Bitcoin’s ‘blockchain’ tech may transform banking

New York, United States—The technology that drives the shadowy cryptocurrency bitcoin is drawing interest from the established banking industry, which sees a potential to revolutionize the sector.

Although bitcoin and related virtual currencies are limited to a small set of transactions and are often associated with the underground economy, the so-called blockchain technology is gaining currency in the financial world.

A blockchain is essentially a shared, encrypted “ledger” that cannot be manipulated, offering promise for secure transactions that allow anyone to get an accurate accounting of money, property or other assets.

“The blockchain, which is the technology behind the encryption and e-certification, that is a technology which might very well be very useful,” said Jamie Dimon, chairman and chief executive of JPMorgan Chase at a conference earlier this year.

Leah Gerstner, a vice president for public affairs at American Express, said the financial group made its first investment in a digital currency company called Abra “as a way to get a better understanding of blockchain technology and explore its potential.”

Gerstner told AFP that “we believe blockchain technology is playing an important role.”

The use of blockchain began in 2009 with the introduction of bitcoin and other virtual currencies that are generated by complex chains of interactions among a huge network of computers around the planet, and are not backed by any government or central bank, unlike traditional currencies.

The blockchain offers potential to the traditional finance sector due to its ease of transaction with verification from any point on the platform.

“You can imagine a number of potential use cases for this technology in financial services across both business-to-consumer and business-to-business transactions—from international money transfers to stored value,” Gerstner said.

The Linux Foundation recently announced a new collaborative “Open Ledger” project to advance blockchain technology, teaming with tech firms such as IBM and Intel, stock exchanges and major banks including Wells Fargo and Mitsubishi UFJ.

“Distributed ledgers are poised to transform a wide range of industries” including banking and shipping, among others, said Jim Zemlin, executive director at The Linux Foundation.

Transparency, lower costs
Blockchain technology could lower the cost for many kinds of consumer cash transfers that now are handled by companies like Western Union and MoneyGram.

The banking industry could save $15 billion to $20 billion in transaction costs for international payments by using the technology, according to Banco Santander, which is working on its own virtual currency.

A consortium of global banks including Morgan Stanley, HSBC, UBS, Credit Suisse, Barclays, Societe Generale and Commerzbank are working with the finance tech startup R3 to use blockchain technology for a wide range of applications.

Others moving forward include Bank of America, Citigroup and Goldman Sachs, which is working on its own virtual currency that could cut out intermediaries for settlements between financial institutions.

The technology could help facilitate instantaneous, secure financial transfers which now sometimes can take days when moving internationally, according to blockchain backers.

“This would change the way settlements of securities are traditionally carried out,” said Prableen Bajpai, founding director of the India-based research firm FinFix.

The use of a cryptographic currency such as the one being developed by Goldman Sachs “facilitates rapid, secure and confirmed transactions via network, thereby eliminating the need for a third party,” Bajpai said.

“The results are extremely timely and efficient settlements.”

Another advantage is that transactions could be made without revealing identities and other information—which could be important for institutions trying to keep personal data secure from hackers.

But a number of issues need to be resolved before virtual currencies and blockchain technology become mainstream.

The anonymity of the transactions is something that concerns regulators seeking to crack down on money laundering, and financing of criminal or terrorist activity.

New York state, for example, is pressing to require the identification of those engaging in financial transactions.

Nonetheless, many see blockchain technology as the wave of the future.

“Ultimately, blockchain could become a way for those around the world who don’t have a bank account to make purchases on the Internet. And that could affect the banks, as well as credit card companies like American Express, MasterCard, and Visa,” says Ed Yardeni at Yardeni Research.

“Blockchain still needs to show that it can grow to the size of Visa’s or MasterCard’s networks. But there are certainly many smart folks throwing a lot of money at the technology, which may one day prove disruptive.”

source: business.inquirer.net

JP Morgan, gov’t settle all issues

WASHINGTON DC, USA- The Justice Department and JPMorgan Chase & Co. have settled all issues and could sign a $13 billion agreement as early as Tuesday that would be the largest settlement ever reached between the government and a corporation, a person familiar with the negotiations says.

The deal is the latest chapter in the bursting of the housing bubble in 2007, when JPMorgan and others among the largest U.S. banks sold low-quality, mortgage-backed securities that collapsed in value. Investors were left with billions of dollars in losses.

In blunt criticism of those banks, the Justice Department’s No. 2 official said Monday that too many financial institutions had failed in their duty to ensure that their businesses were run cleanly.

Recounting the conduct that JPMorgan and other banks engaged in, Deputy Attorney General James Cole told the American Bankers Association that too many supervisors incentivized excessive risk taking, knowing that risky products “could be unloaded down the road, … leaving someone else to deal with the consequences.”

According to the person familiar with the talks between JPMorgan and the Justice Department, the final issue in the settlement revolved around the $4 billion to compensate consumers. Some $1.5 billion will be a write-down to reduce the principal of homeowner loans; $300 million will enable homeowners to pay less now on their mortgages; and the remainder of the $4 billion will go toward reducing mortgage interest rates, originating new loans and helping revive blighted properties in some of the hardest hit areas of the housing crisis, such as Detroit. An independent monitor will be appointed to oversee the assistance to homeowners.

The person familiar with the negotiations spoke on condition of anonymity because the deal had not been finalized. When it is signed, it will eclipse the record $4 billion levied on oil giant BP in January over the worst offshore oil spill in U.S. history.

Another person familiar with the talks, also speaking only on condition of anonymity, said the two sides were “very close” to a final agreement.

