UK in recession, again.

UK's Economy Shrinks Further

UK’s economy has actually shrunk by 0.3% in the first quarter of 2012, as opposed to 0.2% announced by Office of National Statistics (ONS) earlier this year. The primary reason behind the revision is the bigger reduction in construction output by 4.8%.

In the last quarter of 2011 the economy shrank by 0.3%, it has now shrunk in two consecutive quarters, in other words UK is officially in recession. The economy could potentially go into another recession in the second quarter of 2012 and the Queen’s golden jubilee celebrations scheduled in this period can potentially make matters worse.

Interestingly, many economies of the Eurozone, which is currently going through a debt crisis and a looming fear of Greece’s exit from the single currency, are not going through any recession but UK, which is not a part of the Eurozone, has gone back into recession again.

What now?

The government can further increase its spending. It has already increased its expenditure by 1.6% on health and defense.

The Monetary Policy Committee of the Bank of England can sanction Quantitative Easing (QE), i.e. inject cash into the economy. It has given £325bn under the QE program and more are expected. International financial institutions such as IMF have also advised the government to give the economy another boost through QE.

The interest rate has been lowered to a record 0.5% but IMF has suggested further reduction in rates.

Continue with the austerity program --- get rid of the budget deficit. This is very tricky because austerity can lead to further recessions. There have been growing calls from leading economists around the world calling on governments to focus on growth when most European nations are driving towards reducing their expenditures.   

Your comments and feedback are highly appreciated
Sarfaraz A.K.
sarfaraz@when.com
Half Bridge Business News

Apple's CEO Tim Cook refuses $75 million dividend

Apple's Boss refuses to take his share of dividend 

Apple has, finally, decided to give a dividend of $2.65 per share to the shareholders, first time after approximately 17 years. The new CEO of Apple, Mr. Tim Cook is considered as the world’s highest paid executive with annual income exceeding $300 million.  A recent regulatory filing with the Securities and Exchange Commission (SEC) has revealed that he will not take his share of dividends that comes from a million shares.

The report filed this Thursday stated that “At Mr. Cook's request, none of his restricted stock units will participate in dividend equivalents ……….. Mr. Cook will forego approximately $75 million in dividend equivalent value”. The report did not give any reason as to why Cook has taken this decision.

If Mr. Cook is earning $300mn, then $75mn will be equivalent to his three months’ salary, so it is a lot of money, even for the world’s richest CEO. Last year, he earned approximately $378mn that primarily came from the million shares that he received. His base salary is $900,000, exactly $899,999 more than his predecessor Steve Jobs’s.

Mr. Cook had managed the company during Steve Jobs’s illness. He was awarded 1 million in restricted stock units as part of his compensation package, half of which are redeemable by  2016 while other half by 2021.

  

Currently, the company’s shares hover around $562 per share making the business worth an impressive $525bn. Earlier this year, the share prices had gone up to $644 per share making Apple the most valuable firm of the world, although for a small period of time.

Apple under Tim Cook.

It was often rumored that if Steve Jobs leaves Apple, then the company will not be able to survive or at least remain as competitive and innovative. Under Mr. Cook, the business has surpassed all expectations.

Since Tim Cook became CEO, Apple has:

1. Increased its market worth by about $140bn
2. Earned about $31bn in profits
3. Sold 89 million iPhones
4. Sold 38 million iPads
5. Got 97% approval rating from 280,000 Apple employees.
6. According to Bill Shope, a research analyst at Goldman Sachs, “By any quantitative measure, so far his performance is phenomenal,” 

Problems with Facebook's IPO

Facebook’s shares have fallen again as concerns start to emerge about information disclosed to investors prior to the IPO.

Facebook’s shares have fallen again by 9% as regulators suspect that some investors might have been treated favorably during the disclosure process. The shares closed at $31 on Tuesday, more than 18% less than the offering price. The Securities and Exchange Commission (SEC) and the Financial Industries Regulatory Authority (FINRA) have decided to review the process.

