Articles About Trading & Investing

Why Hedge Funds Are Bleeding – and Why You Need to Pay Attention

0 | By Shah Gilani

As I told you Wednesday, investors are fleeing hedge funds in droves due to gross underperformance in the face of over-the-top fees.

In fact, the industry as a whole hasn’t seen anything like this since 2009 – maybe ever.

Ironically, the pain hedge funds are facing, based on the pain their trades have inflicted, holds the answer not only to their survival, but to an almost sure miraculous revival.

Understanding what’s gone wrong at hedge funds, how crowding into the same trades, staying too long in trades when cash registers should have been ringing, and how underperformance led to fee wars and investors fleeing for passive index funds, produces the roadmap funds have to follow to make a comeback.

And it shows average Joe investors how they can play the same profitable future.

Let me show you what I mean…

Exiting Sinking Ships

It’s not just 2016 that’s been tough for hedge funds. Investors in hedge funds and hedge fund managers would like to forget every year since 2008. But they can’t.

According to Bloomberg, the S&P 500 Index, sometimes referred to as “the market” which investors can invest in by buying an indexed mutual fund or a low cost ETF, outperformed the weighted-composite index of hedge funds every year since 2008.

From 2009 through the first quarter of 2016, hedge funds underperformed the S&P 500 by a whopping 51 percentage points.

In 2015, when The HRFI Fund Weighted Composite Index (and equal-weighted index of hedge funds) was down 1.1%, the S&P, with dividends included, had 1.2% gain.

Even in the full first half of 2016, with funds averaging a 1.6% gain, the S&P 500 posted a 3.8% gain.

It’s bad enough investors are underperforming basic indexes, adding insult to injury they’re also paying exorbitant fees to managers to be in the losing game.

Typically, hedge funds charge a 2% management fee. That annual fee, based on assets under management, which is usually collected on a quarterly basis, is paid to the manager regardless of gains or losses.

On top of the management fee, hedge funds take a healthy piece of the gains they generate.

Historically, the performance fee charged is 20% of profits.

The so-called “2 & 20” fee structure has been the standard for hedge funds for decades, though some very successful funds have charged a higher management and a higher performance fee. I’ve seen funds charge a 3% management fee and up to a 50% performance fee!

Investors have been aggressively negotiating down both management fees and performance fees in the face of pure ugliness. While 1% & 15% fee structures are becoming more prevalent, managers sometimes negotiate fees with different investors, providing they’re allowed to do that according to their fund disclosure documents.

But no matter how low a fund may be willing to drop its fees, investors have had enough.

The first giant institution to split from the hedge fund universe was the California Public Employees Retirement System, CalPERS, who is January 2104 started throwing in the towel. Over the past 20 months CalPERS exited 24 hedge funds and 6 fund of funds, withdrawing about $4 billion from the industry.

The giant New York State Common Retirement Fund, one half of a two fund complex that has $181 billion in assets, lost $3.8 billion as a result of hedge fund underperformance and exorbitant fees, according to a just released report from the New York Department of Financial Services. The system stopped investing in hedge funds last year and has withdrawn $1.5 billion this year.

So far in 2016, the Kentucky Retirement System has taken back $1.5 billion form hedge funds. The State of Massachusetts is cutting back all its alternative investments. College and university endowments are cutting back their hedge fund exposure on an almost daily basis.

According to the Credit Suisse Mid-Year Survey of Hedge Fund Investor Sentiment, a study of 200 hedge fund allocators directing $700 billion of investment capital, 84% of investors in hedge funds pulled money out in the first half of 2016. And 61% said they will probably make withdrawals later in the year.

Why Hedge Funds Aren’t Making Money

There are two basic problems hedge funds are having trying to make money. Today I’ll explain one and next week I’ll lay out the other, less obvious, busted strategy that’s killing performance.

The number one problem facing funds is they’re crowding into too many of the same stocks and   creating massive correlation.

There are only so many stocks and so many trades to go around in the $3 trillion, 10,000 fund universe of hedge funds. As more funds ply the same trades and as big funds have gotten bigger, the need for scale increases.

That means more and more fund managers are crowding into positions that consume larger pieces of companies outstanding, floating shares.

That’s fine on the way into a trade if you’re early and other managers plow into those stocks creating momentum, that attracts momentum-driven funds, which attracts more investment capital. But, it’s exiting those positions, sometimes like rushing for the exit doors when someone yells fire, that crushes performance across a wide swath of funds.

According to Andrew Lo, acclaimed professor of finance at the MIT Sloan School of Management, “The whole hedge fund industry is a series of crowded trades.”

Back in a 2011 study Lo found that from 2006-2010 there was a roughly 79% chance “any randomly selected pair of hedge funds will move up and down in tandem in a given month.” That was up from 67% in the 2001-2005 period. It’s worse today says Lo.

In a speech on September 20, 2016 at the RiskHedge USA conference in New York, Mike Jemiolo, chief risk officer at Point72 Asset Management said, “The biggest challenge right now is crowding, the problem is that for many, many years crowding worked – if you loaded on that factor, you made money. But starting in mid-2015, long crowding stopped working pretty steadily and fairly catastrophically in January and February, and in late 2015 – December or so – short crowding stopped working too.”

Basically, investing in crowded stocks exposes investors to shocks and liquidity demands that are not always explicitly captured in risk models.

A perfect example of overcrowding in a trade and the pain a massive exit causes is Valeant Pharmaceuticals (VRX). After touting Valeant at several investor conferences and publicly, hedge fund manager Bill Ackman of Pershing Square Holdings found he had a lot of company in VRX.

According to Novus research on June 30, 2015 VRX was the most crowded position on a list of 10,000 funds from Novus’ Hedge Fund Universe. Novus, in its report pointed out that in spite of the overcrowding, not a single healthcare-focused fund was heavily invested in VRX.

In April 2015, when VRX got above $260 and was held by more than 106 hedge funds, accounting for 38% of its floating stock, as the stock began to tumble daily volume went from 1.8 million shares to 18 million on a 90-day rolling average.

Hedge funds were slaughtered all the way down to $22.27, where VRX trades today. None more so than Ackman’s Pershing Square.

Pershing Square was down 20.5% in 2015 and was down 21.1% in the first half of 2016. Assets under management at Pershing shrunk from $20 billion to $12 billion over the same period. Billions of dollars continue to be withdrawn from Ackman’s funds.

That’s the problem with overcrowding.

Next week I’ll explain what the other “strategy” hedge funds are following that’s killing them, and tell you where the exiting money is going and why.



Here’s Why Hedge Funds Are Poised for a Comeback – And Why it Matters to You

0 | By Shah Gilani

Hedge funds look like they’re down for the count, having been beaten-up by self-inflicted underperformance in the face of over-the-top fees, high profile slip-ups, and investors stepping over them on their way to low-cost, passive investing strategies.

