Microsoft, Yahoo Upgrades Shows Snowden Won, Obama Failed

According to Bloomberg,

Former U.S. National Security Agency contractor Edward Snowden succeeded where President Barack Obama couldn’t — getting Microsoft Corp., Google Inc. and Yahoo! Inc. to upgrade computer security against hackers.

The companies are adopting harder-to-crack code to protect their networks and data, after years of largely rebuffing calls from the White House and privacy advocates to improve security. The new measures come after documents from Snowden revealed how U.S. spy programs gain access to the companies’ customer data — sometimes with their knowledge, sometimes without — and that’s threatening profits at home and abroad.

“These companies actively fought against numerous mechanisms that would have mandated far more secure data,” Sascha Meinrath, director of the Open Technology Institute at the New America Foundation in Washington, said in a phone interview. “Now they are paying the literal price.”

While Google, Yahoo, Microsoft and Facebook Inc. provide data to the government under court orders, they are trying to prevent the NSA from gaining unauthorized access to information flowing between computer servers by using encryption. That scrambles data using a mathematical formula that can be decoded only with a special digital key.

The NSA has tapped fiber-optic cables abroad to siphon data from Google and Yahoo, circumvented or cracked encryption, and covertly introduced weaknesses and back doors into coding, according to reports in the Washington Post, the New York Times and the U.K.’s Guardian newspaper based on Snowden documents. He is now in Russia under temporary asylum.

‘Government Snooping’

Microsoft is the latest company considering measures to ensure the protection of customer data and strengthen security “against snooping by governments,” according to Brad Smith, general counsel for the Redmond, Washington-based company.

Microsoft’s networks and services were allegedly hacked by the NSA, the Washington Post reported Nov. 26. Documents disclosed by Snowden suggest, without proving, that the NSA targeted Microsoft’s Hotmail and Windows Live Messenger services under a program called MUSCULAR, the newspaper said.

“These allegations are very disturbing,” Smith said in an e-mailed statement. “If they are true these actions amount to hacking and seizure of private data and in our view are a breach of the protection guaranteed by the Fourth Amendment to the Constitution.”

Smith didn’t provide details about what the company is considering doing.

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According to The Wall Street Journal, J.P. Morgan Discussions Nearly Ended in a Lawsuit

J.P. Morgan Chase (Getty Images)

According to The Wall Street Journal, in the end, it was J.P. Morgan Chase & Co. that blinked.

A day before J.P. Morgan Chief Executive James Dimon and Attorney General Eric Holder tentatively agreed to a record $13 billion settlement Friday, the Justice Department notified the bank it would file a civil lawsuit in six days and seek a large amount of damages from the largest U.S. lender by assets, according to people close to the talks.

The warning helped spur the bank closer to an agreement, even though the pact didn’t provide the bank what it wanted—protection against a continuing criminal probe of past mortgage-bond sales.

The historic agreement, which is being watched from Wall Street to Washington, isn’t finalized. The parties are still negotiating final terms.

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Hedge Fund’s Suit on Fannie and Freddie May Spell Trouble for U.S.

Hedge Fund’s Suit on Fannie and Freddie May Spell Trouble for U.S.

The lawsuit brought by the hedge fund Perry Capital against the federal government over the Fannie Maeand Freddie Mac bailout may be the case that finally subjects the government’s bailout practices to closer outside scrutiny.

The Fannie Mae and Freddie Mac bailouts were two of the biggest and earliest of the financial crisis. In September 2008, a government team led by the Treasury secretary at the time, Henry M. Paulson Jr., placed the companies into a conservatorship and provided them with hundreds of billions of dollars in backstop financing. In return, the government required the companies to issue super-preferred stock to the Treasury Department, stock that would pay the government before all other creditors, at a 10 percent rate.Read more

“Dude, I owe you big time!… I’m opening a bottle of Bollinger”: The Rotten Heart of Finance?

