Katherine Kane

Receiving Wide Coverage ...The Mess at UBS: More details are emerging on how alleged rogue trader Kweku Adoboli may have run up more than $2 billion in losses for UBS without the Swiss bank's knowing. Press reports suggest he took advantage of a loophole in European reporting requirements for exchange-traded fund trading. Adoboli, the speculation goes, could have made up bogus hedges purportedly offsetting the unauthorized positions he took, because the fictitious trades wouldn't have required confirmations. As a former back-office employee, he was well qualified to perpetrate such a ruse. "Some banks do not confirm trades until settlement and Mr Adoboli is likely to have known which ones those were," the FT says, citing an anonymous insider. The paper points out that this is yet another part of the story echoing that of Jerome Kerviel, who worked in Societe Generale's middle office (PDF) before he made rogue trading history. We might add that Nick Leeson got his start as a clerk, too. (If you're wondering how we even remember that piece of trivia, click here and scroll to about 2:45.) And speaking of the bloke who brought down Barings Bank in 1995, Leeson was recently interviewed by The Sun (one British paper we don't expect to cite very often in the Morning Scan) about the Adoboli affair. He told the tabloid he blames the bank and that Adoboli could become a "fall guy." Banks, Leeson says, have "preposterously" failed to learn any lessons about "their dogged pursuit of money": "Putting controls in place, and employing people to ensure the controls are working, costs money so they won't do it. It's last on their list of priorities." This may well be a correct assessment, but as they say, consider the source. OK, let's zoom back out to the bigger picture: several articles observe that the UBS mess has strengthened the hand of those seeking to tighten regulation of financial institutions worldwide. "In the U.S., those on Wall Street and in Congress who wanted to repeal or roll back the Dodd-Frank law will have a hard time making inroads now," Franceso Guerrera asserts in the Journal's "Current Account" column. "The fact that UBS lost more than $2 billion on unauthorized trades leaves the impression that, once again, a member of the global banking elite has been unable to police itself.… Proponents of stricter regulation could hardly have asked for a better assist." A story in the Times' Dealbook makes a similar argument, and suggests that Adoboli's alleged speculative trades — apparently made with UBS' own money — could bolster the case for a stronger version of the Volcker rule in Dodd-Frank.

Receiving Wide Coverage ...Rogue Trader Redux: UBS raised its estimate of its losses from allegedly unauthorized trades by a London employee to $2.3 billion from the initial figure of $2 billion. The U.K. authorities formally charged Kweku Adoboli with fraud on Friday and said his shenanigans had gone on undetected for three years. Meanwhile, according to the Journal, the scandal has caused some Swiss politicians to call for UBS' CEO, Oswald Grubel, to step down, and intensified pressure on the company to shrink or spin off its investment bank. Grubel refuses to step down, though. Another Journal story says Societe Generale is still haunted by a similar scheme perpetrated by the now-infamous Jerome Kerviel that was uncovered three years ago. The Financial Times delves into the similarities between the two — both traders allegedly disguised losses with fictitious countertrades. Both Kerviel and Adoboli worked on "Delta One" trading desks, which traffic in, among other things, exchange-traded funds. ETFs had already been a source of worry for regulators this year — see this report from the Financial Stability Board, and this one from the U.K. Financial Services Authority. The Adoboli affair has moved the issue higher on their agenda, the Journal's "Heard on the Street" column notes approvingly. The FT columnist Tony Jackson says the UBS debacle has been used as an argument to support the U.K. Vickers report's plan for reforming banks — which he says is all well and good, but there are plenty of other reasons to do so, as that report said, which he then goes on to enumerate. (Interestingly, Jackson, though wholeheartedly in favor of the Vickers recommendations, argues the proposed ring-fencing of investment banks won't work — a point of disagreement with his colleague Martin Wolf. The problem, according to Jackson: "The underlying premise is that the board can set the culture. But that is not how big corporations work" — see BP. But we digress….) British and Swiss regulators have hired Deloitte to investigate the events at UBS, which will pay for the audit firm's gig, the FT says. David Sidwell, a former chief financial officer at JPMorgan and the senior independent director on UBS' board, will head an internal probe. Finally, an article the Times' "Dealbook" provides a concise summary of this multifaceted drama so far, and in the process answers a question that's been on our minds since we saw that photo of a handcuffed Adoboli surrounded by British police: why is he smiling?