But don’t count Hedgies out just yet…

One reason hedge funds have been underperforming benchmarks has become abundantly clear and can be overcome (as you’ll see). They’re also knocking down fees to hold onto investors and attract new limited partners.

Not only that, the multi-trillion dollar trend towards passive investing could blow up spectacularly.

Today, I’m going tell you what’s going on with hedge fund underperformance, those exorbitant fees, and why the trend tooward indexing could be hell for the market and a godsend for hedge funds.

But first, let’s all get on the same page…

What Is a Hedge Fund, Anyway?

The first hedge fund, created in 1949 by Alfred Winslow Jones, was designed to hedge the ups and downs of the stock market. Jones figured he’d divide the money we was going to manage into two equal buckets. Half of his positions would be “long” positions (stocks he would buy) and the other half of his positions would be “short” positions (stocks he’d sell short, a bet prices would go down).

If the market went up his long positions would go up and make money, and if the market went down his short positions would go down and make money. Which makes sense – except the two opposing buckets would just cancel each other out.

But Jones had a plan. Because he was such a good stock picker, he explained to investors, when the market went up his long positions would go up more than the market. And because he could pick good shorts, they wouldn’t go up as much as the market, so he wouldn’t lose much on being short. And when the market went down, because he was a good stock picker his long positions wouldn’t go down as much as the market, and his short positions would go down more than the market dropped.

Jones sold his investors on the proposition that they were hedged against the market’s fluctuations and because he was able to generate “alpha” (a return better than the market) because of his stock-picking abilities, he would charge them a management fee and take a good percentage of the gains as a performance fee.

That’s how the term hedge fund came about, while the prospect of generating “alpha” is how managers justify performance fees.

The entity structure Jones used was a limited partnership. Jones was the “general partner” of the limited partnership, managing its portfolio and business, and investors came in with their money as “limited partners.” A limited partner has “limited liability” in a limited partnership. Because they aren’t involved in running the business they aren’t responsible for losses beyond the investment money they initially put at risk.

Today, “hedge fund” is a generic name for a limited partnership, a limited liability company or some other entity structure where investors fork over money to a manager to invest however he or she sees fit.

There are all kinds of “strategies” managers employ to make money, including: fundamental; technical; long/short; long bias, short bias; market neutral; relative value; value-oriented; multi-strategy, global-macro; special situations; event-driven; merger arbitrage; systemic; credit strategies; high yield credit; commodity-based; real estate-based; and on and on and on.

Today, a manager can invest in almost anything as long as they disclose to investors what they’re doing. However, some investor disclosure documents tell potential investors they’re not going to tell them what they’re going to do, or how they’re going to do whatever they do.

Good luck suing the manager of a fund for losing money if you sign off on giving them carte blanche.

In spite of the designation hedge fund, most hedge funds today don’t hedge against market moves.

That’s one reason funds too often underperform in down markets. But there’s another much bigger reason why so many funds have been underperforming for so long.

It wasn’t always that way…

Hedge Fund Performance Has Tanked Since the 90s

Though they’ve been around for decades, hedge funds exploded in the 1990s.

There have always been outstanding hedge fund managers, including legends Julian Robertson, George Soros, Stanley Druckenmiller, Ray Dalio, and Steve Cohen, whose long term track records are extraordinary, partly proven by the success of their investors and partly proven by the fact they are all multi-billionaires who eat their own pudding.

Based on the HRFI (Hedge Fund Research Index) Weighted Composite Index, an equal weighted index of hedge funds, which tracks funds back to 1990, the funds that make up the index collectively delivered 10% annually to investors from January 1990 to February 2016, with a standard deviation of 6.8% and a Sharpe ratio of 1.04.

At the same time, the S&P 500 Index had an annual 9% return with a standard deviation  more than twice as high, at 14.6%, and a Sharpe Ratio less than half the HFRI Index, at 0.42.

Bloomberg, from which this data was gleaned, defines standard deviation as “the performance volatility of an investment, while the Sharpe Ratio is a gauge of risk-adjusted returns; a lower standard deviation indicates a less bumpy ride, and a higher Sharpe Ratio indicates that investors are more adequately compensated for the volatility they take on.”

As good as that hedge fund performance sounds, however, objects in the mirror are further away than they appear.

The actual rolling trend of the Index shows a significant decline in returns since tracking began.

The HRFI Index actually returned 18.3% annually from 1990 to 1999. But on a rolling basis returned just 3.4% annually over the past ten years. According to Bloomberg, it doesn’t matter what strategies are broken out – they all suffer diminishing returns.

By comparison, the HRFI Index fell behind the S&P 500 Index by 3% annually over the past 10 years and fell behind the Barclays Aggregate Bond Index by 1.3% annually over the same period.

As if that wasn’t bad enough, the Sharpe Ratio of the HRFI Index fell to 0.38, which was one third of the 1.13 Sharpe Ratio earned by the Barclays Aggregate Bond Index.

What’s going on?

In a word (or two), competition and overcrowding.

Too Many Funds, Not Enough Capital

Back in 1990, 610 hedge funds managed $38.9 billion of investor money. Today, there are more than 10,000 hedge funds globally, managing just shy of $3 trillion.

A lot of fund managers, competing rabidly against each other, are crowding into a lot of the same trades, no matter what the portfolio management strategy is.

Not only are managers clipping each other on the way into trades, bidding up prices of assets they’re all chasing, they collectively get killed when they all head for the exit doors as soon as news leaks out (which they are all privy to) that some big money somewhere is exiting positions.

On Friday I’ll give you some devastating examples of how fund managers followed other managers into and then out of trades, why, and what happened. Some of these stories made the front page news, and investors are still reeling from the devastation.

Not only will I cite specific examples and name names, I’ll tell you who’s doing what now and how that’s about to wreak havoc across the entire market.

Then next week, I’ll show you where the smart money’s headed, and how you can follow it.

So stay tuned.



It’s Earnings Season for the Big Banks – and One Is a Bottom-Fishing Buy

5 | By Shah Gilani

The big three American banks – JPMorgan Chase, Citigroup, and Wells Fargo – laid out their earnings today.

We’ve been following big bank earnings all year. Back in Q1, I told you that all was not what it seemed with their earnings numbers, and why they were once again a danger to the system. And in Q2, I told that you, while analysts were saying it was time to invest in the “too big to fail” banks, they were still a risky investment.

So has anything changed? Have the big banks gotten any better?

Here’s the skinny on the big three – whether you should buy, sell, or hold – and what to do at specific price levels…

Why Big Bank Earnings Matter

America’s “too big to fail” (TBTF) banks are all bigger now than they were before the credit crisis and after the Great Recession. And they’ll get bigger unless they’re broken up or implode to a point where they have to be unwound in the next crisis.

U.S. banks got bigger (and are in much better shape than their giant counterparts in Europe, Japan, and China) thanks to the Federal Reserve.

