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  #31  
Old 11-05-2009, 08:15 AM
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Here's more on the Jefferson County situation:
http://mobile.bloomberg.com/apps/new...d=aMVX5q9SgWJ8

Quote:
ov. 5 (Bloomberg) -- JPMorgan Chase & Co.’s Charles LeCroy explained to a colleague in 2003 how he planned to keep his job as the chief bond banker to Jefferson County, Alabama.

“I got to get the politics lined up,” he said, according to a complaint filed by the Securities and Exchange Commission yesterday. “And, of course, we have to pick the partners who are going to get free money from us this time.”

Jefferson County was a money mill to JPMorgan as politicians refinanced $3 billion of debt with a combination of floating-rate bonds and interest-rate swaps that last year pushed it toward bankruptcy. According to the SEC, LeCroy and Douglas MacFaddin , head of JPMorgan’s municipal derivatives unit from 2001 to 2008, paid more than $8 million to politically connected firms to secure its role in the deals.

The complaint provides a window into how New York-based JPMorgan , the second-largest U.S. bank by assets, used fees on the unregulated derivative contracts -- and a trip to a New York spa for one elected official -- to curry political favor, a decade after the SEC adopted rules to drive out pay-to-play from the $2.8 trillion municipal bond market.

The ban was approved in 1994 and “we knew when we passed it there were all kinds of ways to get around it,” said Charles “Skip” Fish, a former chairman of the Municipal Securities Rulemaking Board. “There needs to be rules that are as stringent and as unambiguous covering the derivatives side of the business as there is covering the regular bond side.”
http://www.nytimes.com/2009/11/05/bu...l?ref=business
Quote:
J. P. Morgan Securities will forfeit hundreds of millions of dollars in fees on derivatives contracts that it sold an Alabama county, under a settlement announced Wednesday that could offer hope to other governments staggering under similar deals.

The Securities and Exchange Commission charged in a lawsuit on Wednesday that J. P. Morgan had made unlawful payments to friends of Jefferson County’s commissioners in a scheme to win lucrative business from the county to sell bonds and trade in derivatives.

The lawsuit also named two former J. P. Morgan employees. One of those men has already served a short prison term for manipulating similar bond deals in Philadelphia.

To settle the lawsuit, J. P. Morgan will drop its claims for $647 million in termination fees it had been trying to make Jefferson County pay on the derivatives. The settlement also calls for J. P. Morgan to pay a $25 million penalty to the commission and $50 million to the county.

Over the last decade, thousands of governments around the country entered into deals linking bonds with derivatives, forming complex structures that were supposed to hold down borrowing costs. Many of the deals did not work out the way officials expected them to, partly because financial markets froze last fall and partly because interest rates moved sharply in unexpected directions.

But not every local government can count on relief just because a financial mistake was made. The Jefferson County case involved clear-cut bribes and a criminal conviction, and other governments may be hard pressed to persuade their bankers to change their financial contracts unless they can show laws were broken.

The S.E.C. says the definition of improper activity varies by state, and it is pressing for a uniform federal standard.
More at the links.
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  #32  
Old 11-05-2009, 02:15 PM
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Cool, now Jefferson County can make payroll for a couple more months.

More details: http://blog.al.com/birmingham-news-s...unty_comm.html

Quote:
Federal regulators allege in a lawsuit that Jefferson County Commissioner Shelia Smoot and former Commissioner Jeff Germany demanded that JPMorgan Chase & Co. bankers direct fat payments to two small Alabama firms in county bond and swap deals.
Smoot of course denies any wrongdoing.

Quote:
Smoot also was a booster of the two Alabama investment banks, the suit says. In July 2003, it reads, Smoot persuaded JPMorgan to up its pay*ments to the pair.

"Although LeCroy said he attempted to dis*suade Smoot because it was very difficult to change the amounts after the fact, he agreed to increase JPMorgan's payments to the two firms to $250,000 each," from $150,000 apiece, the suit says.
Will be interesting to see how the local side of things plays out. Sadly, Jefferson County is still on the hook for $3.2 billion and the SEC's settlement [which of course allows JPM to not have to admit any wrongdoing - does anyone know what the hell it takes for someone to have to admit wrongdoing to the SEC?] doesn't change that.
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  #33  
Old 11-05-2009, 03:19 PM
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Originally Posted by Irish Blues View Post
[which of course allows JPM to not have to admit any wrongdoing - does anyone know what the hell it takes for someone to have to admit wrongdoing to the SEC?]
http://executivesuite.blogs.nytimes....ade-a-mistake/

Admitting wrongdoing would violate the US government's protocol.

