It's a Dirty Bird That Fouls Its Own Nest - Part II

I was joking with Dave M. last week that he had to post my piece on the most recent scandals in the financial industry within the hour or a new one might pop up and the story would be out of date.

Well, that did not happen that day but only a day or two later we had another couple of new ones.

The first involves a mid-sized futures broker, PFG Best, which is being accused by the CFTC of fraud and misuse of client funds, in a case eerily similar to MF Global. Skipping many of the details, PFG allegedly was reporting something like $225 million in client funds, while only having $5 million on the books. As in the case with MF Global, it sounds like the remaining funds are frozen for now and clients are not too happy with the prospects of either temporary or permanent losses. The founder of the firm reportedly attempted to commit suicide as the story was coming to the surface.

Dave M. forwarded the second story. From the Associated Press:

“Federal criminal and civil investigators looked into possible leaks of economic data that the U.S. government provides early to news organizations, according to a report released Tuesday by the Labor Department. The report says Labor officials raised concerns about self-identified news organizations that primarily serve high-speed stock traders. It notes that high-speed traders can profit from having the data even a split-second before its public release.”

Now rumors and suspicions of such activity is nothing new and I wrote last week,

“We truly get annoyed when we see what look to be suspicious trading activity in front of major news events. Now this might just be institutions with well-informed sources and faster computers, but sometimes we just have to wonder.”

But this is the first time I can recall have seeing this type of accusation involving a “news chain” which is supposed to be reliably secure. (One of the best of these type stories was quite some time ago back before the digital days when a favorable mention of a stock in BusinessWeek could really move it and someone in the production loop was being paid to leak news before a weekend issue went to press.)

We also had this wire service news item today regarding Wells Fargo:

“Wells Fargo, the nation’s largest home mortgage lender, has agreed to pay at least $175 million to settle allegations that outside brokers discriminated against black and Hispanic borrowers during the housing boom, the Justice Department announced on Thursday. It is the second-largest residential fair-lending settlement in the department's history.”

OK, but let’s connect the dots a bit more here.

You have likely read about JPM’s Jamie Dimon having a special shareholder and analyst meeting on Friday, to address 2nd QTR. results, the details of the “whale trading loss”, and possible “clawbacks” of executive pay for those involved in managing the trades which produced the loss.

Dimon had been the most formidable and prominent critic of elements of Dodd-Frank and other banking regulatory activity, and has loss a fair amount of prestige with the reports of the trading loss (now at $4.4 billion) and his initial reaction to it. Just Tuesday, the CFTC issued new guidelines on regulation of the $650 trillion global derivatives industry, which did not thrill many major financial services organizations.

“Light will begin to shine on the swaps market for the first time,” said Commodity Futures Trading Commission chief Gary Gensler.

Mr. Dimon will also now have to answer questions about mutual fund marketing efforts for JPM’s Wealth Management division. Several regulatory bodies have not yet brought charges but are questioning marketing claims and “steering” of clients into JPM’s funds, which might not necessarily have presented the best fees or returns. The SEC, Financial Regulatory Authority, Manhattan D.A. and states of New Jersey and Delaware are all interested in this matter.

(Being in the business, it was sadly amusing to hear the allegations that JPM posted “hypothetical results” for several funds instead of “Actual”. Now they have given their supposed reasons why, but hey Dave, can we try that when we have less than a stellar week?).

In a feature article yesterday in the New York Times, the headline and lead addressed “The Spreading Scourge of Corporate Corruption. The misconduct of the financial industry no longer surprises most Americans, and trust in big business overall is declining. We should be alarmed.”

Two notable statistics quoted were that “Only 1 in 5 Americans has much trust in banks” and “62% of Americans think corporate corruption is widespread.”

Can you really blame them?

As we said last week, “Even a Muppet like Big Bird knows you can’t foul your own nest”.

Good Trading!
David W. (aka The Underground Trader)

David W’s Option Income Generator. service is designed to help tame market volatility by producing monthly income via a proprietary buy-write strategy. Check it out today!

 

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