Unstructured Finance

Outrage isn’t asleep it’s just gone underground

By Matthew Goldstein and Jennifer Ablan

Where is the outrage? A year ago, the Occupy Wall Street movement was just getting started, with mass demonstrations across the nation against corporate malfeasance and greed.

But now it’s been crickets and we don’t mean the game. There’s been no marching on Wall Street nor on the steps of Capitol Hill since the latest revelations of bad behavior in the financial sector. The populist uproar has been rather sedate in the face of the deepening scandal that big banks rigged Libor–a benchmark lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.

But the lack of populist rage doesn’t mean there’s a lack of concern about these and other scandals. We think that’s a misreading of the temperature of the American people. And if Wall Street thinks the average person doesn’t care about the nearly $6 billion trading loss at JPMorgan Chase, or the alleged Libor manipulation scandal , then the street is badly misjudging things.

As documented in “Banks behave badly redux: Is it killing confidence?” earlier this week, the spate of Wall Street horror stories is having a real impact on the markets. Interest by individual investors in stocks is way down and isn’t showing signs of coming back any time soon. Retail investors are showing their disgust by walking away—something we first noted a year ago in our story on The Madness of Wall Street.

In some ways it’s a quiet protest investors are showing and in some ways maybe more damaging than protests in the street. Maybe there is no outrage because investors and the public have come to believe they don’t expect much better behavior from Wall Street. In other words, the new norm is to expect the worst of the street.

UF Weekend Reads

It’s Libor all the time, just not for me.

Earlier I blogged about how the Libor scandal just isn’t getting me as worked up as it is for other journalists (see Joe Nocera’s column today in the NYT). It’s not that I don’t think allegations of market manipulation aren’t important. And this is nothing to take away from the groundbreaking reporting by my Reuters colleague Carrick Mollenkamp did on the matter back in 2008 while he was at the WSJ.

It’s just that in the scheme of things, the allegation that bankers may have conspired to keep Libor artificially low to make their institutions seem more solvent during the height of the financial crisis doesn’t chill me to the bone. Did anyone really believe those institutions were solvent during the crisis? Does anyone really believe banks with hundreds of billions of second-liens on their books and other poorly reserved loans are really solvent today?

We simply say the banks (except for maybe some in the euro zone) are solvent and whistle past the graveyard.

Libore? The real scandal is still CDOs

By Matthew Goldstein

There is an opaque financial market where pricing is determined by a cadre of Wall Street banks and private emails show that behind the scenes  many in the market don’t even believe in what they are doing.

The Libor price fixing scandal?  Sure. But what I’m talking about here is the market for the CDOs, which at the end of the day you can still argue did more harm to the world financial system than the allegations now emerging from the Libor scandal.

Don’t get me wrong: I am not defending the apparent misconduct by bankers to manipulate Libor, a benchmark interest rate for lots of commercial and leveraged loans. But it’s still not clear just what the big harm was in the Libor scandal.

Counterparty Terror

The Bear Stearns bomb has left bank trading floors full of fear. Faced with perceived counterparty risk at every turn, financial trading and interbank lending nearly ground to a halt on Monday.
“There’s turmoil in all markets after Bear Stearns,” said BNP Paribas strategist Edmund Shing. “Everyone’s asking: Who’s next? Is there a Bear Stearns in Europe? Could investment banks start to fail?”

Reflecting the fear, London interbank offered rates rose 80 points, the biggest daily increase since the attacks of September 11, 2001.

As stock prices and the U.S. dollar plummet, banks’ access to unsecured borrowing from each other has all but dried up, and dealers say the over-the-counter market had become highly discriminatory, depending on the bank name.