Receiving Wide Coverage ...The UBS Delta Blues: Kweku Adoboli, arrested in London Thursday on suspicion of fraud after allegedly blowing $2 billion of his employer UBS' money on unauthorized trades, worked at the Swiss bank's Delta One trading desk — the same line of business as Jerome Kerviel, who was convicted last year for losing Societe Generale a bundle back in 2008. What the heck is this Delta One, you ask? The FT has a very helpful explainer which we could not possibly hope to improve upon. The Times' "Dealbook" says Delta One desks are big moneymakers, and "Heard on the Street" in the Journal finds it "baffling" that this line of business should be the source of two high-profile debacles, since, according to the column, it's a low-risk activity. "For UBS to have lost so much suggests it had an unusually large position in an underlying asset or currency. That, in turn, could suggest a massive failure of oversight at the bank." An analytical story in the Journal says the Adoboli affair raises questions about risk management in the broader financial sector. "Unauthorized trading is hard to fully protect against given that traders typically hide their losses using fraudulent methods," the story says, and "management oversight hasn't always kept pace with the complexity of trades." You may now be wondering, where were the regulators in all this? The more apt question may be "who": Another Journal article reports that UBS' London investment bank operations were supervised by both U.K. and Swiss regulators, and it isn't clear which one had jurisdiction over the trades gone bad. "Dealbook" used the UBS mess as an excuse to dust off a list of famous rogue traders, originally published around the time Kerviel was convicted. Other journalists are taking issue with the use of the term "rogue trader." "They're not 'rogue' for the simple reason that making insanely irresponsible decisions with other peoples' money is exactly the job description of a lot of people on Wall Street," writes Rolling Stone's Matt Taibbi. "Hell, they don't call these guys 'rogue traders' when they make a billion dollars gambling." The Journal's David Weidner makes the same point succinctly in a Borscht-belt headline: "What Do You Call A 'Rogue' Trader Who Makes $2 Billion? A Managing Director." Another analytical story in the Journal points out that this was only the latest in a series of crises for UBS in recent years. (Another "Heard on the Street" piece also focuses on the bank's long-running reputational issues, and in case anyone misses those two stories, this "Deal Journal" entry describes UBS' trust problems as well. The Times also chronicled UBS' rocky recent history in the form of a timeline.) Finally, one more "Dealbook" entry gives us Adoboli's backstory, which is full of sentences like this: "In his spare time, Mr. Adoboli liked photography, cycling and wine." Sometimes, the human interest angle just isn't that interesting.

Receiving Wide Coverage ...Legacy Liabilities: Statutes of limitations are looming for investors with potential legal claims against firms that sold them dodgy mortgage-backed securities during the boom years, helping to explain a recent uptick in bondholder suits, the Journal reports. The Federal Housing Finance Agency's suits against various securitizers, filed just before the three-year anniversary of the agency's takeover of Fannie Mae and Freddie Mac, was only the most prominent example of such litigants racing to beat the clock. Meanwhile, another Journal story reports that the SEC is widening its probe into collateralized debt obligations, those mutant cousins of mortgage-backed securities. Among other actions, the agency is pushing Citigroup to settle a civil case for $200 million, the story says. The charges concern a $1 billion CDO that Citi created in 2007, right around the time cracks were beginning to show in the housing market façade; citing anonymous sources, the Journal says investigators are looking at whether Citi had short positions. In the Times, "Dealbook" takes a TARP tally and finds that nearly three years after the emergency program was created, 500 banks still owe the government a combined $19 billion of bailout money. (For perspective: that outstanding balance is just 8% of the total that the government invested through TARP.) The largest bank that still owes TARP: Regions Financial. Finally, Countrywide is the acquisition that just keeps on giving for Bank of America. The Department of Labor ordered the bank to rehire and pay $930,000 to a whistleblower it improperly fired. The employee, whose name has not been disclosed, had reported "pervasive wire, mail and bank fraud" at Countrywide, and illustrating the adage "no good deed goes unpunished," B of A "used illegal retaliatory tactics against this employee," a government official said. B of A insists the termination was solely related to the worker's "management style" and it plans to appeal. For now we'll just have to speculate on whether there's a "welcome back" card being passed around for everyone in the office to sign.

Receiving Wide Coverage ...The Signs Are Bad …: The market volatility of the summer is beginning to take its toll on results at the large diversified banks (we have taken a vow to avoid as much as possible that apple-and-orange smoothie of a catchphrase, "Wall Street"). JPMorgan Chase executive Jes Staley warned investors at the Barclays conference in New York that trading revenue will probably slip 30% for the third quarter, the Financial Times reported. Banks that have investment-banking operations, including JPMorgan Chase, Bank of America and Citigroup, are expected to post poor results for the third quarter on lower trading volume and weaker income from providing advice for stock and debt offerings, according to the New York Times.

Receiving Wide Coverage ...Remembering 9/11: Of special interest to this audience, the Times' "Dealbook" interviews several financial services executives who were working at the World Trade Center the day of the attacks: a security officer for the NYSE, a Merrill Lynch trader, a Cantor Fitzgerald tech officer and a CFTC lawyer.

