Lessons Not Learned: More Financial Follies

In case we’re inclined to listen to the likes of Senator Dean Heller (R-NV) and declare that “onerous regulations” are “burdening” our economy and slowing economic growth — here are some recent bits from the financial pages which should be a reminder that the Big Bankers haven’t mended their ways since the last time they blew up the economy:

Capital Adequacy:*   Seeking Alpha rates Morgan Stanley “cheap,” but includes a chart on capital adequacy that should give investors a moment of pause –  of HSBC, Wells Fargo, SunTrust, and USBancorp, none have a capital adequacy ratio above 11.5%.  BB&T, Northern Trust, Bank of America, JPMorgan, and Fifth Third are below a 12.5% capital adequacy ratio. [Seeking Alpha]

Risk Management:  There’s this from across The Pond – “The European Central Bank lacks an independent risk management authority and suffers from a disconnect between management and risk management authorities, at least as of 2010, according to an independent audit report released today. ” [Business Insider]

Meanwhile back at JP Morgan: “Little-noticed amid the furor over J.P. Morgan’s loss is a significant increase in the risk measurement of its commodities and fixed-income trading desks within the investment bank.” [WSJ]

“Past Lessons Missed in Failed JP Morgan Hedge..”  [Reuters] “Excessive leverage and complex credit derivatives were a big factor behind the 2008 financial crisis that led to the Dodd-Frank legislation being passed by Congress in an effort to reduce risks. Until JPMorgan’s losses became known in May, bank-led industry groups were gaining ground in trying to head off many key tenets of the derivatives reform regulation.”

Fall out from the Last Fiasco:  Shareholders filed suit contending that Ken Lewis, (Bank of America) bought Merrill Lynch and they were “not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed. ” [NYT]

Bankers are still lobbying to water down the Volcker Rule: “Under the proposed version, bankers would be permitted to do “risk-mitigating hedging activities” for “aggregate positions.” That means using derivatives or other products to reduce the risk of an entire pool of investments, as opposed to a single transaction or position. The JPMorgan loss has ignited a debate whether aggregate or portfolio hedging is appropriate at all and how to define and spot these trades.” [Bloomberg] As Rep. Frank put it, an aggregate hedging isn’t hedging — it’s a profit center. Hedges break even.

“Woman who couldn’t be intimidated by Citi wins $31M award.” Bloomberg. “she took her employer to court — and won. In August 2011, five months after the meeting with Polkinghorne, Hunt sued Citigroup in Manhattan federal court, accusing its home-loan division of systematically violating U.S. mortgage regulations. ”   And, the update to the case? “Citigroup behaving badly as late as 2012 shows how a big bank hasn’t yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program. ”   (emphasis added)

CEO Compensation:  Just as good as ever –thank you very much.

Catepillar is demanding concessions from workers after granting its CEO a 60% pay increase.  [ThinkProgress] Verizon is planning to lay off 1,700 employees after giving its CEO a $22 million compensation package last year. [ThinkProgress]

*”The Tier I capital ratio is a measure of the firm’s Tier I capital (consisting largely of shareholders’ equity and disclosed reserves) divided by the firm’s risk-weighted assets. We rank banking firms based on this measure to show which banks have the greatest capital strength after considering the riskiness of their underlying assets.”  [Seeking Alpha]

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