Exclusive: FBI suspects front running of Fannie, Freddie in swaps market

World) Southwest grounds pilots who landed jet at wrong airport http://tribune.com.pk/story/658968/southwest-grounds-pilots-who-landed-jet-at-wrong-airport/ … #USA #Missouri pic.twitter.com/PoZRj7MmZi GKP limits on buying trying to encourage sellers A 50k buy limit paying over 190p Exclusive: FBI suspects front running of Fannie, Freddie in swaps market By Richard Leong Tue Jan 14, 2014 12:35am EST REUTERS/Gary Cameron Fannie Mae headquarters is seen in Washington November 7, 2013. Credit: Reuters/Gary Cameron (Reuters) - Wall Street traders may be manipulating a key derivatives market and front running Fannie Mae and Freddie Mac, hurting the US-owned mortgage giants in the process, according to an FBI intelligence bulletin reviewed by Reuters. Using what Federal Bureau of Investigation agents described as "unsophisticated tradecraft," such as hand signals and special telephone ring tones, some traders are conspiring to rig rates on large orders submitted by Fannie Mae and Freddie Mac, or front running them in the interest rate swaps market, the document says. The FBI said in the bulletin that the information came from a former high-level employee at a U.S. bank and an employee at a Canadian Bank, plus interviews with other bank workers conducted in 2012 and 2013. The former high-level employee at the U.S. bank estimated the front running had resulted in profits of $50 million to $100 million for the bank, the FBI said. The bulletin did not name any of the traders or banks suspected of the activity, or indicate whether it may extend beyond the two banks. Front running occurs when someone with advance knowledge of another market participant's plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through. The FBI bulletin is the latest indication that officials are concerned that traders are manipulating financial markets. U.S. and European authorities have fined 10 banks around $6 billion for allegedly manipulating the London Interbank Offered Rate, or LIBOR, and other interest rate benchmarks, and authorities are actively investigating comparable behavior in the foreign exchange market. PHONES PROGRAMMED Current and former employees at the U.S. bank said that swap traders at the bank programmed their phones with different ring tones to identify when certain customers were calling, alerting traders that a large order was about to be placed, the FBI said. According to the bulletin, one employee at the U.S. bank and the Canadian bank employee reported that senior bankers at the two banks "planned and encouraged this behavior because it led to higher revenue for their respective parent banks." Disclosure of the suspected manipulation and front running came in an FBI intelligence bulletin that was distributed last week by the bureau's field office in Charlotte, North Carolina, to security officers at financial services firms. The FBI said it had "medium confidence" in the information, which the bulletin described as coming from "multiple corroborating sources with first-hand access." However, it said it had "low confidence" that law enforcement could prosecute suspected traders because the trades concerned seem to be completely legitimate. "It is standard policy for the FBI to share intelligence information with our private sector partners to help protect our economy, thwart crime, and prevent threats impacting American businesses," Shelley Lynch, spokeswoman for the FBI in Charlotte, said in a statement. She would not elaborate. Spokesmen for Fannie Mae and Freddie Mac did not immediately return calls for comment. Spokesmen for the U.S. Securities and Exchange Commission and the Commodities and Futures Trading Commission declined to comment. Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs), often submit large swap orders to hedge their huge holdings of home mortgages against swings in the bond market. The size of the orders provide an incentive for front running ahead of the trades. "GSEs frequently submit large interest-rate swap trades, making them easy targets for front running and lucrative targets for market manipulation," the FBI bulletin said. The interest rate swap market is huge with a notional value of about $400 trillion. In addition to GSEs, pension funds and insurers use interest rate swap as a hedging tool, while municipal governments sometimes enter into these contracts to limit their interest rate risk on the debt they issued. The FBI said its sources reported that voice brokers and senior traders at both the U.S. and Canadian banks encouraged traders to listen in on calls with the investors to gain transaction information "which could be used to facilitate front running or market manipulation." They would then use hand signals to inform other traders of the details of the planned swaps, allowing these traders to also benefit, employees at the banks said, according to the bulletin. (Reporting by Richard Leong; Additional reporting by Mark Hosenball, Sarah Lynch and Margaret Chadbourn in Washington; Editing by