Receiving Wide Coverage ...Obama's Speech: Among other things, the president called for a national infrastructure bank and said he'd take steps to spur mortgage refinancings during his address to a joint session of Congress. Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...What Next for B of A? The papers continue to explore the implications of Tuesday's management shake-up at Bank of America. One Journal story profiled Darrell Darnell, one of the two newly minted co-chief operating officers. He may seem an odd pick to lead the company's sprawling consumer operations, having a background in mostly business lending, but the story notes he has a "reputation for maintaining client relationships while also cutting costs-the key objective of Tuesday's restructuring." Another Journal story reports that Darnell has reassured Merrill Lynch's brokers their pay structure won't change. But "Lex" in the Financial Times says that cutting pay across Bank of America is the one lever that the new management team can pull to improve results, as compensation makes up half of noninterest expenses. The Journal's "Heard on the Street" reiterates a point that the paper already made a day earlier: that the reorganization signals Merrill is unlikely to be spun off. More déjà vu as the Journal revisits the implications of Sallie Krawcheck's departure for women on Wall Street — and this time, the paper is joined by the Times. But another Times story pursues a less-predictable angle on Krawcheck's ouster — the implications for FINRA, the securities industry's self-regulatory body, where she was recently elected a governor. "It is unclear exactly what happens next; the Finra bylaws do not account for such management shake-ups. For now, Finra will not eject her from the position. But to keep the seat she will have to join another large brokerage firm in a 'short period of time.' " The Times also has a curtain-raiser for the hotly anticipated speech CEO Brian Moynihan will give on Monday outlining the "New BAC" strategy; like the FT's story a day earlier, this one warns that thousands of jobs may get the ax. Finally, National Public Radio's "Marketplace" presents an interesting interpretation of Moynihan's C-level housecleaning: it's his attempt to shore up support from his fellow veterans of FleetBoston who sit on B of A's board.

Receiving Wide Coverage ...Shake-Up at B of A: Bank of America reshuffled its executive ranks, and in the process ousted two well-known executives, Sallie Krawcheck and Joe Price. Krawcheck's departure in particular is garnering a lot of attention because she is one of the most prominent women in financial services. The Journal's "Deal Journal" blog noted that before joining B of A, Krawcheck had been demoted and then cashiered by her previous employer, Citigroup. She's in good company, the blog noted, as Erin Callan (formerly of Lehman Brothers), Zoe Cruz (formerly of Morgan Stanley) and Heidi Miller (formerly of JPMorgan Chase) all rose to senior positions, only to be shown the door in recent years. "Each top woman who leaves or is forced from her post will spark anew the 'whither women' questions and stories about why Wall Street is dominated by dudes. At this point, Wall Street would love a few more top-ranking women, if only to stop those pesky questions." (We might add that there may be heightened sensitivity since this news broke the same day that Yahoo ousted CEO Carol Bartz.) Another Journal story says the management restructuring shows that a spin-off of Merrill Lynch is unlikely, because B of A's business units are "being further aligned, making a spinoff much harder…. The restructuring puts the wealth-management business of Merrill's thundering herd under David Darnell, now a co-chief operating officer in charge of the bank's retail arm and all consumer units. …Meanwhile, the investment bank operations are being consolidated with corporate banking operations and other units tied to companies and institutional investors, which will be headed by Tom Montag, the other newly minted co-chief operating officer." Plus, the story says, Krawcheck had become "the face" of the brokerage business and thus the logical head for a newly independent Merrill, and now she's on her way out. Let's zoom out to look at the bigger picture: Bank of America announced the changes after a trading session in which its stock price once again dipped below $7, leading us to once again wonder how close the company's market cap is coming to the value of one of Angelo Mozilo's bespoke suits. B of A Chief Executive Brian Moynihan "is expected to set out thousands of job losses across the bank as part of a presentation next week on 'New BAC' — his turnround strategy," according to the FT. Wall Street Journal, New York Times

Receiving Wide Coverage ...Get Ready to Rumble: Morning Scan is brought to you today by two cups of coffee and the letter X, as in the big targets on the backs of several banks that are drawing the aim of Uncle Sam's legal eagles … A.M. radio jockeys couldn't stop blaring a Times report that the Federal Housing Finance Agency will sue more than a dozen big banks, including Bank of America and JPMorgan Chase, over the sale of mortgage securities. The story lead the paper and cited unnamed sources. Instead of demanding the banks buy back the original loans, in this lawsuit the agency seeks to be reimbursed for losses on the securities held by Fannie Mae and Freddie Mac. Some observers question whether such a lawsuit, when added to the state attorneys general settlement talks, might not push banks over a cliff.

