Financial-Reform Group: JPM Clearly Was Not Hedging - American Banker Online Financial-Reform Group: JPM Clearly Was Not Hedging - American Banker Online

Friday, May 18, 2012

Financial-Reform Group: JPM Clearly Was Not Hedging - American Banker Online

Financial-Reform Group: JPM Clearly Was Not Hedging - American Banker Online

WASHINGTON — The big question following JPMorgan Chase & Co.'s now-notorious derivative trade is whether it would have been permitted under the so-called 'Volcker Rule.' But the answer is clear cut to an advocacy group that has led calls for regulatory restrictions after the 2008 crisis.

In a conference call with reporters Friday, Americans for Financial Reform argued — counter to claims by the Wall Street giant — that the trades by the firm's London investment office resulting in at least $2 billion in losses is exactly the type of transaction that former Federal Reserve Chairman Paul Volcker's proposal was meant to stop. His idea, which bans commercial banks from proprietary trading, was enacted in the Dodd-Frank Act.

"That investment office was sold to regulators as a hedging operation, but what it in fact was was an in-house hedge fund," said Marcus Stanley, the policy director for Americans for Financial Reform. "What that fund was doing was running speculative spread trades that were absolutely designed to generate a profit. We know with certainty that JPMorgan was lobbying the regulators to be allowed to continue precisely these trades … under the Volcker Rule."

But whether JPMorgan Chase and other big banks will be able to continue such trades is ultimately up to U.S. bank regulators that are implementing the Dodd-Frank provision. Their regulatory proposal had indicated that institutions would still be able to carry out certain hedging and market-making transactions not considered the kind of risky trading targeted by the Volcker Rule.

Stanley said the regulators' final rule should firmly make clear that trades like that at the heart of JPMorgan Chase's big loss are not part of the exemption.

"It's very important that the regulators finalize a Volcker Rule that will not permit this," he said. "In fact, that should be fairly straightforward for them to do because there are … many, many differences between a speculative trade designed to generate profits, as this one was, and a true risk-reducing hedge."

In a shareholder meeting Tuesday, JPMorgan Chase chief executive Jamie Dimon indicated the bank agrees the London trades ran afoul of hedging.

"We continue to believe in the importance of being able to hedge risk as an institution. However, we also understand the need for rules and practices that ensure that hedging doesn't morph into something different," he said. "What this hedge morphed into violates our own principles in terms of complexity and risk."

Even Greek stocks may rally once Greece leaves the eurozone - Calgary Herald

The unrelenting and escalating sovereign debt crisis in Europe promises further losses ahead for the region’s already stressed equity markets, but a stock rebound could come sooner than many investors are expecting if Greece exits the eurozone, say analysts.

“The growing possibility of a Greek exit from the European Monetary Union suggests caution remains the watchword for now,” said John Higgins, an economist at Capital Economics. “But once the dust settles, stock markets could fare much better — even in Greece.”

Investors have redoubled their anxiety about eurozone economies that are drowning in government debt and struggling with severe austerity measures after taking a brief hiatus late last year through the early part of 2012.

The Euro Stoxx 50 index listing of the biggest stocks on the continent is down 17% since early February and regional benchmarks have posted even bigger losses. Spain’s IBEX 35 is down 26% over the same period and Greece’s ASE index is down 35%.

The only major European exchange that has made money for investors this year is Germany’s DAX, which, given its relatively superior economic performance, has become a refuge of sorts for investors.

Mr. Higgins said the sharp fall in equity prices has driven valuations down to attractive levels in many eurozone nations, both historically and relative to other countries.

While it’s too soon to expect eurozone stocks to recoup all of their lost ground, he thinks it wouldn’t be long before Greece’s stock market bounced back if the country leaves the single currency area. He said that’s because currency depreciation of a new Drachma would spur economic activity.

“Granted, it would probably be a rough ride in the short term as capital continued to flee the country and contagion fears prompted a world-wide increase in risk aversion,” Mr. Higgins said.

Mr. Higgins said stock markets of other weak countries that remained in the eurozone would also rebound after initially coming under further pressure. But gains would likely be less than those in Greek markets, because those countries would not benefit from significant currency depreciation.