The bottom line is all the TBTF banks were in serious trouble as a result of the credit crisis, most bordering on insolvency, if not technically insolvent by honest measures of their capital ratios and reserve requirements.

The Federal Reserve had to rescue them because they were too big to fail, meaning if they did fail, there wouldn’t be enough money in the FDIC’s rescue pool to bail out depositors in any one bank, let alone all of them, who facing failure would have seen a run on each bank as depositors withdrew their money.

What the Fed did, besides initially provide unlimited liquidity to keep the banks afloat, and as their regulator help them hide their true state of borderline and actual insolvency, was come up with a grand experiment supposed to lower interest rates to stimulate economic growth called quantitative easing.

The real purpose of quantitative easing wasn’t to lower interest rates, they were already at zero. Quantitative easing was a program executed directly with the big banks whereby they could buy massive amounts of U.S. Treasuries and mortgage-backed bonds, bidding up their prices, and sell them to the Fed for a profit. QE continued for years to generate profits for the big banks and long enough to give them time to sequester bad assets in “bad bank” divisions and offload them to speculators.

European banks got initial help from the ECB, but their QE programs didn’t start until much later and the ECB didn’t force giant European banks to offload bad assets. That’s why American banks are in good (but not great) shape, and European banks are in trouble.

Here’s a closer look at the big three…

JP Morgan Chase

Of the big three American banks, mostly associated with retail banking on account of their retail bank branches and history as depository institutions, JPMorgan Chase has fared the best post-crisis and post-Great Recession.

JPMorgan, the largest U.S. bank by assets, posted better than expected third quarter results today, setting the tone in pre-market trading for a rally in bank stocks and index futures and the market’s big up-move this morning.

Profit for the quarter came in at $6.29 billion or $1.58 per share. Analysts had been expecting $1.39 a share. Surprisingly, profit in the bank’s corporate and investment banking unit doubled from a year ago to $2.91 billion, based on higher debt and equity underwriting fees and an increase in advisory fees. Commercial banking had a 50% gain over the year ago quarter, rising to $778 million, and the bank enjoyed higher deposit spreads. Costs continued to be pared down, falling 5.9% and gains came from reducing set-asides for legal and regulatory legacy issues.

But the news wasn’t really all that good when you dig deeper. The better than expected profit at $1.58 was 6% lower than a year ago. Return on equity, an important metric when gauging an investment in a bank, fell from 12% a year ago to 10% this quarter.

The bank acknowledged their trading, corporate and investment banking upticks were based on central bank action, money market reforms, and business resulting from Brexit.

Of the three big banks whose earnings came out this morning, JPM has by far the best performing stock which has risen strongly since February’s market selloff.

Still, it’s not a buy today. That’s because it’s had a good run and is up against overhead resistance. The 52-week high for JPM is $69.06, so even if the stocks makes a new high, which it easily could, there’s not a lot of upside ahead and buying in here would subject an investor to more downside risk than upside potential.

A falling ROE, lower profit than a year ago, the bulk of its earnings beat this quarter coming from corporate and investment banking based on central bank actions (that may change), money market reform (which will be behind us in November), and Brexit, which helped all the banks pick up some revenue (but now creates an uncertain future), means the ride may be over.

If you own JPM, hold it. But use stops to protect your profits. A tight stop on the way down to protect your profits close to the highs for the company, would be $66. Below that, I’d want out if JPM falls back to $64 on account of firm-specific issues or a market selloff.

If you’re a speculator, today’s pop creates a good spot to put on a short. If you sell JPM short here, a tight stop at $70 would be an excellent risk-reward play.

Wells Fargo

Wells Fargo’s earnings weren’t good, even though they beat analysts’ expectations. They beat because analysts have been ratcheting down their estimates for two months now thanks to its cross-selling scandal. Earnings per share came in at $1.03, better than consensus estimates of $1.01, but below last year’s same quarter of $1.05.

Wells’ return on equity fell to 11.3%, continuing a drop it hasn’t been able to arrest. The bank’s highly profitable Community Banking division produced profits of $3.23 billion, down a whopping 9.5% from a year ago. And expenses as a share of revenue increased to 59.4%, way above the bank’s goal of 55%.

As if that wasn’t bad enough, NIM (net interest margin, the spread banks make on loans) fell from 2.96% a year ago to 2.82% this quarter.

Wells set-aside $805 million for loan losses this quarter, but didn’t earmark any big set-asides for legal and regulatory issues the bank’s facing in the wake of its cross-selling scandal. That scandal is going to hurt Wells on all fronts and saddles it with legacy issues that will take years to overcome and work through.

Wells is only a buy here if you’re a bottom-fishing speculator. It’s a reasonable risk-reward play to buy the stock below $45 and use a $43 stop to get out if the trade doesn’t work. Buying here provides a good dividend yield and is a worthwhile play.

If you own Wells, you might as well hold it here, for the same reason it might be a buy after falling hard on the heels of the scandal. Still, depending on your comfort level, and your time horizon, if the stock goes lower, it’s only going to get more painful.

While Wells can go a good bit lower, especially if it faces state and federal investigations that could result in massive fines, it’s not going out of business and at some point will be a good turnaround story. I wouldn’t recommend shorting it here, only because there are better short plays to make if the market falters in the weeks ahead.


Citigroup is a similar story to Wells, in that it beat expectations but still had lower year over year revenues and profits.

Citi’s trading revenue rose 16% with the help of an accounting adjustment, meaning it may have been a one-time helping hand for trading. The bank also cited Brexit as a help in revenue, but looking back at Citi’s second quarter corporate and investment banking revenues, most of the Brexit gains came then, not in the current quarter.

The bank’s stock recently broke out of a sideways pattern, which some investors might see as a buy signal.

With the bank’s return on equity at a disturbingly low 6.8%, which is down considerably from last year’s paltry ROE of 8%, and revenue down at Citi Holdings, the division that holds the bank’s “bad assets” it doesn’t make sense to buy the stock here.

Its upside might be 10%, but the risk of backsliding outweighs the upside opportunity and the stock’s meager dividend yield of 1.31%.

If you own C then hold onto it. If you’re not a long-term holder – and I wouldn’t be with that ROE and tiny yield – then get out if it falls back below $45 and find a better place to park your capital.

I wouldn’t short Citi here. There’s a small play to the downside, but not enough for me to commit my capital to a slow moving stock with limited profit potential.



These Markets Are the Definition of Insanity – Here’s Why… and What to Do Now

6 | By Shah Gilani

Welcome to insanity, which – by a definition commonly attributed to Albert Einstein – is doing the same thing over and over and expecting a different result.

Our insanity is actually a dangerously circuitous negative feedback loop.

It’s all about “Extraordinary Popular Delusions and the Madness of Crowds,” which happens to be the title of a brilliant book published in 1841 by Scottish journalist Charles Mackay. If you read this book, you should because it provides factual, granular evidence of what happened in the past when crowds – mostly crowds of investors – went mad following popular delusions of their day.