SEC Chairwoman Mary Schapiro, while speaking with the press said, “There is a lot of reason to have confidence in our markets and the integrity of how they operate, but there are issues we need to look at specifically with regard to Facebook,”

The lead underwriter of the IPO Morgan Stanley (MS) maintains that the IPO was "in compliance with all applicable regulations". Pen Pendleton, spokesperson for MS, wrote that the company “followed the same procedures for the Facebook offering that it follows for all IPOs,”

Analysts have long suspected Wall Street of extending unethical and illegal support to big investors. A shocking news that was revealed earlier this week has all but confirmed Wall Street’s questionable practices. Morgan Stanley (MS) had reduced Facebook’s future revenues forecast, just days before the IPO, a crucial piece of information that failed to reach the small investors, but Reuters has reported that the information was passed on to MS’s major clients. Other underwriters of the IPO, Goldman Sachs and JPMorgan Chase had also reduced the company’s future revenue expectations.  

In short, 'institutional investors received valuable information that retail investors did not', but this is not a surprise, it happens every day and in each IPO, all the small investors are aware of this situation. Most consider it as one of the primary issues facing this industry, not just in U.S. but around the world.

Overvalued 

There are literally dozens of analysts who are convinced that “Facebook is overvalued”. Thomson Reuters Starmine had predicted 10.8% annual growth rate for Facebook. The figure is not an exaggeration neither an understatement as this is almost exactly similar to the average annual growth rate of technology sector. At 10.8%, Facebook’s share price comes down to just $9.59 per share.

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Facebook, Morgan Stanley and Nasdaq are all pulled together in this scandal, but Nasdaq’s executives and its shareholders aren’t worried about the situation. On its exchange operators annual meeting, none of the top executives received any questions from the shareholders regarding its handling of the Facebook IPO. Nasdaq’s CEO Bob Greifeld was quoted as saying "While clearly we had mistakes in the Facebook listing, we still want to highlight the fact that it was the largest IPO ever and on Friday of last week, we processed over 570 million shares,"

On the other hand Richard Laermer, CEO of ThankBank, who has invested a considerable sum in Facebook’s IPO believes that the investors will turn out to be winners in the long run. He said, "There's no way I will ever lose money off a stock from a network with 900 million users. It's not physically possible,"

Worst IPO of the decade 

(Updated 26th May, 2012)

After five days of trading, Facebook's IPO is now, according to Bloomberg, the "worst IPO of the decade". Furthermore, the current forecast presents tougher times ahead. Bloomberg has compared the current IPO with some previous failed IPOs, including that of MF Global which holds the spot for eighth largest U.S. bankruptcy. 

Interestingly, 'problems with the IPO' started even before the IPO had officially begun. Apparently, NASDAQ's had some issues with their software which delayed the IPO by about half an hour. This caused some confusion among brokers who weren't sure whether their clients orders were processed.   

The table below shows the percentage increase or decrease in share prices from the IPO price in five days of trading. Facebook came down from $38 to $33.03

•  Apple                 142% 
•  Microsoft             31% 
•  Yahoo                125% 
•  Amazon                 -7% 
•  eBay                   150% 
•  Google                  25% 
•  LinkedIn              110% 
•  Facebook             -13%  

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Sarfaraz A.K.
sarfaraz@when.com
Half Bridge Business News

Yahoo sells half of its Alibaba stakes

Internet Company Yahoo Inc has decided to sell half of its stake in the Chinese e-commerce group Alibaba for $7.1 billion back to Alibaba. Yahoo had purchased 40% stake in Alibaba in 2005, half of which (20%) is being sold back to the company. Alibaba will pay $6.3 billion in cash and remaining in preference shares. Most of the sale proceeds will be transferred to the shareholders.