Dan Burns and Martin Howell) ======================================= Fannie, Freddie watchdog in probe of alleged Wall Street front running Tue, Jan 14 17:51 PM EST image By Aruna Viswanatha WASHINGTON (Reuters) - A U.S. government watchdog is involved in an investigation of whether bank traders manipulated markets and engaged in front running of orders from Fannie Mae and Freddie Mac in the interest-rate swaps market, according to an FBI intelligence bulletin reviewed by Reuters. Reuters reported on Monday that the FBI had warned regulators and security officers at financial services firms about potential abuse by traders with advance knowledge of large orders submitted by the U.S. government-owned mortgage giants. The bulletin, which did not provide the names of the banks or traders under suspicion, warned of "unsophisticated tradecraft" such as hand signals or special ring tones that traders were using to deliver information about impending orders. The FBI attributes some of the information to its own interviews with former and current employees at a U.S. bank and a Canadian bank, but also cites information from the inspector general's office of the Federal Housing Finance Agency. According to a footnote to the bulletin, the source for some of the information was an employee at the U.S. bank in an interview conducted by a special agent with the FHFA, the regulator of Fannie and Freddie. The memo does not make clear how active or advanced the FHFA involvement is. Officials at the inspector general's office were not available to comment. Representatives for FHFA, Fannie Mae and Freddie Mac declined to comment. Fannie and Freddie, which are government-sponsored enterprises, often do large swap trades to hedge their huge holdings of home mortgages against swings in the bond market. The size of the orders makes the GSEs lucrative targets for front running and market manipulation, the FBI bulletin said. Front running occurs when someone with advance knowledge of another market participant's plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through. The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information. For example, analysts and brokers who buy up shares in a company just before the brokerage is about to recommended the stock as a strong buy are practicing front running. Another example is a broker who buys himself 200 shares in a stock just before his or her brokerage plans to buy a large block of 400,000 shares. One former high-level employee at the U.S. bank estimated that the front running had resulted in profits of $50 million to $100 million for the bank, the FBI said. The FBI said it had "medium confidence" in the information. However, it also described the challenge of prosecuting such activity. "The FBI assumes law enforcement will have difficulty detecting and proving illegal activity perpetrated through the use of the identified tradecraft because the resulting trades appear completely legitimate," the bulletin said. The FHFA inspector general's office has authority to investigate crimes affecting the regulator's programs, including those that have an impact on Fannie and Freddie. Between April and September of last year, the office's investigations led to the indictment of 75 individuals, the conviction of 55 individuals and $104 million in criminal fines and restitution orders, according to a report to Congress on its activities. (Reporting by Aruna Viswanatha; additional reporting by Margaret Chadbourn; Editing by Karey Van Hall, Martin Howell and Dan Grebler) ===================== Investopedia explains 'Tailgating' When a broker or advisor buys or sells a security for a client(s) and then immediately makes the same transaction in his or her own account. This is not illegal like front running, but it is not looked upon favorably because the broker is mostly likely placing a trade for his or her own account based on what the client knows (like inside information). ================ Bank of America fourth-quarter profit rises as bank shakes off financial crisis Wed, Jan 15 17:10 PM EST By Peter Rudegeair and Anil D'Silva (Reuters) - Bank of America Corp said on Wednesday its quarterly profit surged by nearly $3 billion as revenue increased and mortgage losses plunged, the clearest sign yet the bank was shaking off the impact of the financial crisis. The results for the second largest U.S. bank were strong across most businesses, with consumer banking having its best quarter since 2011 and the wealth management and global banking divisions posting record revenues. "They're showing some positive momentum on growing their customer base and their revenues," said Jonathan Finger of Finger Interests Ltd, a Houston investment firm that owns shares in the bank. "Certainly the stock has been performing very well." Bank of America's shares rose 2.3 percent to $17.15 on Wednesday, after earlier rising to $17.42, the highest level since May 2010. The bank's shares rose 34.6 percent last year, outpacing the broader market, and have risen some 250 percent from their post-crisis nadir in December 