We’re there again. Only this time the popular delusions are exponentially more dangerous and the crowds – most of the global populous – aren’t just going to go mad, they’re going to go broke.

Here’s who’s deluding us, over what, why, how they’re doing it, and how it’s going to end… and how you can save yourself from going broke.

Your Best Comments on Goldman’s Libya Problem – and My Replies

1 | By Shah Gilani

Last week, I told you about how the banksters at Goldman Sachs lost $1.2 billion in Libyan sovereign wealth, and how the Libyan Investment Authority (LIA) subsequently sued the Vampire Squid, citing “undue influence.”

I asked for your input – whether you sided with the Goldman or the LIA – and the story elicited more than a few great comments. (Then again, most of my reporting on banksters – and Goldman Sachs, in particular – tends to stir the pot.)

Here are some of your best comments, and my replies…

Did Congress Really Intend to Do This?

Public Law 94-29 has opened the door for retirees to potentially earn an extra $4,000 or more each month. A controversial 89-word clause makes it possible. With so much money on the line, was this a mistake – or the greatest retirement secret of all time? (Story here.)

How Goldman Sachs Lost $1.2 Billion in Sovereign Wealth

Later this month, a court will decide if the Vampire Squid is liable for losing some $1.2 billion in trades it executed on behalf of the Libyan Investment Authority. Ordinarily, these are open-and-shut cases, as clients are well aware of what and investment bank is doing – selling them financial products off of which the bank intends to profit (whether the client does or not). But, as is usually the case with Goldman, these are special circumstances… click here for the whole story.

In Just 9 Days, These New Government Regulations Could Tank Markets

On October 14, 2016, New SEC regulations are going to change how institutional prime money market funds are able to price themselves. While these funds aren’t open to individual investors, your money is still at risk. Click here to find out why.

Fallingman wrote: Why anybody would deal with Goldman is beyond me. The sucker at the table is YOU, by definition. I guess that’s why they try to find rubes… uh, I mean, muppets.

SG: If everybody knew that Goldman routinely takes advantage of its clients (I’m being polite), they wouldn’t have any. But Goldman Sachs’ underbelly, it’s history, and it’s incredibly self-centered nature unfortunately aren’t common knowledge.

In fact, Goldman’s “long-term greedy” mantra, which it openly articulates to its clients (who are supposed to agree that they too are greedy) is actually an endless series of “short-term greedy” moves made at the expense of a long line of clients over a long, long history.

Maybe prospective clients are seduced by the power of one of the greatest money-making machines the world has ever known – and believe they will partake in the magic moneymaking prowess of the Midas makers. Yes, that means YOU, if you’re not aware of what the Vampire Squid is known for, you are just a different kind of sucker.

Jlr wrote: Perhaps the blame and the judgment should cut both ways in the case at hand. The LIA may only be entitled to half in refund from GS. The high stupidity on the one part may just balance the high greed on the other.

SG: I agree judgement cuts both ways, on account of the LIA being incredibly stupid in how it bet billions of dollars in the most cutthroat casino in the world, and Goldman being… well, Goldman.

But I don’t know what the LIA can be blamed for in a legal sense, and if it makes its case, it should be entitled to all of what was lost. Why? For one reason: It would send a message to banksters that shearing sheep has a season, and it’s past.

There will always be high stupidity displayed by teed-up clients, sometimes because they’re actually stupid, sometimes because they don’t want to look and sound stupid, and sometimes because no matter how smart they are, they can be made to look stupid when dealing with the geniuses of gall and guise at Goldman.

Kent wrote: If Libya “lost” $1.2B (- $350M for fees, of course…), someone made $850M, no?! Any “bets” on how much the right hand of Goldman Sachs and/or close friends kept in their pockets (I’ll reserve the left hand for the salesperson)?

SG: Kent’s comment hits a bullseye. There isn’t enough space for me to lay out how Goldman could have taken the other side of these so-called trades that were supposed to be investments, and how they could have made close to 90% of the actual at-risk money put up by LIA after they hedged out their risk.

And believe me, that’s how the Squid does it. That’s how it makes so much money “making markets” (which isn’t proprietary trading, wink, wink) for clients like the LIA lambs.

James wrote: Goldman exerted undue influence. LIA entered trades without adequate advice or due diligence. This should be a classic set-up for a decision based on contributory negligence. For how much of the bad outcome was each party responsible? It is hard to predict the result without knowing the contributory negligence rules for the court with jurisdiction. However, since Goldman was clearly giving risky advice, it is hiding behind the fact that its agent was a salesman without any fiduciary duty to the client. LIA chose nepotism and cronyism over expert management. I believe Goldman will be held less responsible than LIA based on a stronger position in law. Since both sides were sleazy, it is a rare case where justice will be served regardless of the outcome. My bet is that the undue influence charge will fail but the unconscionable bargain charge will succeed. The payout will likely be tiny compared to $1.2 billion.

SG: James, I totally agree with your assessments, all of them. You’re dead-on right. Let’s see how right you are – and how little they pay.

Bob wrote: Fining corporations is totally meaningless. Jailing the banksters and all the other corporate gangsters for a minimum sentence of 50 years without parole is the only way to eradicate those seeking, and GETTING, “Golden Parachutes!” Lock ’em up! Throw away the key!

SG: And in the final analysis, Bob hits it out of the park. Well done, sir!

Though I’m not entirely “down” with blanket 50-year jail terms or throwing away the keys, I do believe that clawbacks, firings, personal fines, permanent disassociation from the industry, and – when appropriate – jail time, is the way to go, always.



How the Vampire Squid Gambled – And Lost $1.2 Billion in Sovereign Wealth

18 | By Shah Gilani

On March 18, 2016, the Libyan Investment Authority (LIA), a sovereign wealth fund set up by dictator Colonel Muammar Gaddafi in 2006, filed suit in London at The High Court of Justice’s Chancery Division against Goldman Sachs International.

The suit claims the fund paid Goldman approximately $350 million to set up trades the LIA says it didn’t understand, which lost the fund $1.2 billion, everything it invested.

Instead of fraud, the LIA claims its “causes of action” are “undue influence” and “unconscionable bargain.”

Goldman decided not to settle and believes it can beat the charges because, you know, there was never any undue influence and Goldman Sachs is not unconscionable.

The suit will be decided this October.

In short, the LIA claims the Great Vampire Squid’s blood-funnel bankers, traders, and especially one junior salesman, cozied up to the “nascent” sovereign wealth fund’s managers and traders, who all had “limited legal and financial expertise,” by entertaining them lavishly at expensive restaurants and hotels, plying them with gifts and prostitutes, training them enough to claim they should have known what they were buying, employing the deputy executive director of the fund’s younger brother, and finally inducing them into putting on leveraged derivatives trades that amounted to an unconscionable bargain.