As the mystery of LIBOR begin to unmask, it aroused more and more attention from the public. Expert from the Economist.com gives a detailed report today on this specific topic.

THE most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London inter-bank offered rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. “Coffees will be coming your way,” promised one trader in exchange for a fiddled number. “Dude. I owe you big time!… I’m opening a bottle of Bollinger,” wrote another. One trader posted diary notes to himself so that he wouldn’t forget to fiddle the numbers the next week. “Ask for High 6M Fix,” he entered in his calendar, as he might have put “Buy milk”.

What may still seem to many to be a parochial affair involving Barclays, a 300-year-old British bank, rigging an obscure number, is beginning to assume global significance. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

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Navigating Uncharted Territories After S&P’s U.S. Debt Downgrade from its Gilt-Edged AAA Credit Rating at Public Finance Leaders Forum 2011

Golden Networking is organizing Public Finance Leaders Forum 2011, “Navigating Uncharted Territories After S&P’s U.S. Debt Downgrade from its Gilt-Edged AAA Credit Rating” (http://www.PublicFinanceLeadersForum.com), September 9, New York City,conference that will provide attendees with the first analysis of the impact of the U.S. credit rating downgrade by S&P. Recognized investors, government officials and executives from the rating agencies will debate the short and medium-term outlook for public issues in the U.S.

Public Finance Leaders Forum 2011

Standard & Poor’s (S&P) downgraded the U.S. debt rating on August 5, saying that political gridlock had prevented the country from reaching a plausible solution to getting its financial house in order. It remarked that the agreement to reduce the nation’s debt by at least $2.1 trillion over the next 10 years “fell well short” of comprehensive reforms. Moody’s has a negative outlook on the U.S. but has indicated it is in no rush to cut its rating. Fitch Ratings has a similar outlook. If the U.S. is no longer AAA, can any municipal credit still be AAA?
Topics that will be covered by Golden Networking at Public Finance Leaders Forum 2011, sponsored by Modern Finance Report (http://www.modernfinancereport.com), include:

• Obtaining Financing under Increased Uncertainty in the U.S. Municipal Markets
• The Investors’ Perspective: Rethinking Public Issues in a Brave New AA+ World
• The Government’s Perspective: Striking a Balance Between Short and Long-Term Needs
• The Ratings Agencies’ Perspective: Judging Fiscal Policy through the Political Process

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Edgar Perez: S&P U.S. Credit Rating Downgrade Wake-Up Call for Government to Get Serious About the Future of this Great Nation

Last April, when Standard and Poor’s downgraded its outlook on the long-term sovereign debt of the United States to “negative”, stocks closed down a bit more than 1%. The Dow Jones Industrial Average fell about 140 points (it fell 247 points at one point during the session). Both the S&P 500 and NASDAQ fell. The CBOE Volatility Index, VIX, widely considered the world’s premier barometer of investor sentiment and market volatility, rose just about 11% to nearly 17, after trading well above 18 earlier in the session.

However, it might be wrong to read now too much into the market reaction to S&P’s decision to downgrade the outlook for U.S. long-term debt as it came during a week marked by both the Passover and Easter holidays. As a result, many of the most active market participants were on vacation, leaving trading desks thinly staffed. During a fully staffed season, like now, the market could have fallen more, some experts say. On top of that, as of Friday, the U.S. stock market was coming off its worst week since the financial crisis, knocked down by worries of an economic slowdown and the possible contagion of Europe’s sovereign-debt crisis.

David Beers, head of sovereign ratings at S&P, and the top official behind the unprecedented, if not unexpected, decision to downgrade the United States’ prized triple-A credit rating, has said it was his company’s duty to make such a hard and controversial call. The unfortunate part is that this decision could eventually raise borrowing costs for federal and state governments, companies and consumers. While banks and broker-dealers wouldn’t likely suffer any immediate ratings downgrades, S&P had already announced two weeks ago that they would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating; they would also lower the ratings on ‘AAA’ rated U.S. insurance groups, as per their criteria that correlates insurers’ and sovereigns’ ratings.