2011. Bank of America has been groaning under the weight of bad mortgages it took on when it bought Countrywide Financial Corp in 2008, just before the housing crisis turned into a full-blown banking meltdown. The purchase has cost it more than $45 billion in write-downs and legal settlements. On Wednesday, the bank said losses in its mortgage unit fell to $1.1 billion in the fourth quarter from $3.7 billion in the same period in 2012. In the year-earlier quarter, the bank reached several settlements totaling more than $5 billion with the federal government and mortgage finance giant Fannie Mae over foreclosures and bad loans. Results in the most recent quarter were hurt by an industry-wide drop in mortgage refinancing activity, as rates have risen. The bank made $11.6 billion in home loans, down 49 percent from the third quarter. Not all of the lingering problems from the financial crisis are behind the bank. Litigation expenses jumped to $2.3 billion in the fourth quarter from $916 million in the same period a year earlier. Chief Financial Officer Bruce Thompson said the increase was tied to mortgage securities litigation, but declined to elaborate. Even so, the company is in a much stronger position than it was during the financial crisis, when it took two bailouts from the federal government. A measure of its capital that regulators look at, known as the Basel III capital ratio, rose to 9.96 percent from 9.25 percent in the fourth quarter of 2012, and the bank said it could last 38 months without having to tap the debt markets again. Overall, fourth-quarter net income for common shareholders rose to $3.18 billion, or 29 cents per share, from $367 million, or 3 cents per share, in the same quarter of 2012, when profit was dented by about $5 billion in mortgage-related charges. Revenues increased 14 percent to $22.3 billion. Analysts estimated earnings of 26 cents per share, according to Thomson Reuters I/B/E/S. "There's a company emerging from what was a pile of trouble," said Nancy Bush, a banking analyst at NAB Research LLC. Other banks are doing well now, too. JPMorgan Chase & Co and Wells Fargo & Co both reported better-than-expected quarterly earnings on Tuesday. Bank of America's improvement has been helping one investor in particular: Warren Buffett, whose Berkshire Hathaway Inc bought $5 billion of preferred shares and warrants from the bank in 2011, when investors were panicking about its mortgage holdings. Buffett has said he has no plans to exercise the warrants until near their expiration date in 2021; if he exercised them at current prices, he could sell the shares for an immediate $7 billion profit. LITTLE TERRIER Bank of America's chief executive officer, Brian Moynihan, has focused on cutting costs at the bank since he took the top job in 2010 and announced plans in 2011 to save the bank $8 billion per year. The bank is making progress toward his goals - operating costs in the fourth quarter fell by 6 percent to $17.3 billion. "If you think back three years when he got there, nobody believed that he could do what he's done," said Bush. "He's like a little terrier. When you set him on a task, he's going to keep digging and digging till he finds the bone." Credit costs have also been falling. The bank set aside $336 million to cover bad loans in the quarter, compared with $2.2 billion a year earlier. It released $1.2 billion from reserves to cover bad loans, compared with $900 million a year earlier and $1.4 billion in the third quarter. As the bank's executives get other issues under control, Moynihan said last April, boosting revenue has to be the main focus. Those efforts may be paying off. For the fourth quarter, Bank of America's global wealth and investment management business posted a 7 percent increase in revenue, to $4.5 billion, driven by higher fee income and customers depositing more funds into their accounts. Net income rose 35 percent to a record $777 million. Revenue also rose in investment banking, where fees increased 9 percent to $1.7 billion as companies around the world took advantage of record high stock prices to raise equity capital. Bank of America executives were optimistic the bank would benefit as dealmaking activity and debt and equity underwriting increased. "There's not one piece we look at within the pipelines that we don't feel good about," Thompson said on the call. Revenue for global banking as a whole rose 9 percent to $4.31 billion, but net income dropped 9 percent to $1.27 billion as the company set aside more funds to cover possible losses on commercial loans. Equity trading revenue jumped 27 percent to $904 million from a year earlier, and bond trading revenue rose 16 percent to $2.08 billion, excluding accounting adjustments linked to changes in the value of the company's debt. In bond trading, stronger results in credit and mortgage products offset weakness in rates and commodities. (Reporting by Peter Rudegeair in New York and Anil D'Silva in Bangalore; Editing by Dan Wilchins, Ted Kerr, Jeffrey Benkoe and Leslie Adler) ======================