Here’s the inside scoop on the case…

Background Checks

Libya gained its independence from Italy in 1951. Eight years later massive quantities of oil were discovered and Libya entered the world stage. In 1969, with Libya’s king out of the country, an upstart colonel in the Libyan army, Muammar Mohammed Abu Minyar Gaddafi, led a coup and took over the country.

By 2003, the “Mad Dog” dictator was feeling the pinch when fellow strongman, Iraq’s Saddam Hussain, was pulled from his hiding hole and paraded as a prisoner of war.

Gaddafi, only a few weeks later, renounced his country’s nuclear and chemical weapons programs and sought to have sanctions against his country lifted.

Twelve countries lifted sanctions in 2003. The United States in 2004, to reward Libya’s renunciation of weapons of mass destruction, lifted its sanctions. By 2006 full relations were restored.

Gaddafi established the Libyan Investment Authority, the country’s sovereign wealth fund, in 2006. Its operations were primarily conducted by a management committee set up in January 2007, which later became the fund’s board of directors.

Gaddafi appointed his friend, a traditional commercial banker, Mohamed Layas, as executive director. Mustafa Mohamed Zarti (38 years old), at the suggestion of Safir Al Islam Gadaffi, Zarti’s friend and the son of Moammar Gadaffi, became the fund’s deputy executive director. Zarti’s banking experience was limited to a stint on OPEC’s Fund for International Development. The directors set up two teams at the fund, the equity or direct investment team and an alternative investment team.

The LIA claims the fund’s twelve team members had “no legal expertise and no background in, or experience of complex derivative products.”

Enter the Dragon

In June 2007, Moroccan native Youssef Kabbaj (31 years old), an upstart Goldman securities salesman out of the firm’s London offices, who spoke English, French, and Arabic and had an engineering degree from MIT, cold-called the LIA and got a meeting.

The suit claims Goldman, in particular Youssef Kabbaj, befriended LIA managers, especially deputy executive director Zarti, who pulled the trigger on the fund’s trades and investments.

Not only did Goldman’s Kabbaj lavish gifts on LIA managers and team members, wine and dine them, send them to Goldman University in London for training, and pay for their travel with him to Marrakech, Casablanca, and Rabat in Morocco, he did deputy executive director Zarti the ultimate favor and got his younger brother, Haitem Zarti (25 years old) an internship at Goldman.

With the ball teed-up, Goldman swung at LIA as hard as it could.

Between January 2008 and April 2008, Goldman suggested and executed nine “disputed trades” on behalf of the LIA.

The LIA itself was interested in an investment in Citigroup, having been told by Gadaffi himself that Qatar had made a $7.5 billion investment in the American bank, and to look into it. Goldman was only too eager to move that trade along.

But, rather than have the fund buy shares in Citi, Goldman created a “cash-settled forward purchase agreement for Citigroup shares with downside protection in the form of a put option at the same price as the forward.”

Yeah, that’s what I said. And I understand derivatives.

According to a just-published Bloomberg Businessweek article, “More simply, if Citi shares rose, as the LIA was betting, the fund stood to gain many times its initial investment. If the shares fell by a certain amount, the fund could lose everything. The structure was potentially more lucrative than a conventional purchase of equity and also significantly riskier-while resulting in far higher profits for Goldman.”

Goldman teed-up two of these trades amounting to a $200,000,000 bet on Citi going up.

An investment decision that seems damning to Goldman, and to me, is revealed in the suits “Re-Re-Amended Particulars of Claim Dated 18 March 2016.”

The LIA wanted to take an equity position in France’s Electricite de France, and on February 19, 2008, it’s equity direct investment team bought $73,768,695 worth of EdF stock. But, Goldman, on the same day, “restructured” the position into another “cash-settled forward purchase agreement for shares with downside protection in the form of a put option at the same price as the forward.”

In other words, Goldman took the LIA’s shares and converted it to $73,768,695 in premiums to establish a derivative trade that would make more money if EdF went up, but could lose everything if it fell far enough.

In the end, the LIA lost $1.2 billion on the trades Goldman ushered it into when markets imploded during the fall of 2008. While the derivative contracts had three years to go, by expiration none of the positions had recovered enough to be worth anything.

So LIA sued.

Undue Influence

What’s revealed in the suit is that before the fund’s investments were wiped out, in the summer of 2008, LIA hired the law firm of Allen & Overy to help it understand the Goldman trades.

Catherine McDougall, a 26 year-old Australian lawyer working for Allen & Overy was assigned to the LIA. She was dismayed, to say the least.

Goldman never had the LIA sign an ISDA master agreement, standard in derivatives transactions, only sent LIA trade confirmations months after trades were executed (some they never received) didn’t provide account statements, and apparently charged the LIA some $350 million in fees which otherwise should have been closer to $111 million.

According to Matthew Campbell and Kit Chellel’s excellent Bloomberg Businessweek article, McDougall “was astonished by how little the LIA’s junior employees seemed to know. The legal department’s level of competence in dealing with complex legal documentation was ‘zero,’ she wrote later in a witness statement. The problem was compounded by rudimentary English and basic paperwork that was missing. She described the setup as like ‘an advertising company having no TVs.'”

“She asked to see the due diligence the LIA had performed before committing to the deals. They responded, she wrote, ‘Due what?'”

But lawyer Robert Miles in the Bloomberg article said, “that’s not the bank’s problem; the Libyans entered commercial transactions, fair and square.” The LIA “understood at all times that Mr. Kabbaj was a salesman, and that his job was to sell investments to the LIA from which [Goldman] could make money,” Goldman’s lawyers said in closing arguments.

The bank’s official statement on the lawsuit reads, in part, “We have always disputed the LIA’s claim that it was financially illiterate and it is clear that they understood the disputed trades and entered into them of their own volition.”

The LIA claims “undue influence” which Campbell and Chellel say is “more commonly used by wives against husbands”- the idea being “that one party to a transaction can have so much power over another that a contract between them isn’t valid.”

The unconscionable bargain claim stems from the oppressive fees Goldman charged in a mostly one-sided bet the LIA claims they had no idea they were at risk for.

We’ll know in October what the court’s decision is.

But in the meantime – what do you think?

Did Goldman exert undue influence to make gross profits on an unsophisticated “elephant” client? Or are slickster salesman still a viable business tool?

Sound off in the comments below.



What They Didn’t Say About the Fed in Monday’s Debate

1 | By Shah Gilani

Republican Presidential Nominee Donald Trump blasted the Federal Reserve and Fed chair Janet Yellen for being more “political” than his Democratic counterpart Hillary Clinton in Monday night’s heated presidential debate.

Is he right? Is the Federal Reserve political in any way, shape or form?

Fed officials, the vast majority of political analysts, and “a wide range of independent observers,” according to the New York Times, “roundly rejected” Mr. Trump’s “accusation.”

But the truth is, the Federal Reserve is absolutely, positively political. It’s in their DNA.

