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Monday, September 26

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Receiving Wide Coverage ...

Fault Found in STARS: The feds are fighting five domestic banks over transactions Barclays arranged that allegedly exploited discrepancies in U.K. and U.S. tax laws to stiff Uncle Sam for billions, a joint investigation by the Financial Times and ProPublica found. The deals, known as "structured trust advantaged repackaged securities," or STARS (one of those names that makes us suspect the investment bankers started with the acronym and then decided what words it would stand for), were so complex that a Harvard-educated federal judge adjudicating one of the court cases couldn't make heads or tails of them. So we're not even going to try to give you a pat summary, but the FT has a nifty interactive feature that explains the structures in relatively simple terms. "Foreign tax credits are designed in US law to prevent double taxation of companies that do business overseas," the FT says. "Because US companies are taxed on their worldwide income, they are allowed to claim credit for taxes paid in foreign jurisdictions so as to keep their tax bill essentially neutral." But the IRS alleges the STARS deals "were 'foreign tax credit generator' schemes to reap credits even when there was no double taxation." Aside from the four U.S. banks that used STARS - BB&T, Bank of New York Mellon, Sovereign and Wells Fargo - the government is also tussling with AIG over a different kind of a foreign tax credit deal that dates back to the 1990s. One of the masterminds behind these transactions was a young Joseph Cassano, who would go on to lead the infamous Financial Products group whose gambles led to AIG getting bailed out by the government in 2008. Finally, on a related topic, Washington Post columnist Allan Sloan proposes that the FASB require U.S. companies to disclose how much federal income tax they pay "so that we could have an informed discussion" -- he notes that some well-intentioned press stories have blundered by confusing accounting and tax figures.

UBS Chief Quits: Oswald Grubel resigned over the weekend; anonymous sources told the FT that the board would not support his plans to overhaul the Swiss bank's strategy and corporate governance. Now, in addition to revamping itself in the wake of a rogue trading scandal, UBS must also find a permanent replacement CEO, the Journal notes. A separate Journal story profiles the interim CEO, Sergio Ermotti, pointing out he is a "relative newcomer" who's been at the firm only five months. Another FT story says Ermotti "has about six months to convince the bank that he is the man who should be made the bank's permanent chief executive." Yet another FT article gives an insider-y account of the 10 days at UBS between the discovery of the mammoth losses allegedly caused by a junior trader and the CEO's departure. Yet another Journal story provides an appraisal of Grubel's career: As the leader of UBS, and before that Credit Suisse, the 67-year-old was known for his "command of small details and a focus on weeding out weak performers." Well, until recently. One more FT story says it's doubtful that UBS will remain a "universal" bank after this debacle. Washington Post columnist Barry Ritholtz joins the list of journalists who dislike the term "rogue trader," arguing that it's the bank's fault if an employee finds ways to put it in peril. Like it or not, we're probably going to be seeing more "rogue trader" headlines soon: U.K. authorities are "examining multiple cases of possible improper or unauthorized trading at banks operating in London," the Journal reports, citing anonymous sources. Lastly, despite the FT story on Sept. 18 saying Deloitte was going to investigate UBS on behalf of regulators, another U.K. paper, The Independent, says KPMG has the gig. Would the real outsourced public servant please stand up? Wall Street Journal, Financial Times, New York Times.

Wall Street Journal

Bank of America is in talks to sell its correspondent mortgage business to the private equity firm Fortress, the paper reports, citing anonymous sources. The business, inherited from Countrywide, buys closed loans from other lenders. Fortress' CEO, Daniel Mudd, should know something about that business, since his previous job was at the helm of Fannie Mae.

The failure of a tiny credit union led to the demise of Full Tilt, the online poker site that authorities have accused of running a Ponzi scheme. The credit union, Vensure Federal, was based in Arizona, though somehow it had connections to a Knights of Pythias lodge in the Adirondacks. Vensure processed transactions for Full Tilt, believing it could legally do so under a loophole in the 2006 law banning most companies from processing funds for online gambling. Regulators disagreed and shut down the credit union. Unable to collect money from customers placing bets, Full Tilt allegedly began allowing them to (unknowingly) wager "phantom money" it didn't have. The government says the site then used other players' money to pay off the people who cashed out (and to pay its executives). This kind of thing never ends well.

New York Times

The financiers Wilbur Ross and Ron Burkle will invest $50 million each in Amalgamated of New York, the nation's only union-owned bank.

Columnist Gretchen Morgenson examines a Dodd-Frank rule proposed by the CFTC that critics have said will encourage speculation in commodities, to consumers' detriment.

The front page of the Sunday Business section features a lengthy profile of IMF chief Christine Lagarde. "As the future of the euro hangs in the balance, Christine Lagarde is emerging as a European who is willing to speak openly about Europe's problems," says the caption below her photo in the online edition. Which we find much more relevant and appropriate than the caption that ran under the very same photo in the print edition, which said Lagarde "is known for her elegant wardrobe, including Chanel jackets and Christian Louboutin heels." (Yes, it really said that, and we've got the hard copy, covered with the coffee we spat out, to prove it.) Granted, there is one paragraph toward the end the story describing how she's been "accused by members of the mostly male French establishment of studying her clothes more than her dossiers." But really - giving precious caption space to the label names?

Financial Times

U.S. banks that committed to finance leveraged buyouts before the markets went haywire recently are now facing losses as they try to syndicate the loans and sell off the junk bonds.

If you find Jamie Dimon's public statements pugnacious, just imagine what he says behind closed doors. Eyewitnesses tell the FT that during a recent meeting of about 30 bank CEOs, the JPMorgan chief launched a tirade at the head of Canada's central bank over the Basel III capital surcharge for big banks. Once again Dimon called the new capital rules "anti-American," a phrase he used in an interview with the FT this month. One wonders what other words he used; according to the FT, the scene was so ugly that afterward Goldman Sachs' Lloyd Blankfein tried to smooth things over with the Canadian central banker. When you make Blankfein look like an ambassador...

 

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Q1 Earnings Outlook to Put Focus on Lawsuits, Stress Tests, Lending
With JPMorgan Chase (JPM) and Wells Fargo (WFC) set to issue the initial round of first-quarter earnings reports Friday, big bank CEOs are bracing to answer questions about executive departures, capital shortfalls, seemingly unending legal risks and oh, yeah how they are going to make money.

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