Karen Olney, a strategist at UBS AG, said it is tempting to turn bullish on European equities, but doesn’t advise it at the moment.

In addition to Greece, she remains concerned about Spain’s banking sector — which remains undercapitalized despite additional provisions — and France’s change in leadership.

“[French President François] Hollande hasn’t announced any austerity measures,” she said. “If he does, someone suffers; if he doesn’t, the bond market could force it.”

Ms. Olney said the muted risk appetite of global investors also makes it hard for European stocks to rally, particularly when there’s not enough good news coming from the United States and China.

If and when confidence returns, she likes European value stocks, which have fared 40% worse than growth names since January 2011, and cyclicals that are down near their previous lows.

“Buy Europe over the United States given relative valuations look stretched,” she added. “Just not yet.”

European Financial Woes Push Markets Lower - NPR News

LONDON (AP) — Concerns that Europe's debt crisis could drag down parts of the continent's banking system rattled global markets on Friday, while the IPO of social network Facebook failed to buoy spirits on Wall Street.

Ratings agency Moody's downgraded 16 Spanish banks late Thursday, three days after downgrading 26 Italian lenders, noting they are vulnerable to huge losses on government debt.

In Spain's case, the lenders are also exposed to tens of billions of euros (dollars) in soured investments in the country's imploded real estate market. Their bad loans have hit an 18-year high, according to new figures compiled by the Bank of Spain.

Worries over Spain were reignited in the past two weeks by the prospect that Greece might leave the 17-country euro union. Anti-bailout political parties made huge gains in general elections on May 6, though that ballot proved inconclusive. Another election will be held on June 17, and the radical left party Syriza is forecast to make gains, possibly becoming the biggest party.

Syriza rejects the international bailout — and the related austerity measures — that the former government negotiated.

But without that rescue package, Greece will likely default and have to leave the eurozone. That would result in financial disaster for Greece and send shockwaves through European markets, destabilizing other weak countries.

Fitch ratings agency downgraded Greece to the lowest possible grade for a country not in default on Thursday, noting that if the next elections do not produce a government that supports the bailout, Greece's exit from the eurozone "would be probable."

After a day of volatile trading, Britain's FTSE 100 closed 0.7 percent lower at 5,267.62 while Germany's DAX dropped 0.6 percent to 6,271.22. France's CAC-40 shed 0.1 percent to 3,008.

Spain's main stock index recovered 0.2 percent from heavy losses on Thursday, thanks mainly to a bounce back in the shares of state-controlled lender Bankia, which had plummeted on Thursday on reports of an increase in deposit withdrawals. They rose 23.5 percent on Friday, more than making up for a 14 percent drop the previous day.

Wall Street tracked European stocks lower on Friday after Facebook shares failed to sustain early gains on their first day of trading. The stock surged 10 percent before falling back to trade around $39, just above the $38 initial offer price.

The Dow Jones industrial average was down 0.4 percent at 12,397.69 and the S&P 500 lost 0.4 percent to 1,299.88.

In Asia, Japan's Nikkei 225 tumbled 3 percent to close at 8,611.31, its lowest finish in four months as signs of weakness in the U.S., a critical export market for Japanese companies, battered some of the country's behemoth manufacturers.

Hong Kong's Hang Seng dropped 1.3 percent to 18,951.85 and Australia's S&P/ASX 200 slid 2.7 percent to 4,046.50. South Korea's Kospi tumbled 3.4 percent to 1,782.46. Benchmarks in Singapore, Taiwan and New Zealand also fell.

Mainland Chinese shares lost ground, with the benchmark Shanghai Composite Index losing 1.4 percent to 2,344.52. The Shenzhen Composite Index fell 1.5 percent to 940.91.

Benchmark oil for June delivery was down 77 cents to $91.79 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 25 cents to settle at $92.56 in New York on Thursday.

In currencies, the euro fell to $1.2711 from $1.2714 late Thursday in New York. The dollar rose slightly to 79.32 yen from 79.28 yen.


Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.

White Paper on black money likely on Monday - Daily News and Analysis

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Finance Minister Pranab Mukherjee is likely to table the 'White Paper' on black money in Parliament on Monday. The tabling of White Paper by the finance minister figures in the list of business of the Lok Sabha for Monday. "I will try to give all the ...

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