Death Star Economics



Eric Schneiderman’s war on finance

Today seems to be a wild day for financial regulation and banking scandals…

In New York, Attorney General Eric Schneiderman hit again, entangling J.P. Morgan in a lawsuit over mortgage-backed securities underwritten by Bear Sterns, which was acquired by J.P. Morgan in 2008 for about $5. According to Schneiderman’s office, Bear Sterns has “committed multiple fraudulent and deceptive acts in promoting and selling” mortgage-backed securities. As evil as that sounds, it is really much more a claim about Bear Sterns being bad at its job, saying that poor evaluation of loans led to the $22.5bn of losses for investors. Schneiderman wants the unidentified profits of those MBS sales to be handed over by J.P. Morgan. The bank, of course, is outraged at being held accountable for historic actions of an acquired subsidiary. This case is not part of the SEC’s roundhouse-kick against i-banks involved in the subprime mortgage crisis that was announced in February and could involve Wells Fargo and Goldman Sachs besides J.P. Morgan. Schneiderman’s charges are the result of a presidential investigation into mortgage fraud. read FT read WSJ

The SEC on the other hand, is meeting with unnamed companies today to discuss the future of high-frequency trading regulation, after the industry had called for more defined rules in response to Knight Capital’s $440m loss in August. read article

But back to mortgages, which have been in the news a lot in general lately. Europe has seen its first commercial mortgage bond issuance since 2007 yesterday, the lion share of which has been bought by no other bank than J.P. Morgan for €565m. In the UK, a new lender, Castle Trust, with an alternative approach to profit and cost sharing has emerged out of the collaboration of various former and current FSA advisors and the US private equity form J.C. Flowers.

Schneiderman is also fighting the good fight on behalf of Barack Obama’s election campaign. A recent investigation is looking into tax avoidance by a number of big American private equity houses, including Romney’s Bain CapitalKKR and Apollo GroupA very candid comment from an anaymous tax avoider:

“This is shamelessly political, but it’s to be expected and I’m surprised it hasn’t happened sooner,” said one private equity executive. “You have a right to privacy, but you don’t have a right to be president. If Bain and Mr Romney saved themselves tens of millions of dollars in taxes, then you would expect that to be examined.”

Meanwhile, the Liikanen report has arrived in Brussels, where it is entirely supported by Michel Head-Overregulator Barnier. The report advises that retail operations should be shielded from other bank activities, capital reserves should be higher and bonuses should be paid out as debt to redistribute risks of possible losses. read article

In more commercial legal news, Samsung filed a lawsuit against Apple over patent infringement in the iPhone 5. Here we go again. read article

So long.


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773 Germans want Greece to leave the euro

The fun fact of the day is that only a quarter of Germans think Greece should stay in the eurozone. Outrage everywhere. Most papers have made this out to be yet another factor in Angela Merkel’s dilemma of domestic vs foreign affairs. But when you consider that the Financial Times/Harris Interactive poll of 5,134 people between the age of 16 and 64 only features 1,030 Germans, the results look much less drastic. read article

But yes, sure, there might be some truth to it. Why else would Bank of America consider to send trucks filled with drachmas Deutsche Mark euros into Greece to support their clients’ salary payments… read article

In France, lender Centrale du Credit Immobilier du France was bailed out by the government. The bailout of the real estate loan provider is rumored to be worth €20bn. France was involved in the two-times bailout of French-Belgian bank Dexia in 2008 and 2011; however, CCIF is the first ‘fully’ French bank to need state aid. Prime minister Jean-Marc Ayrault said in a statement that the bailout would not inhibit France’ plans to cut the budget deficit until the end of the year. Well, bon courage, because if all these crises have taught us anything, then it is that there’s a herd instinct among institutions which need bailing out. read article

In line with that: over the weekend, the Spanish government threw more money at Bankia, after the nationalized lender posted a €4.4bn loss for the first half of 2012.

International Airlines Group (IAG), the owner of British Airways and Iberia, is looking to become a cornerstone investor in a new humongous American airline. This could be composed of bankrupt American Airlines, currently owned by AMR, and the US Airways Group. After AA and US Airways shared their books with the other, IAG signed a confidentiality agreement, which allows it access to the balance sheets drenched in red.

In the US, Mitt Romney will have to deal with some more blast from the past very soon. Some of the largest US private equity firms have been subpoenaed to get to the bottom of a tax avoidance procedure, which helped hundreds of millions of dollars to slip through the system’s fingers. Besides Bain Capital, KKR, the ‘inventor’ of the leveraged buyout, and Silverlake Capital Partners, formerly invested in Skype. At issue are the taxes paid on fees collected from fund investors, which have to correspond to whether said fees count as income or capital for re-investment. read article

Otherwise, CICChina Investment Corporation, has sold its 3% stake in asset manager BlackRock, which is thought to be worth $1bn, in an effort to reduce its financial services holdings, and Markit’s manufacturing index shows that the eurozone was subject to yet another contraction in August, making a zone-wide recession more and more probably. Chinese manufacturing continued to slow over the same time period. read article

So long.

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