Still to come is a decision on whether the Justice Department will file criminal charges against JPMorgan. An investigation is under way by the U.S. Attorney’s office in Sacramento, California.

The nation’s biggest bank will pay more than $6 billion to compensate investors, pay $4 billion to help struggling homeowners and pay the remainder as a fine.

JPMorgan has said most of its mortgage-backed securities came from Bear Stearns Cos. and Washington Mutual Inc., troubled companies that JPMorgan acquired in 2008.

As part of the $6 billion to investors, $4 billion will resolve government claims that JPMorgan misled mortgage finance giants Fannie Mae and Freddie Mac about risky mortgage securities the bank sold them before the housing market crashed. That part of the deal was announced Oct. 25. Fannie and Freddie were bailed out by the government during the crisis and are under federal control.

The Justice Department and the banks reached a tentative settlement in mid-October on the $13 billion, but the negotiations hit a stumbling block that has now been resolved. As part of any settlement, JPMorgan wanted to be able to collect money from a receivership involving Washington Mutual Inc., the biggest U.S. savings and loan. The S&L failed and was purchased by JPMorgan. The Federal Deposit Insurance Corp., which maintains stability and public confidence in the banking system, said JPMorgan should be responsible for any liabilities regarding the Washington Mutual acquisition. Under the arrangement, JPMorgan cannot seek reimbursement from the FDIC for any part of the deal, the person close to the talks said Monday night.

The $13 billion JPMorgan settlement amount is only about half of its record 2012 net income of $21.3 billion, or $5.20 a share, which made it one of the most profitable U.S. banks last year.

Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year’s third quarter, the first under CEO Jamie Dimon’s leadership. The bank reported Oct. 11 that it set aside $9.2 billion in the July-September quarter to cover the string of legal cases against the bank. JPMorgan said it has placed $23 billion in reserve to cover potential legal costs.

On Friday, the company announced it had reached a $4.5 billion settlement with 21 major institutional investors over mortgage-backed securities issued by JPMorgan and Bear Stearns between 2005 and 2008. The investors, which include Goldman Sachs, said the bank deceived them about the quality of high-risk mortgage securities.

source: newsinfo.inquirer.net

Ex-JPMorgan execs pressed about trading loss

WASHINGTON— Two former high-ranking executives at JPMorgan Chase faced tough questions from U.S. senators Friday about why the bank played down risks and hid losses from regulators when it was losing billions of dollars.

The hearing was held a day after the Senate Permanent Subcommittee on Investigations issued a scathing report that ascribed widespread blame for $6.2 billion in trading losses to key executives at the nation’s biggest bank.

The losses came less than four years after the 2008 financial crisis and hurt the reputation of a bank that had come through the crisis known for taking fewer risks than its competitors. Three employees in the London office were fired — two senior managers and a trader. It also led to the resignation of Ina Drew, the former chief investment officer overseeing trading strategy.

Douglas Braunstein, the former chief financial officer, and Drew were pressed to explain why bank executives gave federal examiners in April information that significantly understated losses for the first quarter of 2012.

“The number I reported (to the regulators) was the number that was given to me,” said Drew, who resigned last spring after the losses became public.

Drew blamed the losses on executives under her watch who failed to control risks out of the London office. She said that undermined her oversight and kept her from preventing the losses.

The report also suggested that CEO Jamie Dimon was aware of the losses in April, even while he played them down publicly. And Sen. Carl Levin, the chairman of the panel, implied that Dimon set a precedent at the bank for withholding information.

Dimon acknowledged in May 2012 that the firm had lost $2 billion on risky trades out of its London office. The losses have since been revised to more than $6 billion.

After reading the report and hearing executives testify that they didn’t know who was responsible for informing regulators, members of the panel questioned whether the nation’s biggest bank had become too large to manage.

The “trading culture at JPMorgan … piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight and misinformed the public,” Levin said Friday at the hearing.

New York-based JPMorgan acknowledges that it made mistakes but rejects any assertions that it concealed losses or risks.

The bank said in a statement Friday, “We have made regrettable errors and overhauled our risk policies to correct these mistakes, but senior executives always provided information to regulators and the public that they believed to be accurate.”

Dimon was not a witness at Friday’s hearing.

In April, news reports said a trader in JPMorgan’s London office known as “the whale” had taken huge risks that were roiling the markets. Dimon immediately dismissed the reports as a “tempest in a teapot” during a conference call with analysts.

But Dimon acknowledged the losses a month later. And he told a separate Senate committee in June that the bank showed “bad judgment,” was “stupid” and “took far too much risk.” He also had his compensation last year reduced by 50 percent, as did Braunstein.

After the trading loss came to light, Drew resigned after 30 years with the firm and voluntarily paid back two years of salary.

Drew said Friday that while she doesn’t believe she bore personal responsibility for the losses, she decided to step down to make it easier for JPMorgan “to move beyond these issues.” Her comments were her first public remarks since leaving the firm.

Braunstein acknowledged that risk models for the trading operation were changed in a way that was improper early last year. The changes made the bank’s trading losses appear smaller than they were.

The subcommittee report was also critical of the Office of the Comptroller of the Currency, JPMorgan’s primary regulator. It said the Treasury agency failed to investigate the trading even when the London operation repeatedly blew through pre-set risk limits and it failed to notice when the unit didn’t submit required reports for several months.

The agency acknowledged that there were shortcomings in its oversight of JPMorgan.

“There were red flags that we failed to notice and act upon,” Comptroller Thomas Curry testified at Friday’s hearing.

source: business.inquirer.net