Alibaba is a major player in the Chinese internet market, which currently holds the number one spot as the ‘world’s biggest internet bazaar’. Its strength comes from its Chinese online marketplace “Taobao” which is host to approximately 90% of Chinese consumer-to-consumer online trades and 53% of business-to-consumer trades.

Yahoo had purchased 40% stakes in Alibaba for $1bn in 2005. According to recent estimates, the value of the stake is currently around $14bn. Half of the 40% shares are being sold now while the remaining will be sold in different stages in subsequent years. Alibaba’s founder and CEO Jack Ma was quoted as saying that the deal “enables Alibaba to take our business to the next level as a public company in the future.”

Analysts are predicting an IPO of Alibaba’s shares in the future, by December 2015. If this were to happen then either

i)                 Alibaba will buy back further 10% of its shares from Yahoo and will go to the stock market for IPO or

ii)                Alibaba will not buy back anymore shares and will allow Yahoo to conduct an IPO.

It has been a rough couple of years for Yahoo as it faces severe competition from Google and Facebook. Its revenues have plummeted as the company has replaced one CEO after another. Almost exactly four years ago, in May 2008, Yahoo’s shares were soaring at $33 per share and Microsoft had shown interest in buying the business for $47.5bn, an offer which Yahoo declined. The board might regret their decision now as the company shares trade around $15 per share as it receives criticism from shareholders.

Earlier this month, Yahoo CEO Scott Thompson was forced to resign when it was revealed that he had mentioned a ‘fake degree’ in his official CV.

Your comments and feedback are always appreciated.
Sarfaraz A.K.
sarfaraz@when.com
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US Colombia Free Trade Agreement

US -- Colombia Trade Promotion Agreement. 

U.S. and Colombia have finally implemented the free trade agreement signed more than five years ago under Bush administration. Colombia is one of the strongest US all in the region but has a poor track record of dealing with trade unions. This was the primary reason which caused the delay. Its relationships with trade unions haven’t improved but the White House administration have pushed the lawmakers towards implementation of the agreement.

Under the free trade agreement, both countries can trade goods freely, without any kind of import duties or taxes. US exports can potentially increase to $1.1bn while Colombian exports to US can reach up to approximately $490mn.

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Crtiticism

Critics have voiced their concerns against the free trade agreements from both sides.

From U.S: Democratic members from Congress have argued that Colombia hasn't stopped its violent practices against trade union leaders and its members therefore labor is still exploited in the country. The agreement should not be implemented until Colombia can prove to the United States that it has taken all necessary steps to stop violence against trade unions.

From Colombia: Some Colombian trade unions have opposed the agreement saying that the country does not produce enough goods, therefore the deal will only benefit the US. If all import tariffs are removed then the demand for US goods will increase, which is bad news for Columbian industry.

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Advantage U.S. 

[Source: Office of the U.S. Trade Representative (USTR)]

1.  The free trade agreement can boost U.S. exports to Colombia by $1.1bn, create hundreds of jobs in this sector and will eventually increase the GDP by $2.5bn.
2.  The U.S service industry will have access to the $116bn Colombian service market.
3. Key US exports such as construction equipment, aircraft and parts, autoparts, I.T. equipment etc, will get immediate duty free access to Colombian markets.
4.  Other remaining tariffs will be phased out over a period of 10 years.
5. Some of the U.S. goods such as consumer goods, building products, transportation equipment, paper products, had to pay tariffs between 12.5% and 14.6%. Elimination of import duties will substantially reduce the prices of these goods which will increase their demand in Colombia significantly.