I’ll prove it to you…

The Fed Began as a Political Tool

This isn’t about Donald Trump being right. And, it isn’t about Hillary Clinton telling reporters on her campaign plane on September 6, 2016, “You should not be commenting on Fed actions when you are either running for president or you are president. Words have consequences. Words move markets. Words can be misinterpreted.”

This is just the bare naked truth about the Federal Reserve and how it operates.

Most people, including the majority of politicians in the U.S., analysts and journalists covering politics and the economy, and overseas observers, don’t know what the Fed is.

They think as America’s central bank it’s a branch of the government. It isn’t.

An example of the ignorance of even respected news outlets like the New York Times was front and center yesterday.

In a Times article titled “Scant Evidence to Support Trump’s Attacks on the Fed,” author Binyamin Applebaum writes, “The Fed is not independent. It is an arm of the federal government, chartered by Congress to maximize employment and minimize inflation.”


The Federal Reserve System is privately-owned by shareholders. It is not an “arm” or branch of the U.S. government.

It was conceived in 1910 by a handful of rich and powerful men including Senator Nelson Aldrich of Rhode Island, well known as an agent of John D. Rockefeller, to whom he was related through a family marriage, J.P. Morgan & Co. partner Henry Davison, Paul M. Warburg the principal partner at Kuhn Loeb & Co., and American agent of  Europe’s richest, most powerful banking family, the Rothschilds, and National City Bank president Frank A. Vanderlip, at a clandestine meeting at the secluded Jekyll Island Club off the tip of South Georgia, partly owned by John Pierpont (J.P.) Morgan.

The Senator and bankers designed the private central bank, which took three years to slide through Congress, to have the sole right to create Federal Reserve Notes (U.S. dollars), in other words they own America’s money supply, and to use their money to buy the government’s debt whenever it was necessary to support Federal operations and to support and backstop the big banks who were the shareholders in the new central bank.

The whole story of how the Fed was created, by who, for what purposes, and how it was greased to be twisted through Congress and institutionalized in law under the Federal Reserve Act of 1913 is one of America’s dirtiest secrets. But the truth is out there.

As conceived, the Federal Reserve System is a political tool. It couldn’t have come into being if political interests weren’t satisfied.

The Fed Is Political – Whether it Acts or Not

The Fed was meant to look to the outside world like it was above politics in order to be a “Reserve System” (not a bank, wink, wink) to backstop the financial system and maintain stable prices.

The so-called “dual mandate” which says the Fed has to “promote effectively the goals of maximum employment,” in addition to stable prices, was only inserted into the Federal Reserve Act when in 1977 Congress punted its fiscal responsibilities to the Fed because it was tired of being blamed for “stagflation” plaguing the country.

But that doesn’t mean the Fed isn’t political.

Politicians constantly threaten the Fed with audits, greater Congressional oversight and control, and on rare occasions threaten to abolish it.

Since Congress has the ability to legislate the Fed out of existence, successive Federal Reserve chairmen, FOMC members and Regional Bank presidents have had to play ball with whichever party’s administration is in power.

Donald Trump maintaining that, “They’re keeping the rates down so that everything else doesn’t go down,” and saying, “The Fed is being more political than Secretary Clinton” isn’t a stretch.

The Fed announced last December, when it raised the Federal Funds rate one quarter of one percent, its first rate hike in nine years, it was looking to hike four times in 2016.

After a hiccup through February when stocks and bonds fell sharply, stocks made multiple new all-time highs and bonds are booming again. And still there’s no rate hike.

No doubt, the Obama administration and Hillary Clinton remember when in October 1979, right before the presidential election between Jimmy Carter and Ronald Reagan, the new non-partisan Fed chair, Paul Volcker, changed the Fed’s policy objectives and rates soared.

Jimmy Carter lost hands down.

In terms of the metrics the Fed says it watches, there was no reason for it not to raise in September, unless of course, there were political motivations.

Of course there were. Especially in light of Donald Trump criticizing and threatening the Fed.

Saying the Fed isn’t political is like calling the Grand Canyon a ditch.



The Unintended Consequences of These New Rules Could Kill the Rally – Or Worse

4 | By Shah Gilani

Starting October 14, 2016, institutional prime money market funds won’t be able to price themselves at a constant $1.00 a share.

New SEC rules will require these giant funds to value shares based on actual market prices for underlying assets in their portfolios.

That means their per-share prices will fluctuate on a daily basis.

While that’s not exactly good news, it gets worse.

The rules allow funds to charge up to a 2% redemption fee when investors want out.

But the killer is, funds can put up “gates” that prevent investors from selling shares.

Besides problems investors will have with the new rules, unintended consequences affecting companies and municipalities that rely on selling their commercial paper and other short-term debt instruments to these big funds could end up killing the market.

Here’s what you need to know, and what to do…

Why They’re Changing the Rules

Money market funds used to price their shares at a constant $1.00. It used to be “a dollar in and a dollar out.”

If the underlying assets in a money market fund rose above a $1.00 funds could pay the excess out as a dividend. If the underlying value of assets fell such that the pro-rata per share price was below $1.00, funds could use amortizing accounting methods to still maintain the fund’s constant $1.00 a share price.

In 2008 the oldest and largest money market fund in the U.S., The Reserve Primary Fund “broke the buck” and priced its shares at $0.97 when Lehman Brothers collapsed and the price of Lehman’s commercial paper The Reserve Fund held imploded.

The Reserve Fund breaking the buck panicked investors who immediately withdrew hundreds of billions of dollars from money market funds before they could lower their prices too.

That run on money market funds brought the financial system to a standstill.

Instantly, there were no buyers for the billions of dollars of commercial paper and other short-term debt instruments corporations and municipalities sold to money market funds on a daily basis to fund their payrolls and other short term cash needs.

In July 2014 the Securities and Exchange Commission handed down new rules to make some money market funds more transparent in terms of pricing their underlying assets and to temporarily steady funds during times of extraordinary financial stress.

Making institutional funds float their share price makes it more transparent to impacted investors so that they, and not the fund sponsors or the Federal government, bear the risk of loss.

By allowing these funds to charge up to a 2% redemption fee, under certain circumstances, the SEC hopes to slow redemptions when investors would normally head for the exits.

By allowing funds to put up “gates” to shut down redemptions altogether, the SEC expects to halt debilitating money market runs when the financial system can least afford them.

The Letter of the Law

Here’s how the SEC explains the new pricing requirements, the new redemption fees, or “liquidity fees,” and gates:

Showing Fluctuations in Price – Institutional prime money market funds would be required to price their shares using a more precise method so that investors are more likely to see fluctuations in value. Currently, money market funds “penny round” their share prices to the nearest one percent (to the nearest penny in the case of a fund with a $1.00 share price). Under the floating NAV amendments, institutional prime money market funds instead would be required to “basis point round” their share price

Liquidity Fees – Under the rules, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets (the regulatory minimum), the money market fund’s board would be allowed to impose a liquidity fee of up to two percent on all redemptions. Such a fee could be imposed only if the money market fund’s board of directors determines that such a fee is in the best interests of the fund. If a money market fund’s level of weekly liquid assets falls below 10 percent, the money market fund would be required to impose a liquidity fee of one percent on all redemptions. However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interests of the fund or that a lower or higher (up to two percent) liquidity fee is in the best interests of the fund. Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week.

