker Rule is expected to be delayed from its original July 21, 2012 deadline.  A majority of the largest American banks have already sold or closed the desks that make these trades – known as “prop” or proprietary trading desks.  “Banks can put themselves under with dangerous trading and take the commercial side with them as they go down,” said Robert Prentice, a professor of business law at the University of Texas’ McCoombs School of Business.  “A big part of what the Volcker Rule will do is separate out the risky trading from the deposits.”

A majority of the banking system depends on computers to spot abnormal trading activity that could signal unauthorized trades.  Industry watchers still question whether the Volcker Rule in its final form will mandate the spin-off of prop trading from banks or whether it will be watered down.  “You can’t underestimate the lobbying ability of the banking industry in the U.S. and the U.K.” said Stewart Hamilton, a finance and accounting professor at the University of Edinburgh.  “It’s huge.”

Warren Buffet Bullish on U.S. Credit Rating

Monday, August 22nd, 2011

Standard & Poor’s may have downgraded the United States credit rating from AAA to AA+ and the bears may have taken over Wall Street, but the Berkshire Hathaway chairman and billionaire Warren Buffett believes that the nation deserves a AAAA rating.

In a recent appearance on CNBC, Buffett said that he still believes that the United States’ debt is AAA and that he’s not changing his mind about Treasuries based on Standard & Poor’s downgrade.  “If anything, it may change my opinion on S&P,” according to the Oracle of Omaha.  “I wouldn’t dream of putting it anywhere else,” Buffett said, noting that at Berkshire, the only reason he’s sold Treasuries in the past is to purchase stocks or make acquisitions.  Berkshire is still buying T-bills, even though yields have declined.  “If I have to buy (Treasuries) at a zero percent yield, I will,” he said.  “I don’t like it, but we’ll do it.”

Buffett has something of a vested interest in criticizing Standard & Poor’s.  Berkshire Hathaway is one of the biggest shareholders in Standard & Poor’s main competitor Moody’s with about 28 million shares. But the billionaire has long urged people to make their own decisions about an investment’s prospects without relying on credit rating agencies.  Buffett said the action doesn’t change his view on the soundness of U.S. Treasury bills.  At least $40 billion of Berkshire Hathaway’s approximately $48 billion cash and equivalents is in U.S. Treasury bills, and Buffett won’t consider investing it elsewhere.

According to Buffett, America’s leaders may have a difficult time agreeing on the country’s financial future and the value of the dollar may slide, but that won’t keep the world’s richest nation from paying its debts.  The United States has a GDP of about $48,000 per person, and the Federal Reserve can always print more money.  “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” Buffett said.

Writing on the InvestorPlace.com website, Jeff Reeves says that “Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs.  Thanks to the 10 percent interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago.  What’s more, the investment bank paid a hefty 10 percent premium to buy back those preferred shares.  Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008.  But it was awfully profitable for Buffett.  You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds.  But take a deep breath and remember that not everyone is screaming and running for the hills.  Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues.  But they are hardly new.”

Not everyone agrees with Buffett.  According to the Equity Master website, “We must say that we do not agree with Mr. Buffett.  We are not arguing with the credibility of S&P, whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman.  But that does not mean that the U.S. is without some serious problems.  Indeed, the U.S.’ mounting debt is a huge cause for concern and the government’s latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it.  Moreover, the claim that the U.S. can pay its debt because it can print more money is a dangerous one to make.  Printing money never really solved America’s problems.  The two big quantitative easing programs and their failure to revive the sagging U.S. economy is testimonial to the fact.  One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the U.S.  So, while criticisms can be piled on S&P, downgrading of the U.S.’ credit rating is something that the world’s largest economy had a long time coming.”