Your comments and feedback are always appreciated.
Sarfaraz A.K.
sarfaraz@when.com
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Spain's Economic Woes

Moody’s Investor Service has recently downgraded the credit ratings of sixteen Spanish banks due to

a)      Recession in the country and weak economic forecast

b)      Increase in the number of loan defaults

c)      Reduced ability of the government to support debtors

d)      Little access to funding sources due to Eurozone debt crisis

Out of the sixteen, the outlook for ten banks remains negative while the remaining banks outlook will be under review. The banks that have been downgraded include two of the largest Spanish banks (Santander and BBVA). Banks that have been downgraded to ‘A3’ are

1.      Banco Santander SA (Santander’s UK based subsidiary Santander UK PLC has also been downgraded.)

2.      Banco Bilbao Vizcaya Argentaria (BBVA) SA.

3.      Banco Espanol de Credito

4.      Unicaja Banco SA

5.      Banco Popular Espanol

(Note: Santander UK is downgraded to A2. Spanish government’s rating is A3)

According to Moody’s official statement, "The Spanish economy has fallen back into recession in first-quarter 2012, and Moody's does not expect conditions to improve during 2012. Moreover, the real-estate crisis that began in 2008 is ongoing, and unemployment has risen to very high levels."

Unemployment

The reasons cited are neither exaggerated nor an overstatement. Spain has the highest unemployment rate of 24.1% in the entire 17 member Eurozone bloc, higher than Greece. Its future outlook is even worse as its employment rate is expected to touch 25% mark in 2013, which practically means that every 1 in 4^th person in the labour force will be unemployed. This also translates into decrease in income taxes and increase in unemployment benefits.

Interest Rates

As Spain’s economic condition worsens, the interest rates are increasing which makes borrowing more expensive. When Germans borrow money for 10 years, then they pay only 1.75% interest rate while Spain is offering about 6% on the 10 year note but still finding it difficult to get any funding.

Who is responsible?

In short, the general public and the government, both are responsible for the crisis.

When Euro was launched in Spain in 1999, the interest rates had fallen to record lows, borrowing had become extremely cheap. Naturally, the Spanish banks and financial institutions, property dealers and developers and the general public, everyone (except the government) went on a borrowing spree. Most economist agree that timely government intervention at that time could have prevented the current crisis. 

Once their liquidity was ballooned, they went on a shopping spree and invested billions in Spanish property. The increase in demand for property pushed up the prices. Although property prices were increasing in other European countries as well, (e.g. UK) but Spain’s price push was approximately three times more than UK’s.

Eventually the bubble burst and prices started falling. The construction industry was the first to fall with thousands of construction workers losing their jobs. Home owners who had taken out mortgage on their property were left perplexed --- the value of their property was falling --- interest rate wasn’t.

Surprisingly, it was like the beginning of 2008 global financial crisis all over again --- although this time the epicenter is Spain and it is not expected to go global, at least not in the near future. According to EU and IMF’s estimate, if Spain sticks to its plans and delivers on its promises then all of this should be over within the next three to five years.

Your comments and feedback are always appreciated.
Sarfaraz A.K.sarfaraz@when.com
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Facebook increases shares

Facebook Increases Share Price and Number of Shares

On 15th May, Facebook announced that it would increase its share price from $28-$35 to $34-$38 due to strong demand. A day later, on16th May, Facebbok announced that it will now sell 25% more shares. The company is currently spending thousands on a massive media campaign to promote its IPO, and it seems to be working.

The earlier announcement of increase in share prices had increased the company's potential worth to more than $100bn, bigger than other corporate giants such as Ford and Disney. It has 900 million global users and has reported a profit of $1bn in 2011.

The current increase in the number of shares means that it will now sell 421 million shares which can raise about  $18bn. 

Despite the billion in profits, some investors have serious doubts about the company's ability to sustain the returns in the long run. The simple fact is that Facebook was able to make just 1% in profits compared to its current market value of $100bn. Others have also expressed  doubts over Facebook's ability to increase its revenues when its primary utility is providing social networking updates. The business also reported a decrease in revenue for the previous quarter. Furthermore, General Motors decision to drop advertising on Facebook has also put a question mark over Facebook's advertising power.

 

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The company has now implemented a new growth strategy and wishes to tap into the market of mobile devices and tablet computers. Facebook currently plans to purchase Instagram, a mobile photo sharing app for $1bn. 