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.

You can read the SEC’s full release here.

What the Unintended Consequences Mean for Your Money

Now, let me be clear: not all money market funds are subject to the new rules.

Retail and government money market funds are exempt and can still price their shares at a constant $1.00 per share.

Retail funds cater to natural persons, individual accounts (brokerage or mutual fund), retirement accounts, including workplace defined contribution plans, college savings plans, health savings plans, ordinary trusts and accounts sold through intermediaries with the underlying beneficial ownership being a natural person.

Government money market funds only invest in government issued debt instruments and are exempt.

But these rules could still have a big impact on your investments.

Besides affecting the industry already, where almost $500 billion has exited institutional prime funds this year, there are sure to be unintended consequences from the new rules.

Big institutional investors who invest in prime money market funds, a lot of them whose companies issue the commercial paper held by prime funds, aren’t going to take kindly to being subjected to redemption fees when they want their money out of funds as prices are falling.

And they for sure aren’t going to want to be in prime funds if they can’t get their money out at all, while prices are plummeting.

That means there will be hundreds of billions of dollars, possibly more than $1 trillion, not available to banks, corporations and municipalities who borrow on an almost daily basis by selling their commercial paper and debt instruments to institutional prime money market investors.

Besides drastically choking short-term borrowers, who will have to find other ways to raise short-term funds, investors who would normally invest in money market funds are moving into government money market funds, who now have to find hundreds of billions of dollars of short-term Treasury bills to hold in their portfolios.

There’s already a shortage of T-Bills.

Between banks, hedge funds and institutional investors hoarding T-Bills for liquidity purposes, there’s very little supply in the $1.7 trillion T-Bill market. The Treasury plans to add another $188 billion to the T-Bill supply in anticipation of the new money market rules and the move by big investors out of prime funds and into government funds.

That’s not nearly enough supply. Any rush into Treasuries, which are across the yield curve in short supply because the Fed’s hoarding over $3 trillion of government notes and bonds, could result in severe liquidity problems if any kind of market selloff triggers a further rush into safe governments and there aren’t enough of them.

The new rules will undoubtedly spawn unintended consequences that regulators and investors haven’t considered but are likely because of the massive disruption to corporate borrowers and big investors we’re about to witness.

Whenever the market encounters huge unknowns, there’s likely to be disruptions, dislocations and possibly panic if something somewhere all of a sudden breaks or stops working.

You’ve been warned.



Why Tomorrow Is the Most Important Day in the Markets

9 | By Shah Gilani

If you haven’t been paying attention, you could be forgiven for not understanding just how important tomorrow is for the markets.

Tomorrow is day two of two-day meetings being held by the Bank of Japan’s monetary committee and the Federal Reserve’s Federal Open Market Committee (FOMC).

Right now, it’s not what central bankers with god complexes say that matters – even though, yes, they move markets with what they say and even what they don’t say.

It’s what they’ve done and what’s going to happen – no matter what they say – that matters now.

Forget the gobbledygook, cryptic blathering spewing down from Mt. Olympus.

Here’s what going to happen tomorrow – and beyond…

Three Things You Need to Know About Central Banks

Before we dive in, there are three facts you probably don’t know – but you absolutely need to know – about central banks.
Number one:

All central banks, in all their iterations, whether they’re a branch of government, quasi-independent institutions, or private corporations whose shareholders are big banks and elitist bankers, which is exactly what America’s Federal Reserve System is, are all in bed with their governments.

They couldn’t exist otherwise. They’re given the power to manipulate interest rates, mostly through “open market operations,” where they go into financial markets (without any capital to speak of) and buy and sell trillions of dollars’ worth of government bills, notes and bonds to move interest rates up and down, for two reasons:

  1. They can buy all the government-issued debt they’re asked to buy so governments can run unlimited deficits without immediately adversely impacting interest rates;
  2. They can be blamed by politicians if there’s no economic growth or high inflation due to too much government borrowing, relieving politicians of the blame for high unemployment or high interest rates.

Number two:

All central banks, after glad-handing their political masters, serve their country’s big banks, providing liquidity when needed and bailing them out, if they can, at least up to the point that governments have to step in with bailout money they get from central banks. Central banks are big bank, backstopping, bailout machines.

Number three:

There is no need for any central bank, anywhere. They only exist to be manipulated by governments, to bailout TBTF (too-big-to-fail) banks, and to enrich bankster oligarchs, their capitalist cronies, and political officers all feeding at the same dirty trough.

With that established, I want to take a close look at the Bank of Japan. In terms of modern-day manipulations, BOJ has been at it the longest.

Believe it or Not, the BOJ Is Worse Than the Fed

After the BOJ’s excessive easy money policies inflated Japanese real estate, which was used as collateral in the 1980s for margin loans to buy stocks, which rose exponentially and were themselves used as collateral with banks for mortgages to buy skyrocketing properties, all ended in the horrific crashing of Japan’s stock markets in 1990 and real estate markets in 1991, the BOJ stepped in. And it never left.

Thirty-five years later, the BOJ’s still manipulating rates, still pushing on a string, still trying to underpin stocks and real estate, still trying to turn deflationary realities into some kind of magical 2% inflationary panacea. It’s not working.

The BOJ’s pursuit of inflation by artificially manipulating interest rates lower, into negative territory as of this past January, by buying 38% of all Japanese government issued debt in the world, by buying corporate debt, and by buying stocks, hasn’t worked.

It’s not that the BOJ can’t see that their low interest rate policies haven’t worked.  It’s not that the BOJ can’t see that Japan’s exporting juggernaut has been slam-dunked by rising emerging markets exporters, especially China. It’s not that the BOJ can’t see that productivity declines and demographic realities are working against Japan’s economy.

The BOJ sees all that. None of it matters to them because it’s just doing what it does, what central bankers with god complexes and their cheerleading state governments want them to do, step into the void and manipulate rates and financial markets.

Why? Because regardless of what’s working for the economy, or the population, there are financial asset renters, bankers, and politicians who benefit by the manipulation.

The same story holds true for the run-up in real estate prices in the U.S. and the stock market crash. The Federal Reserve’s low interest rate policies inflated bubbles that popped.

Just like in Japan, big banks were saved by a central bank and have all gotten bigger.

The haves have gotten wealthier and the middle class and lower socio-economic classes have tragically fallen backwards down a very slippery slope.

Savers have been punished. Retirees and pensioners have been devastated. And the capital they’d amassed, which fed bank lending and capital formation throughout free markets, has been replaced by central bank, master-of-the-universe funny money.