Firstpost agrees that Buffett is wrong.  “Among other things, he said that the U.S. deserved a AAA credit rating when the S&P decided to bring it down to AA+. He also believes the U.S. will avert a double-dip recession.  Well, Mr. Buffett, you are already half-wrong. A slow-growing nation with a 100 percent debt-to-GDP ratio cannot be AAA by any stretch of economic logic.  It makes India’s 70-72 percent debt-GDP ratio look like the epitome of prudence.  As for the other half of your prediction – that the U.S. will avoid a double-dip recession – the jury is out on that one, but the recession wasn’t the reason for the S&P downgrade anyway.  There are two reasons, or maybe three, why the U.S. is in a mess.  One is that it is overleveraged – in deep debt – both at the level of government and the common people.  Two, the law that the U.S. can indefinitely live beyond its means has a flaw.  It was built on the assumption that dollar debts can be paid off by printing more of the green stuff forever.”

Federal Reserve Comes Clean on Who Received Bailout Money

Thursday, January 27th, 2011

Federal Reserve Comes Clean on Who Received Bailout MoneyAt the instruction of Congress, the Federal Reserve has released the names of the approximately 21,000 recipients of $3.3 trillion in aid provided during the financial meltdown –without doubt the nation’s worst economic crisis since the Great Depression.  Not surprisingly, two of the top beneficiaries were Bank of America and Wells Fargo, who received approximately $45 billion each from the Term Auction Facility.  American units of the Swiss bank UBS, the French bank Societe Generale and German bank Dresdner Bank AG also received financial assistance.  The Fed posted the information on its website in compliance with a provision of the Dodd-Frank bill that imposed strict new financial regulations on Wall Street.

One of the biggest surprises on the list is the fact that General Electric accessed a Fed program no fewer than 12 times for a total of $16 billion.  Although the Fed originally objected, Congress demanded accountability because there was evidence that the central bank had gone beyond their usual role of supporting banks.  In addition, the Fed purchased short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in housing debt.

Reactions to the revelations are both positive and negative.  On the positive side, Richmond Fed President Jeffrey Lacker said “We owe an accounting to the American people of who we have lent money to.  It is a good step toward broader transparency.”  Sarah Binder, a senior fellow with the Brookings Institution, disagrees, noting that “These disclosures come at a politically opportune time for the Fed.  Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”

Senator Bernard Sanders (I-VT) said “We see this (list) not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government.  Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them.”

Will the Stock Market Recovery Continue in 2011?

Tuesday, January 11th, 2011

Will the Stock Market Recovery Continue in 2011?  With the stock market ending its best December since 1987, there is hope that 2011 will see a strong Wall Street recovery.  One source of hope is the fact that the Standard & Poor’s 500 Index has returned to its pre-Lehman Brothers level.  It joins the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 in seeing strong improvements in their levels.  Stocks have risen 20 percent in just four months.

The recent surge was helped by performance chasing.  The proportion of money managers lagging their benchmarks by five percent has increased from 12 percent at the end of October to 22 percent in the middle of December and trimming their risk exposure “on the presumption that the markets had reached the upper end of a trading range,” said JPMorgan’s Thomas Lee.  BTIG’s Mike O’Rourke, chief market strategist, believes the purchase of hard assets as a hedge against depreciating currencies has helped drive the price of oil to above $90 per barrel.  He also points to high silver and copper prices – with the latter at an all-time high.  “There is no doubt commodities have performed well even though the dollar has not broken down, but the question is how long will it take before speculators bail on the trade,” O’Rourke said.

Wall Street market strategists are consistently bullish, generally forecasting 2011 gains of 10 to 17 percent, with Deutsche Bank forecasting gains of as much as 25 percent Main Street investors are equally upbeat: Recent polls indicate the greatest level of optimism since 2007, with the bullish crowd surging to 63 percent of those queried, with just 16 percent claiming bearishness.

Global Financial Reform Hits a Roadblock

Wednesday, October 20th, 2010

Global financial reform efforts stalemated.  Two years after the global financial meltdown and collapse of Lehman Brothers, world leaders seem to have reached an impasse over crucial proposals designed to prevent the same devastating scenario from occurring in the future.  The stalemate is so serious that there may be little chance that needed changes will be made. Executives at the World Bank and the International Monetary Fund (IMF) are disappointed with the slow movement and analysts warn that national interests could undercut badly needed real reforms.  Tension over currency rates is growing, and there is an increasing sense that major financial centers will create significantly different rules impacting their nation’s financial firms.  United States Treasury Secretary Timothy Geithner prefers a more unified approach to financial reform.