IPO Predictions

Analysts are expecting the share prices to rise even further on the first day, which might continue for a couple of more day, then a slight dip, a dip further until the market price mechanisms automatically adjusts the price in a few months. 

If things go extremely well for Facebook, then it can sell all the shares at the highest price of $38 per share which will earn it a bronze medal in U.S. IPO history, behind massive successes of Visa and GM. Furthermore, it can also introduce 60 million excess shares into the market. 

All current Facebook shareholders have "B" shares which entitle them to 10 votes per share. The new shareholders will have "A" shares which would entitle them to just 1 vote per share.

Your comments and feedback are always appreciated.
Sarfaraz A.K.
sarfaraz@when.com
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Yahoo CEO resigns

The Chief Executive of Yahoo Scott Thompson has quit his job after he was accused of having a fake accounting and computer science degree, which was also included in his CV and Yahoo’s financial reports. He is being replaced by Ross Levinsohn who is currently Yahoo’s global media head. Levinsohn will take the CEO’s responsibility on a temporary basis until the board of directors decides on the new CEO.

This is another bad news coming from the company headquarters in Sunnyvale after it announced, a month ago, that it was going to lay-off 2000 employees. Yahoo has been facing severe competition from Google and Facebook and has witness dwindling profits in the extremely competitive environment. After joining Yahoo, Thompson had adopted a severe cost cutting strategy that included the lay-offs and several management changes. He was able to increase the company’s revenues after a gap of nearly three years.  

Prior to joining Yahoo, Thompson was the President of online payments at PayPal. He joined Yahoo in January and was the third CEO in approximately three years. He replaced Carol Bartz who was fired in September, 2011.

He had earlier claimed that he did not possess the accounting and computer science degree but it was his head hunting firm, Heidrick and Struggles’s fault that had included the information in his CV when he joined PayPal in 2000. Heidrick and Struggles had denied the allegation stating that the degree in question was a part of the CV that Thompson had submitted to the firm.

Daniel Loeb, a hedge fund manager and Yahoo’s shareholder, discovered the chief’s fake degree and launched a campaign for his removal. Loeb, who heads the Third Point investment fund which owns 5.8% of the company’s shares, also notified the Securities and Exchange Commission of Thompson’s embellishment.

Yahoo has already officially stated that its CEO did not have a computer science degree.

Following the news, Yahoo is set to change its executives and some new faces are going to join the board of directors. Leob had suggested four new names, including himself, out of which Leob, Michael J Wolf and Harry Wilson will join the board. Five existing board members, who were due to leave in the current year’s annual general meeting will also resign by Wednesday (16^th May).

In its recent statement to the press, the company announced, “The board is pleased to announce these changes and the settlement with Third Point, and is confident that they will serve the best interests of our shareholders …… “

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Sarfaraz A.K.
sarfaraz@when.com
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Can Greece leave the Eurozone?

Countries in the Eurozone have the democratic right to leave, even if it is not in the larger interest of Europe.  A Greek exit from the Eurozone is therefore “possible”. This was recently stated by Luc Coene, European Central Bank’s (ECB) governing council member. On the other hand, Mario Draghi, president of the ECB has refused to comment on the possibility of Greece leaving the euro. The economic repercussions, he believes, would be far worse than anyone can imagine. The bank has already spent approximately $51bn in purchasing its bonds to support the country.

  

Earlier this year, the central bank had announced that it had no specific plan or set of plans in case if Greece decides to exit the Eurozone. The fallout in that case would be so unpredictable that it is not possible to plan ahead; rather the ECB would deal with the situation on ad-hoc basis. 

Coene, the central bank governor of Belgium has expressed frustration over Athens’s inconclusive elections as euro fell to three month lowest against dollar on Thursday (10^th May). The ECB has demanded economic reforms from Greece in return for bailout but the current indecisive result creates more problems. President Karolos Papoulias is holding meetings with all other party heads to form a successful unity government.