Despite these negative consequences, I am inclined not to kill the messenger and see S&P’s decision in a positive light as it should serve as an effective wake-up call to get Washington’s warring players to the negotiating table again. In the past, S&P’s decision to put the UK’s AAA-rating on negative outlook in May 2009 fueled a debate on the need for significant fiscal tightening, and the tough decisions taken by the new coalition government were eventually rewarded by S&P with the UK’s outlook being revised back up to stable in October last year. By entering the debate in this way and at this time, S&P is serving a useful public service by putting all parties on notice that words and actions in the political debate have consequences that will impact 300 million Americas.

We cannot deny the significant psychological impact of S&P’s decision on the markets and the view of foreign governments and investors of the U.S. economy. However, I expect Monday’ stock plunge to be a short-term event that will lose steam quickly. In fact, investors can be tempted to use it as reason to snatch value plays, as there would have not been a fundamental change from where we were last Friday. At the end of the day, S&P’s main theme, that U.S. finances are in bad shape, is not news to investors and traders; for instance, Pimco, the world’s largest bond fund, had stepped away from US government debt back in March; in addition, savvy money managers had already positioned themselves for a potential rating downgrade.

I agree with experts who sustain that the downgrade will not lead to sharp rises of lending rates to the corporate sector or households in the U.S., as Fitch and Moody’s still maintain their top rating for U.S. debt. Also, a sudden sell off of U.S. Treasury instruments looks unlikely, as there are still not many safe assets to replace them. Once the dust settles, attention will turn back to the economic fundamentals. Disregarding the S&P downgrade comes with high risk for the U.S. economy, particularly if Washington prioritizes electoral concerns over the long-term health of this great nation, the United States of America.

Edgar Perez is the author of The Speed Traders.

The crisis was the result of human action and inaction, not of computer models gone haywire, concludes Financial Crisis Inquiry Commission

The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. That is how the Financial Crisis Inquiry Commission, called upon to examine the financial and economic crisis and explain its causes to the American people, kicked off its final report released on January 2011. The Commission, whose work involved the review of millions of pages of documents, interviews with more than 700 witnesses, and 19 days of public hearings in New York, Washington, D.C., and struggling communities across the country, concluded that this crisis was avoidable, which is not surprising at all; they said, paraphrasing Shakespeare, the fault lied not in the stars, but in us. The Commission found instead widespread failures in financial regulation; dramatic breakdowns in corporate governance; excessive borrowing and risk-taking by households and Wall Street; policy makers who were ill prepared for the crisis; and systemic breaches in accountability and ethics at all levels. You would have to dig a little deeper to find the main culprit, the explosion of  risky subprime lending which led later to the collapse of the housing bubble.

The United Stated had set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government failed to ensure that the philosophy of opportunity was being matched by the practical realities on the ground. Witness again the failure of the Federal Reserve and other regulators to rein in irresponsible lending, recommends the Commission. Homeownership peaked in the spring of 2004 and then began to decline. From that point on, the talk of opportunity was tragically at odds with the reality of a financial disaster in the making.

In fact, while the vulnerabilities that created the potential for crisis were years in the making, the report indicates, it was the collapse of the housing bubble, fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages, that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008. Many mortgage lenders had set the bar so low that lenders simply took eager borrowers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay. Nearly one-quarter of all mortgages made in the first half of 2005 were interest-only loans. During the same year, 68% of “option ARM” loans originated by Countrywide and Washington Mutual had low or no-documentation requirements. These trends were not secret. As irresponsible lending, including predatory and fraudulent practices, became more prevalent, the Federal Reserve and other regulators and authorities heard warnings from many quarters. Yet the Federal Reserve neglected its mission “to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.” It failed to build the retaining wall before it was too late.