Here’s why tomorrow is so important…

Why Tomorrow Is Huge for Markets

Tomorrow, the BOJ’s going to say they’re going to do more.

They’re probably going to say they’ll take rates further into negative territory if they have to. They’ll buy more government bonds, more corporate bonds, and more equities if they have to. They’ll buy foreign government bonds to lower those rates to manipulate the yen down to spur export growth if they have to. And to help beleaguered savers and pensioners, they’ll even let longer-term rates rise, and buy even more shorter-term debt to “steepen the yield curve” if they have to.

And the Fed?

It’s unlikely they’ll raise rates tomorrow. Partly because they don’t want to let the world think Donald Trump, who called them out for being political (which of course they are) is going to goad them into raising rates before the presidential election (which, by the way, happened in October 1979 and cost Jimmy Carter the election).

They’ll probably say they’re data dependent and since things have slipped a little they’re on hold until December.

But the fact remains that the Fed could raise rates tomorrow. And that could disrupt markets that aren’t expecting a raise. The BOJ could say tomorrow that to help pensioners they’re going to let long-term rates rise. And that could disrupt markets even more than the Fed raising rates.

Or they both might take those unexpected courses and really double-whammy disrupt markets.

But it doesn’t matter. The disruption is coming. It’s either coming tomorrow or between now and the end of the first quarter of 2017. But it is coming.

It’s impossible to keep manipulating rates and blowing smoke into financial markets when there’s no earnings growth, when earnings have been declining for five quarters in a row, when there’s no meaningful economic growth anywhere.

Central bankers are not gods. Free Markets are the closest thing we have to capitalist heaven, and they eventually will break free from the massive manipulation, from the extraordinary decades-old manipulations.

Because that’s what happens when markets are manipulated too high for too long.

Starting today, get ready for bond market and stock market volatility.

We’re betting interest rates are going to rise and we’re betting stock market volatility is going to explode over at my subscription newsletters.

We’re shorting the bond market by buying inverse ETFs that go up when bond prices decline (and rates rise) and we’re buying call options on the VIX.

Follow us – before the storm hits.



The Situation at Wells Fargo Is Worse Than We Thought

15 | By Shah Gilani

We covered the still-breaking story last week, and I told you how it sold its customers up the river by selling them accounts and services they never signed up for, how the once-cleanest big bank in America sold its soul for a tiny fistful of dollars.

It’s already old news that the bankster culture club bred another scandal of almost biblical proportions on account of 5300 Wells’ “team members” getting the stiff arm out of the bank for doing what they were pressured to do.

It’s old news that the bank paid $185 million in fines to settle civil charges with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency, and the L.A. city attorney.

And it’s old news that none of that money will do one ounce of good anywhere – it’s only going to be absorbed into the black hole of the federal government.

But there’s still plenty to be said about cross-selling at Wells Fargo.

In fact, it’s worse than we thought…

Too Little, Too Late

First, for those aggrieved customers who suffered ignominious identity theft, forgery and fraud at the hands of junior banksters executing orders from above, Wells set aside $5 million to pay them back the false fees they were charged.

Do you get that? This deep and wide-ranging scheme that included the creation of two million unauthorized accounts, perpetrated by some 5300 employees (including bankers, managers, and branch managers) in 8800 branches for a measly $5 million in fees!

And we’re not talking about one of the usual suspects here (I’m looking at you, Goldman Sachs, Deustche Bank, and HSBC). We’re talking about a well-admired bank with 70 million customers and $1.9 trillion in assets.

It’s disgusting.

And to make matters worse, the Los Angeles Times unleashed an incendiary investigative piece by E. Scott Reckard titled, “Wells Fargo’s Pressure-Cooker  Sales Culture Comes at a Cost” back on December 21, 2013 detailing most of what’s come to light two and a half years later.

It’s a great piece of investigative reporting, and if you have the stomach for it, you can read it here.

One question: What took the CFPB and other regulators and district attorneys so long?

If You’re Not Thoroughly Disgusted, You Will Be

The other bit of news that’s breaking is about Carrie Tolstedt, the 55-year-old senior executive vice president of Community Banking at Wells, who announced her retirement this past July, and was the driving force behind Wells’ phenomenal cross-selling binge.

Tolsted, a 27-year Wells veteran and senior executive vice-president of Community Banking, was ranked the 27th “Most Powerful Women” in the U.S. in 2015 by Fortune.

That Tolstedt’s $1.7 million salary was augmented in 2015 with $7.3 million in stock and cash bonuses, which was announced in a Wells Fargo proxy statement detailing executive pay, and said, “under her leadership, Community Banking achieved a number of strategic objectives, including continued strong cross-sell ratios, record deposit levels, and continued success of mobile banking initiatives,” is all too telling.

When she retires, she’ll leave with an additional $124.5 million courtesy of stock, options, and restricted Wells Fargo shares, which weren’t vested but eligible because she’s “retiring.”

Yep, another exit package that should get clawed back, but probably won’t.

The facts aside, it looks like high-pressure sales tactics and a win-at-all-costs mentality trickled down from the head of the Community Banking throughout the company and bred a culture within a culture.

This coming Tuesday, Well Fargo’s CEO John Stumpf has to address a Senate Banking Committee hearing, called in astonished anger to admonish the bankster in charge. They’ll no doubt will ask him why the hell the bank is paying Tolstedt $124.5 million on the way out the door.

This travesty of a mockery of a sham is not going away so quickly for Wells Fargo.

According to the Wall Street Journal, “Federal prosecutors are in the early stages of an investigation into sales practices at Wells Fargo & Co. that led to the bank being hit last week with a $185 million fine.”

The investigation is being conducted by the U.S. Attorney’s Offices for the Southern District of New York and the Northern District of California, and while prosecutors have yet to decide if any case can be brought, either civil or criminal charges could result.

The Journal says:

The investigation is focusing on whether someone senior within the bank directed employees to falsify documents in conjunction with the opening of accounts and products without consumers’ knowledge or authorization. Prosecutors are also focusing on whether there was willful blindness to sales practices on the part of executives at the bank.

Please! That’s a no-brainer.

It’s about the bankster culture club. We all know it. And Wells Fargo knows it too.

Upon Carrie Tolstedt’s retirement announcement, Wells’ chairman and CEO John Stumpf sang her praises and the bank’s culture saying,

A trusted colleague and dear friend, Carrie Tolstedt has been one of our most valuable Wells Fargo leaders, a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership.  Because of her passion for serving our customers, wherever and however they chose to receive their banking services – online, in branches, or via mobile phones – Carrie leaves Wells Fargo uniquely positioned to continue to be a leader in retail banking, no matter how the future of banking evolves. We share in the pride that she has for the legacy, accomplishments and talent that she will leave behind.

Somebody pass me a barf bag, PLEASE!