SOFR-linked deals plummet; 1MDB scandal mastermind settles with DOJ

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Profit grows

Credit Suisse said its third quarter net profit “more than doubled on the back of strong results in global markets and the sale of a fund platform, though results in its core wealth management units were weaker,” the Wall Street Journal reports. The bank earned 881 million Swiss francs ($887 million), up from 424 million francs in the year earlier period, on 9% higher revenue. “Excluding the sale of its fund platform, revenues rose 2% and pretax income rose 21%.”

“The results follow a scandal related to the surveillance of the bank’s former wealth-management chief, Iqbal Khan, earlier this year," the paper says. "This led to the resignation of the bank’s operating chief, a close deputy of Chief Executive Tidjane Thiam, who was cleared of involvement in a probe ordered by Credit Suisse.”

Thiam “defended his conduct during the corporate espionage scandal that rocked Zurich last month, saying it has not hurt performance and reiterating he had no involvement in the decision to hire private investigators to tail his former protégé, Iqbal Khan,” according to the Financial Times.

They have a deal

Jho Low, “the Malaysian financier at the center of the 1MDB scandal,” has reached a $700 million settlement with the U.S. Justice Department “that resolves a string of civil forfeiture lawsuits targeting assets including luxury properties and a private jet,” according to the Financial Times. "The settlement, the largest civil forfeiture ever agreed by the Justice Department, fully resolves 10 lawsuits brought by the DOJ as it sought to recover cash allegedly stolen from 1MDB, Malaysia’s government investment fund. It marks the latest step towards a resolution of a multibillion-dollar corruption scandal that rocked Malaysia and implicated Goldman Sachs.”

As part of the deal, Low “has given up his claim to hundreds of millions of dollars in luxury apartments, yachts, jets and artwork that prosecutors say were bought with stolen money,” the New York Times reports. He “is believed to be living in China, and he has not appeared in criminal court in the United States or Malaysia, where he is also charged.”

“The 1MDB scandal is believed to be one of the largest financial frauds in history, involving at least 10 countries around the world from Asia to the Middle East to North America,” the Journal says. “It has resulted in the political downfall of former Malaysian Prime Minister Najib Razak, as well as criminal charges against top bankers at Goldman Sachs.”

Show me

Investors in Deutsche Bank “remained unconvinced” the bank’s restructuring plan “is on track” after it reported a third-quarter net loss of €832 million ($924 million). “To be convincing, Deutsche Bank must not only execute on cost savings and divestitures, but also deliver revenue growth in its core businesses," The Journal says. "Falling revenue has heightened concerns about how well the leaner bank can compete as it continues to restructure. Slimming down is one thing, but showing that the refocused bank can hold its own and deliver returns is quite another.”

The bank’s earnings report “underlined in stark terms [the] severity of the challenge facing” CEO Christian Sewing, the FT says.

Wall Street Journal

Not ready for prime time?

Issuance of floating-rate debt linked to the secured overnight financing rate, or SOFR, has dropped to $24.5 billion so far this month, down from $43.4 billion in September and $56.1 billion in August. “The pullback comes after September’s turmoil in short-term cash markets prompted the Federal Reserve to intervene, renewing questions about whether SOFR will be ready to replace its predecessor [Libor] by 2021. The decline highlights the difficulties faced by banks, policy makers and companies as they try to replace the London interbank offered rate.”

On her own terms

Anne Pramaggiore resigned as chair of the board of directors of the Federal Reserve Bank of Chicago, just a day after the paper reported the bank said she could remain in her post until her term expires at the end of the year. “The Chicago Fed said that Pramaggiore stepped down from her position on October 25” but the resignation wasn’t made public until after the paper asked the bank about it.

“Pramaggiore abruptly retired on October 15 from her job as chief executive of the utilities unit of Exelon Corp., the largest operator of nuclear plants in the U.S., less than a week after the company said it had received a second grand-jury subpoena from federal prosecutors looking into its lobbying activities in Illinois.”

Worrisome trend?

There was a “hairline fracture” in credit card spending in the third quarter that bears watching. Spending on credit cards rose by 9% versus the year earlier period, but that was down from the 12% year-on-year pace in the third quarter of 2018. “Business card spending was especially tepid,” while debit card volume “was half the pace of the third quarter last year.”

“On its own, this might be just a blemish. But the trend also dovetails with some macroeconomic data, such as retail sales, which are still rising but no longer accelerating. All of which suggests that consumers, the driving force behind the economy in the third quarter, may not be as able to keep driving economic growth with the same gusto. That logic applies to banks as well.”

Financial Times

You better watch out

“In a decision with far-reaching implications for banks handling client monies,” the U.K.’s Supreme Court ruled that Japan’s Daiwa Capital Markets Europe must pay damages of more than $152 million for its “negligence” in failing to adequately check on a customer transaction that later proved to be fraudulent. The case involved payments the bank made from a Cayman Islands-based company on instructions from its former chairman that eventually resulted in the company’s failure.

“Daiwa should have realized that something suspicious was going on and suspended payment until it had made reasonable inquiries to satisfy itself that the payments were properly to be made,” said Lady Hale, the president of the Supreme Court. “Lawyers said that the ruling was significant for banks and financial institutions because it spelt out the duty of care they owed to customers about processing transactions in cases where fraud was suspected.”

New York Times

Little help

The Federal Reserve’s interest rate cut Wednesday is unlikely to give the housing market much of a boost, “because rates aren’t what was holding back housing in the first place.” High home prices and strict lending standards are bigger obstacles to more people being able to buy a home.

Quotable

“It was strictly an isolated incident  ...  I was not aware of the surveillance. It’s possible that those who did it did not believe that they were doing something wrong, maybe they thought they were protecting the company. But surveillance was not an appropriate course of action ... it was a judgment error. It was unfortunate this played out in public and I hope Iqbal and his family were not disturbed.” — Credit Suisse CEO Tidjane Thiam commenting for the first time on the scandal that involved the bank spying on his former protégé, Iqbal Khan, before he defected to rival UBS

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