Mr Coene believes that in case of decrease or absence of international financial support, ECB would be forced to end the emergency liquidity and therefore Greece’s banks might become bankrupt. Some economists have argued that ECB would continue to support Greek banks even if there wasn’t any international support. On the contrary, ECB officials have stated that the ECB liquidity funding would automatically stop if a Greek bank were to go insolvent.

He suggested that the ECB sponsored “firewalls” will be able to sustain any short term damages arising out of the “divorce”. 

Patrick Honohan, another ECB governing council member believes that a Greek exit can be “managed” but it would be extremely damaging for the reputation of ECB. 

Almost all the senior ECB officials have, at one time or another, publicly expressed that they are in favour of Greece keeping itself a part of the union. In the long run, this will be beneficial for both, Greece and Europe. Mr Coene believes that whether or not Greece will remain or exit the euro was a political question which needs to be answered by politicians, not bankers. He is quoted as saying, “Divorce is never smooth …… an amicable divorce -- if that was ever needed -- would be possible but I would still regret it."

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Sarfaraz A.K.

sarfaraz@when.com

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What JPMorgan wont tell you

JPMorgan has been in all the business headlines owing to its shocking $2bn trading loss. This has lead to a revival of debates questioning whether these ‘megabanks’ are actually beneficial to the society. The banks believe that they bring economies of scale, therefore higher efficiency. The critics have argued against the high levels of leverage maintained by these financial institutions and the risks associated with it.

The current crisis has also revealed that very little has changed following the 2008 global financial crisis. Lessons that should have been learned have been completely ignored. The recent loss is associated with trading credit derivatives, almost similar investments were made four years ago which started the global recession.

Anat Admati, Professor of Finance and Economics at Stanford Graduate School of Business, asked some tough questions about one and a half year ago, whose relevance has all the more improved in the wake of the recent developments.

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The questions, with the relevant link to the main article are posted below.

(i) Is "too big" the same as "too big to fail?"

(ii) Do capital requirements force banks to "set capital aside for a rainy day" and not use it to help the economy grow?

(iii) Are banks different than non-banks in that high leverage is essential to banks' ability to function?

(iv) Would terrible things happen if capital requirements were to increase dramatically?

The first order of business is to clear the fog and focus on the right things. I will try to explain. With the basics in place, answers will begin to emerge, or at least the right questions to ask.

By the way, I answer an emphatic NO to each of the above questions.

Admati, A. (2010). What Jamie Dimon Won’t Tell You: His Big Bank Would Be Dangerously Leveraged. The Baseline Scenario. [Onine]

Link: Click Here. (Opens in New Window)

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Sarfaraz A.K.

sarfaraz@when.com

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Chinese Banks in US

The U.S. Federal Reserve has given approval to

1. The largest Chinese Bank, Industrial and Commerce Bank of China (ICBC) to purchase the New York based The Bank of East Asia U.S.A. 
2. The Agricultural Bank of China to open a branch in New York City.
3. The Bank of China to open its branch in Chicago. The bank already has branches in New York and Los Angeles.

The Government of China is one of the primary shareholders in all of these banks.

ICBC, one of the biggest global bank, has assets exceeding $2.5 trillion, approximately 70% of which are owned by the government. According to the agreement ICBC, along with China Investment Corporation and Huijin Investment Ltd, will acquire 80% of The Bank of East Asia which has 13 branches and deposits of approximately $620 million. The three companies will jointly operate as the holding company for The Bank of East Asia.

China Investment Corporation is an investment company that is owned and operated by the Chinese government. The business makes investments from China’s monumental foreign exchange reserves. It also acts as a parent company for other smaller firms including Huijin Investment Ltd.

The Agricultural Bank of China is the fourth largest Chinese bank with $1.85 trillion of assets. The Chinese government owns 83% of this bank

The Bank of China is the third largest Chinese bank and is approximately 70% government owned.