“Urgent action is needed to arrest the disturbing trend toward unilateral moves,” wrote Institute of International Finance managing director Charles H. Dallara in a letter to IMF officials.  The IMF fears that the global overhaul does not fulfill its promise to insulate the world from a repeat of the financial crisis.  “The more we continue with the present system, the more likely we are to have a relapse,” said Jos Vials, the IMF’s financial counselor and head of its capital markets department.  “Unless we deal with these problems, we will not have a safer system.”

The major points of contention relate to identifying and regulating firms considered to be too big to fail and how to create a system for some companies to collapse without requiring government bailouts.  The IMF’s financial experts believe that companies must be allowed to fail so they do not pursue risky strategies in the confidence that the government will rescue them if they get into trouble.  The only way to create effective regulations is to retain the idea of a moral hazard.

Basel III Tightens Global Banking Standards

Tuesday, September 28th, 2010

 Basel III agreement is designed to prevent future financial meltdowns.Global banking regulators have agreed to implement new rules that will make the international banking industry safer and avoid future financial meltdowns. Known as Basel III — after the Swiss city in which the agreement was worked out — the new requirements will more than triple the amount of capital that banks must have in reserves.  This will oblige banks to be more conservative and compel them to maintain larger hedges against potential losses.

The heart of the agreement is a requirement that banks raise the amount of common equity they hold – perceived as the least risky form of capital – to seven percent of assets from just two percent.  Banks are concerned that the tough new regulations will reduce profits, harm weaker institutions and increase the cost of borrowing money.  To allay their concerns, regulators are giving the banks as long as 10 years to implement the toughest rules.  Jean-Claude Trichet, president of the European Central Bank, said “The agreements reached today are a fundamental strengthening of global capital standards.”  Representatives from 27 nations, who are members of the Basel Committee on Banking Supervision, participated.  The committee’s recommendations are subject to approval in November by G-20 nations, including the United States.  A deadline of January 1, 2013, was set to start phasing in the revised regulations.

Mary Frances Monroe, vice president for regulatory policy at the American Bankers Association – which represents the nation’s 8,000 banks – was happy with the results.  “Banks understand the need for heightened prudential standards,” she said.  The United States’ top banking regulators – the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – issued a statement saying the agreement “represents a significant step forward in reducing the incidence and severity of future financial crises.”

Commercial Real Estate Is Recovering

Wednesday, June 30th, 2010

American commercial real estate is gradually regaining its value.After nearly two years of waiting, watching and hoping, American commercial real estate is finally regaining strength. This is one conclusion of the Reuters Global Real Estate and Infrastructure Summit held recently in New York City.  Starting in the fall of 2008, real estate investors feared there would be a wide-ranging sell-off of debt-laden commercial properties after Lehman Brothers collapsed.  And while office building and other commercial property values have fallen since the capital markets froze, the anticipated spate of foreclosures has not come to pass.  According to James Koster, president of Jones Lang LaSalle’s capital markets group, that is now unlikely to happen.

“We should be in a relatively good position to not have this other shoe drop,” according to Koster.  Banks have extended, restructured and modified loans to give the real estate industry the opportunity to regroup.  Values also are on the rise once again, although some properties whose loans were securitized are troubled.  The percentage of CMBS loans that are a month late in making payments climbed to 8.42 percent in May, according to Trepp, which follows CMBS performance.  Koster notes that special servicers who oversee troubled loans are not selling the properties at bargain basement prices.  Rather, they are holding onto them and being paid for managing them.

Institutional investors and REITs have the money to purchase good but debt-laden real estate.  When those properties hit the market, their price tags will be higher than two years ago.  “There is fresh capital coming in.  It’s a better market now,” Koster concluded.

Lehman Brothers Workout Could Take Three to Five Years

Tuesday, October 6th, 2009

1105000_lehman_brothersCleaning up the mess left by Lehman Brothers’ collapse and bankruptcy involves salvaging a national portfolio of 900 properties valued at $16 billion.  What the advisory firm overseeing Lehman’s bankruptcy achieves could be a framework for the strategies that big banks across the country use as they deal with their own troubled assets whose loans are maturing over the next 18 months.