Receiving Wide Coverage ...The Fault Lies Not in Our Stars: The fingers seem to be pointing at CEO Robert P. Kelly in his separation from Bank of New York Mellon. Kelly passed the blame for certain problems to others in senior management “people familiar with the matter” told the Journal. Also he reportedly was “difficult” to work with and the Board feared it would lose top employees the same sources told the paper. The Times cited an unnamed source who said Kelly’s departure was not rooted in litigation, nor was it related to one specific issue. Another unnamed source told the paper Kelly was not as engaged in day-to-day issues as the board would have liked.

Receiving Wide Coverage ...Krueger on Board: As Scan readers were anticipating: Obama did in fact nominate labor economist Alan Krueger as chairman the Council of Economic Advisers, to replace Austan Goolsbee, touting his experience, according to the Post. More specifically, the Times reported, Krueger's studies of labor markets will be a boon for Obama, who plans to announce a jobs initiative next week. The Journal sees his role as Obama's "advocate for more aggressive government intervention to revive job growth." Wall Street Journal, New York Times, Washington Post

Receiving Wide Coverage ...Goodnight, Irene: Evacuation and contingency plans ahead of Hurricane Irene were the topic of a DealBook item Friday. Luckily, the storm did not cause as much damage as expected and the downtown area is "open for business" today. The headquarters of Goldman Sachs headquarters and the World Financial Center office of American Express are located in the low-lying areas on Manhattan that were evacuated ahead of Hurricane Irene. Deutsche Bank was just outside the first evacuation zone, DealBook noted. The AmEx building will be closed today, with employees working from home, according to Bloomberg. Stock, bond and commodities markets are open, all this despite some interruptions in MTA service and outages on LIRR and Metro-North service. Wall Street Journal, New York Times, Bloomberg News

Receiving Wide Coverage ...B of A Buffed Up: Crédit Agricole analyst Mike Mayo summed up Warren Buffett's $5 billion investment in Bank of America by saying, "Bank of America got the Good Housekeeping seal of approval and Buffett got a sweetheart deal, but the company hasn't been able to get its arms around the magnitude of the losses." The Times also noted that B of A's board met less than 24 hours after Buffett called Brian Moynihan to approve the deal. Buffett's Berkshire Hathaway is now in a position to become the biggest shareholder in Bank of America, and it's already the top shareholder in Wells Fargo and American Express. The Journal called the investment "a desperately needed jolt of confidence at a time when investors are questioning" the bank's health.

Breaking News This Morning ...The Oracle to the Rescue: Warren Buffett's Berkshire Hathaway announced this morning that it was making a $5 billion investment in Bank of America. Markets quickly responded by sending the Charlotte company's stock up 23% in pre-market trading. Wall Street Journal, New York Times

Receiving Wide Coverage ...Fiddling (and Looting) While Rome Burned: The FDIC is suing 17 former directors and officers of Silverton Bank, charging gross negligence and corporate waste related to the May 2009 collapse of the Buckhead, Ga., bank — the state's largest. As the economy fizzled, the bank continued to pursue real estate loans. But there were other questionable actions, as the Atlanta Journal-Constitution points out: the purchase of two airplanes and a hangar to store them, and a builiding called "The Medici," a lavish headquarters that cost $35 million and boasted 26 conference rooms.

Receiving Wide Coverage ...Foreclosure Settlement Talks: The Obama administration is pressuring New York attorney general Eric Schneiderman to accept a settlement with large banks over foreclosure practices, the Times reported. But Schneiderman has resisted because he believes it will restrict his ability to investigate things like how loans were bundled into mortgage securities. Banks are getting increasing frustrated with Schneiderman and asked the Obama administration for help in changing the New York AG's mind. The Journal, meanwhile, reports on a broader impediment to the settlement talks. The sides seem to be at a stalemate, with banks seeking wide-ranging immunity that would cover all mortgage-related charges, while state attorneys general are willing to clear the banks on robo-signing and servicer-related misdeeds, while leaving open the possibility of suits for wrongdoing in fair lending and securitization. New York Times, Wall Street Journal

Receiving Wide Coverage ...SEC Shredded: Rolling Stone's Matt Taibbi gives us a crushing assessment of the Securities and Exchange Commission's integrity in a piece that describes the systematic destruction of closed "matters under inquiry" over the past 17 years. The problem was "brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle."

Receiving Wide Coverage ...B of A Trying Sell Portfolio: Bank of America is in talks to sell a Merrill Lynch real estate portfolio for up to $1 billion to Blackstone Group. Wall Street Journal, New York Times

Breaking News This Morning ...Bank of America agreed to sell its $8.6 billion Canadian credit card portfolio to Toronto-Dominion Bank. Terms were not disclosed. This was the third sale of international credit-card portfolios by the bank this year. It still plans to sell its U.K. and Ireland credit card operations.