Worldwide bond ratings called into question after collusion admitted

Summary

Collusion admitted in the bond market, at the very time that a major bond trader admits to have poor worldwide internal controls.

Information

Second apology; German bond sales investigation August 2, 2004. Ref. On top of bad information about Enron SPEs; and Pension fund's concerns.

Discussion

Here is a typical boiler plate on a 10Q:

"The principal executive and financial officers have evaluated our disclosure controls and procedures within 90 daysprior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and proceduresare effective"

Because the actual internal controls are not consisten with requirements, this means that the financial officers and executives [who "evaluate" the internal controls, and provided the assertion to th board of directors] have a problem

Citigroup

Citigroup provides a useful window to the bond world. Notice the price tanked after April 2004.

To be determined how these problems compare with problems in Germany; raises questions about management controls, supervision, and adequacy of management oversight of bond ratings issued worldwide. Extreme caution warranted; to be determined to what extent bond ratings that should have been downgraded due to poor operating cashflows have been deliberately delayed.

Problems are not just in Germany and Japan, but also UK and France. Ref This comes on top of the investigation into UK's FSA £17 million ($30.5 million) fine on Citigroup in re the Royal Dutch/Shell Group disaster.

Unspoken agreement: Collusion, price fixing, and rigging in bonds?

In practice, Bond traders know how much supply is absorbable. It remains to be seen to what extent Bond trading companies deliberately time their bond-releases in collusion with other firms, so as to maintain artificially high prices in the bond market. The bond traders have an "unspoken agreement not to flood the market to drive down prices." [NYT: Citigroup Regrets Bond Trades in Europe By HEATHER TIMMONS Published: September 15, 2004]

This is essentially saying, "We know there is too much supply of debt, and inadequately demand; so let's time to release so as to artificially create and sustain prices that would otherwise not be achievable had the bond companies provided the bonds in a non-coordinated-manner."

Raises questions about the basis for the rating in an inefficient market

If their actual demand-levels relative to the actual supply would be much lower [thereby driving down prices], it remains unclear what basis there is to offer the bond with a particular rating, or at a particular price. DoJ, SEC, Fidelity bonds.

If there is collusion in the supply, then it would reasonably be presumed that the market purchasers [intermediaries] also know that the bond-market is not efficient, raising questions about the non-official communication that exists between purchasers. In short, if the actual supply of bond exceeds that which is sustainable, why are not bond prices fall? Answer: It appears as though the "informal agreement among the suppliers" is also balanced-mirrored by another agreement on the demand side. More.

Warnings: Stonewalling and non-sense in Europe

Warning Signs of A Major Problem at Citigroup -"We cannot comment"; -"will not be making a statement", -"each agency will have their own views each agency will have their own views"; -"still gathering facts"; -"still gathering facts about Citigroup and what happened" -"still ... digesting the facts" Ref

Japan Sanctions: Citigroup busted in Japan, forced to close private banking

Japan's Financial Services Agency suspended private banking operations for a year at four of Citigroup's branches in Nagoya, Osaka and Fukuoka

Citibank in Japan, part of Citigroup Inc., accepts the finding, without disputing anything. Article 27 of Japan's Banking Law allows the government to revoke banking licenses when a financial institution acts in a manner that is detrimental to public interest Ref

eight employees have had their compensation reduced and other employees have received formal reprimands Ref

ordered Citibank to refrain from accepting foreign currency deposits from new customers for one month starting Sept. 29

Internal control problems:

"serious" breaches found:

failing to conduct proper checks against money laundering in one customer account

uncovered fraud in a Citigroup unit that has about 400 employees who cater to wealthy individuals, more than 100 million yen -- about $909,256; Private banking consists of lending, investment management, and other banking services for wealthy customers

allowed transactions that could be suspected of being associated with money laundering by permitting an account to be opened without proper account procedures

Global internal control problem, according to Deutsche Bank AG analyst Richard Strauss

"the company needs to work on strengthening controls, not just in the U.S. but also globally"

Ref