According to Bryan Marsal, the head of Alvarez & Marsal, the advisory firm overseeing Lehman’s bankruptcy proceedings, “It’s not a great time to sell today.  We are not passively waiting for a better market.”  Marsal’s firm has 66 people overseeing the Lehman portfolio, as well as 250 outside contractors.  Describing the effort as the “biggest workout department in the U.S.,” Marsal estimates that it could take his team three to five years to complete the wind down of Lehman with its creditors and in federal bankruptcy court.

Lehman’s restructuring could provide a lesson for U.S. banks and thrifts holding more than $1.2 trillion in commercial mortgages backed by office buildings, hotels, shopping malls and apartments.  With falling property values and tight credit, commercial property lenders’ losses could total as much as $115 to $150 billion, according to a Deutsche Bank AG report.

The Lehman portfolio clearly demonstrates the depth of losses across the board.  One group of properties fell in value by an estimated $5.4 billion between the weekend of its bankruptcy filing and December 31.  This was due to a combination of a deteriorating market and unrealistically high valuations prior to the bankruptcy filing.

One Year After Financial Meltdown, Obama Counsels Caution

Monday, September 21st, 2009

On the first anniversary of the collapse of Lehman Brothers and the onset of the global financial crisis,  President Barack Obama used a Wall Street speech to call for stringent new regulation of United States markets.  After Lehman’s collapse, the American government infused billions of dollars into the financial system and took major stakes in Wall Street’s most famous names.  Although this action stabilized the system, it could not forestall a shrinking economy or the highest unemployment rate in 26 years.lehmanbros

“We can be confident that the storms of the past two years are beginning to break,” he said.  As the economy begins a “return to normalcy,” Obama said, “normalcy cannot lead to complacency.”

Lobbyists, lawmakers and even regulators so far have opposed proposals to more closely monitor the financial system. The five biggest banks – Goldman Sachs, JP Morgan, Wells Fargo, Citigroup and Bank of America – posted second-quarter 2009 profits totaling $13 billion.  That is more than twice their profits in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the same timeframe two years ago – a time when the economy was considered strong.

Connecticut Senator Christopher Dodd, chairman of the Senate Banking Committee, is the point man for formulating new rules.  President Obama wants stricter capital requirements for banks to prevent them from purchasing exotic financial products without keeping adequate cash on hand.  It was precisely this type of behavior that caused last year’s financial crisis.

Watergate Hotel Relegated to White Elephant Status

Wednesday, July 29th, 2009

watergate01The Watergate Hotel – the site where the “third-rate burglary” that sparked the biggest political scandal in American history and brought down Richard M. Nixon’s presidency was plotted — is now a distressed commercial property that failed to find a buyer at a much-anticipated auction.

The 251-room hotel, with its spectacular views of the Potomac River, was taken back by its owner, PB Capital, a subsidiary of Deutsche Postbank AG after no bidders expressed interest in purchasing and rehabbing the property in an auction held by Alex Cooper Auctioneers.  Monument Realty, which in 2004 bought the 12-story hotel with financing from the now-bankrupt Lehman Brothers, owes PB Capital $44.3 million and is in default on the property.  In addition to paying off the loan, the new owner would have to rehab the Watergate, which has been closed for several years.  Built in 1967, the legendary hotel needs an estimated $100 million in renovations to bring it up to 21st-century standards.

David Furman, an attorney with Gibson Dunne, is not surprised that the hotel did not interest bidders.  “Lenders usually win in these kinds of auctions because they have the ability to credit bid the full amount of their loan.  There is usually a negotiated settlement before or after the auction.  It is rare that there is an upset at a foreclosure sale.”

According to Monument principal Michael Darby, he has commitments from new investors to restore the Watergate as a five-star hotel.  Another developer, Robert Holland, wants to buy the Watergate and is in talks with the United Arab Emirates-based luxury hotel chain, Jumeirah, to operate it.