You see, the system works best, when no one is at fault. Why bother suffering the consequences when you can just use taxpayer's/shareholder's (this distinction is becoming meaningless) money to resolve the conflict at hand.

I pity the entrepreneurs who think that hard, honest work will be rewarded most of the time.

Last edited by WellThen; 11-05-2009 at 03:23 PM..
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  #34  
Old 11-14-2009, 07:34 AM
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More on Jefferson County:
http://www.nytimes.com/2009/11/14/bu...1&ref=business

Quote:
Even after a $700 million settlement with the federal government, JPMorgan Chase still faces troubles in Alabama.

On Friday, Jefferson County sued the bank, seeking additional relief on $3.2 billion in county sewer bonds the bank helped underwrite. Under the previous settlement, the county will receive $50 million and will not have to pay the bank $650 million in fees. But the county says it needs more help to get out from under the huge debt that remains.

The county, which includes Birmingham, accused JPMorgan of fraud and conspiracy in selling it several packages of debt and derivatives known as interest rate swaps that “provided no value to the county or its citizens, and created an inherently flawed financial structure that imploded within just a few years.”

The bank issued a statement in response to the lawsuit, saying: “We believe the claims are meritless and we intend to defend ourselves vigorously. Meanwhile, we continue to work to achieve a responsible restructuring of Jefferson County’s financial affairs.”

Under the settlement with the Securities and Exchange Commission, announced earlier this month, the bank did not admit any wrongdoing.

In its new lawsuit — against JPMorgan Chase, its securities division and others — the county cited many of the same details in the S.E.C. complaint, but asked the court to order JPMorgan and others to produce the supporting documents. The commission has extensively investigated Jefferson County’s financial debacle but has not shared its evidence, as a matter of policy.

The county’s new lawsuit gave a sense of the heated competition for its business and how it could be manipulated, describing efforts by JPMorgan to fend off two other firms, Goldman Sachs and the Rice Financial Products Company. The complaint said two employees of the bank’s securities division, Charles E. LeCroy and Douglas W. MacFaddin, worked out a deal to pay rivals “to stay out of the deal.”

JPMorgan wired $1.4 million to Rice Financial, according to the complaint, and transferred $3 million to Goldman Sachs through a separate derivatives contract created just to make the payment. The president of the county commission at the time, Larry P. Langford, then awarded most of the county’s business to JPMorgan.

Afterward, Goldman Sachs wrote to Mr. Langford and recommended that the payments be properly reported in the county’s bond documents, but Mr. Langford did not do so.

Mr. Langford, was convicted in October of accepting luxury gifts and cash totaling $235,000 in connection with the scheme.

Lawyers for Mr. LeCroy and Mr. MacFaddin have said the two men did nothing wrong and expect to be vindicated.

As the dealing continued, Jefferson County ended up with a “radically different” risk profile, according to the complaint. The county said in its complaint that it could not pay down the debt, and that rating agencies had downgraded its overall creditworthiness, so that it now had to pay more to finance its schools and other services. It hopes to press JPMorgan to reduce the interest rate and the principal.

“This whole process has been tainted,” a county commissioner, Bobby Humphryes, said after a heated meeting this week. “It has been corrupt. People made money off of it that didn’t do a bit of work, and I don’t think there is any reason we should even think about making these people whole.”
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  #35  
Old 11-18-2009, 07:56 AM
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Lawsuits all around!

http://www.nytimes.com/2009/11/18/bu...1&ref=business

Quote:
A California utility, the Sacramento Municipal Utility District, has accused more than a dozen banks of rigging the sales of municipal derivatives and sharing illegal profits.

In a lawsuit based on federal and state antitrust claims, the utility claims that the financial firms, including Bank of America, UBS and JPMorgan Chase & Company, conspired to pre-select winners of municipal derivative auctions, coordinated their pricing and accepted kickbacks disguised as fees from co-conspirators.