In return, the Chinese government has allowed foreign firms greater access to Chinese financial institutions.

The concerned banks had applied nearly two years ago to Federal Reserve regarding purchase of U.S. bank and opening up new branches.  The United States and China have been conducting the annual Strategic and Economic Dialogue talks to improve bilateral relations. The meetings that concluded on Friday (11^th May) were held in Beijing and included Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.  

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Sarfaraz A.K.

sarfaraz@when.com

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JPMorgan reports $2bn trading loss

JP-Morgan Delivers a Shocker and Voldemort was responsible 

The biggest US bank, JPMorgan has reported a trading loss of at least $2bn on Thursday. The CEO Mr. Jamie Dimon said in the press conference arranged after the markets closure, “errors, sloppiness and bad judgment” were committed by the bank that caused the monumental loss, which “could get worse”. The bank had adopted a risky hedging strategy which could take the total loss to $3bn. The strategies adopted have been "riskier, more volatile and less effective" than originally thought.

Net losses, after accounting for all other inflows and outflows, are expected to cross $800 million by the end of the second quarter. 

The news of the loss caused JPMorgan’s shares to slide by 9%. Effects were also felt by other banks in US and Europe with Bank of America’s shares falling by 2.4%, Barclays 3.5% and Deutsche Bank 1.6%.

JPMorgan’s business unit called Chief Investment Office (CIO) is responsible for hedging the bank’s portfolios of individual holdings. Fluctuations in prices can decrease the value of an asset which can be very costly to a business or individual. To reduce this risk, banks and other financial institutions practice “hedging” whereby the cost of an asset is mutually agreed and maintained by two or more parties to eliminate the risk of any future price fluctuations.

JPMorgan’s CIO unit was responsible for hedging the risks. Mr. Bruno Michel Iksil, a JPMorgan trader based in London who was responsible for making bets as part of his hedging strategy, which is often practiced by the bank, but this time it failed. Mr. Iksil is a well known within the trading circles and is often referred to as the “London Whale” and “Voldemort”.

The Bank is not expected to report any profit, or breakeven, in the first quarter of 2012.  It is not only embarrassing for JPMorgan but the entire banking industry. It was one of the few banks that had enjoyed consumer confidence and was able to rise up from the 2008 global recession more quickly than its rivals. Potential investors and regulatory authorities might think that if JPMorgan could do this, then what about other financial institutions? The news is bound to invite even tighter financial rules.

According to the New York Times, the Federal Reserve and Financial Services Authority, UK’s banking regulator, came to knew about the trading losses a month ago and were having discussions with the concerned bank.

Impact on Volcker Rule

The Volcker rule is one of the primary provisions of the 2010 Wall Street Reform law originally proposed and named after the former Federal Reserve chairman Paul Volcker. The provision aims to put restrictions on banks on making speculative and risky investments that might not benefit the customers or the shareholders. There have been news about banks and other financial institutions lobbying to soften the clauses of Volcker rule but the current events will put an end to such activities. The law is currently being finalized and will be implemented from the third week of July, 2012.

JPMorgan has earlier claimed that tougher financial regulations come with a hefty price tag for the banks and increase their costs up to $600 million. The bank has often publicly criticized the Volcker rule.

Rep. Barney Frank, one of the authors of the rule has said, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today”.

All eyes on JPMorgan

The shocking news of the trading loss has attracted attention not only of the global media but regulators, analysts, economic pundits, and above all the Securities and Exchange Commission. Its chief Mary Schapiro has said, “I think it's safe to say that all the regulators are focused on this."

Ratings Downgrade

Fitch, one of the leading credit rating agencies, have downgraded JPMorgan's long term and short term debt.  The ratings agency believes that although the loss is "manageable" but the bank will face some short term liquidity problems. 

Standard and Poor have revised the bank's ratings to "negative", indicating a possible decline in ratings in future.

Your comments and feedback are always appreciated.

Sarfaraz A.K.

sarfaraz@when.com

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