While many of these mortgages were kept on banks’ books, a significant amount of money came from global investors who clamored to put their cash into newly created mortgage-related securities. It appeared to financial institutions, investors, and regulators alike that risk had been conquered: the investors held highly rated securities they thought were sure to perform; the banks thought they had taken the riskiest loans off their books; and regulators saw firms making profits and borrowing costs reduced. But each step in the mortgage securitization pipeline depended on the next step to keep demand going.

From the speculators who flipped houses to the mortgage brokers who scouted the loans, to the lenders who issued the mortgages, to the financial firms that created the mortgage-backed securities, collateralized debt obligations (CDOs), CDOs squared, and synthetic CDOs: no one in this pipeline of toxic mortgages had enough skin in the game, said the Commission, chaired by Phil Angelides. They all believed they could off-load their risks on a moment’s notice to the next person in line. They were wrong. When borrowers stopped making mortgage payments, the losses—amplified by derivatives—rushed through the pipeline. As it turned out, these losses were concentrated in a set of systemically important financial institutions.

In the end, the system that created millions of mortgages so efficiently had proven to be difficult to unwind. Its complexity had erected barriers to modifying mortgages so families can stay in their homes and had created further uncertainty about the health of the housing market and financial institutions. Trillions of dollars in risky mortgages had become embedded throughout the financial system, as mortgage-related securities were packaged, repackaged, and sold to investors around the world. When the bubble burst, hundreds of billions of dollars in losses in mortgages and mortgage-related securities shook markets as well as financial institutions that had significant exposures to those mortgages and had borrowed heavily against them. The losses were magnified by derivatives such as synthetic securities.

The crisis, the report continues, reached seismic proportions in September 2008 with the failure of Lehman Brothers and the impending collapse of the insurance giant American International Group (AIG). Panic fanned by a lack of transparency of the balance sheets of major financial institutions, coupled with a tangle of interconnections among institutions perceived to be “too big to fail,” caused the credit markets to seize up. Trading ground to a halt. The stock market plummeted. The economy plunged into a deep recession.

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs, concludes the Commission. There was an explosion in risky subprime lending and consequently securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness, the report concludes; little meaningful action was taken to quell the threats in a timely manner.

For the Commission, the prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of the Commission’s examination is replete with evidence of other failures too: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans, and the risky assets all came home to roost. What resulted was panic. We had reaped what we had sown.

Trader Racks Up a Second Epic Gain

The Wall Street Journal’s Greg Zuckerman reported that hedge fund manager John Paulson personally netted more than $5 billion in profits in 2010—likely the largest one-year haul in investing history, trumping the nearly $4 billion he made with his “short” bets against subprime mortgages in 2007.

Mr. Paulson’s take, described by investors and people close to investment firm Paulson & Co., shows how profits continue to pile up for elite hedge-fund managers. Appaloosa Management founder David Tepper and Bridgewater Associates chief Ray Dalio each personally made between $2 billion and $3 billion last year, according to investors and people familiar with the situation. James Simons, founder of Renaissance Technologies LLC, also produced profits in that range, say investors in his firm.

 

By comparison, Goldman Sachs Group Inc., Wall Street’s most profitable investment bank, paid all of its 36,000 employees a total of $8.35 billion last year. James Gorman, chief executive of 76-year-old investment bank Morgan Stanley, is expected to receive compensation of less than $15 million for 2010.

Mr. Paulson and his fellow managers seldom take much of their profits in cash. Some of the profits are so-called paper gains, which reflect the rising value of their firms’ holdings, and could erode if those investments sour. Other gains come from selling investments, and most of those are rolled back into their funds.

Mr. Paulson and the other top managers made winning bets on commodities, emerging-market companies, bank shares and U.S. Treasury bonds, among other investments. These moves, along with profitable picks by other funds, are part of the reason the hedge-fund industry is back on its feet after a rough stretch. Assets managed by hedge funds have grown to a near-record $1.92 trillion, up 20% over the past year. Assets jumped almost $150 billion in the fourth quarter alone, the largest quarterly growth on record, according to Hedge Fund Research, Inc.

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