The accusations are similar to those made by a federal grand jury last month in New York, according to the lawsuit, which was filed on Nov. 12 in federal court in Sacramento. In that case, the founder of CDR Financial Products, David R. Rubin, and two employees were indicted and charged with accepting kickbacks on investments sold to local governments. CDR, which is based in Beverly Hills, Calif., is also named as a defendant in the Sacramento case.

The banks engaged in “allocating customers and markets for municipal derivatives, rigging the bidding process by which municipal bond issuers acquire municipal derivatives and conspiring to manipulate the terms that issuers received,” according to the suit.

Derivatives are unregulated financial instruments linked to stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or weather.

Shirley Norton, a Bank of America spokeswoman, declined to comment on the suit, adding that the bank was cooperating with federal investigations of the derivatives industry.

“In January 2007 we were granted leniency by the D.O.J. for voluntarily providing information before the beginning of their investigation,” Ms. Norton said in an e-mailed statement.
To be fair, this doesn't sound like a municipal group misusing derivatives [yet... could be they're suing because experience has sucked], but fraudulent/corrupt practices.
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  #36  
Old 12-01-2009, 08:19 AM
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Harvard explicitly warned against doing what they did:
http://www.boston.com/news/local/mas...t_investments/

Quote:
It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing - or mismanaging - its basic operating funds.

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.

But the warnings fell on deaf ears, under Summers’s regime and beyond. And when the market crashed in the fall of 2008, Harvard would pay dearly, as $1.8 billion in cash simply vanished. Indeed, it is still paying, in the form of tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.
Lots more at link.

You would think they didn't need to be told not to bet the milk money, but the stupidity of "smart" people is pretty incredible to those who have never dealt with it first-hand.
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  #37  
Old 12-01-2009, 10:18 AM
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Originally Posted by campbell View Post

You would think they didn't need to be told not to bet the milk money, but the stupidity of "smart" people is pretty incredible
Their incentive to enrich themselves and their friends is also incredible, as is their reward for taking excessive risk, which in this case is a spot in the circle of elites advising the President.
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  #38  
Old 12-01-2009, 10:37 AM
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What is flabbergasting is why anybody trusts these guys with money. At all. [except for the self-interested, to be sure.]
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Old 12-07-2009, 12:08 PM
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What a bizarre situation. You have the endowment managers begging Summers and the other university suits to stop leaving them with so much of Harvard's dough. What were they thinking... oh, these guys who actually run the investments are just modest/timid, they'll magically grow money no matter what?

Quote:
Originally Posted by Boston Globe article
Derek Bok, a former Harvard president from the ’70s and ’80s, took over as interim president. He was, by his own admission, unplugged from the complexities of the financial picture.

“I concentrated on academic issues,’’ Bok said in a Globe interview. He said that his strength was not in investments and that Harvard had an experienced treasurer and board to oversee those issues. “I think they would have come to see me if there were really important changes,’’ he said.
Too bad Summers didn't have such an enlightened attitude when he was in charge.

Well at least he's not working there anymore, and is just focusing on the whole country's finances. DOH.
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  #40  
Old 12-22-2009, 01:04 PM
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And more glory:
http://www.bloomberg.com/apps/news?p...d=aHQ2Xh55jI.Q

Quote:
As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school said last week they will suspend work on the building early next year.

....

Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers because of the size of its bet and the length of time before all its bonds would be sold.

In December 2004, Harvard completed agreements that locked in interest rates on $2.3 billion of bonds for future construction in Allston, with plans to borrow $1.8 billion in 2008 after they broke ground and the remaining $500 million through 2020. At the time, the benchmark overnight interest rate set by the U.S. Federal Reserve was 2.25 percent. The agreements backfired last year after central banks slashed lending rates to zero and the value of the contracts plunged, forcing the school to set aside cash.
....

Harvard’s woes stemmed from misunderstanding its role, said Leon Botstein, president of Bard College in Annandale-on-Hudson, New York.

“We shouldn’t be in the banking business, we should be in the education business,” Botstein said in a telephone interview.
Hull's fiasco chapter generally has institutions being in high finance biz that have no business doing so [cf: Orange County]. Looks like Harvard is yet another one.
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