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Last week, Moody’s Investors Service downgraded more than a dozen global banks to reflect their significant exposure to the volatility and risk of losses in capital-markets. Although the downgrades included several major banks, the financial sector rallied on better-than-expected results. However, new scams and downgrades continue to take investors in banking stocks on a wild ride.
The United Kingdom, the crime scene for banking blunders such as Bernie Madoff and MF Global, can now add another perpetrator to its list. On Wednesday, Barclays (NYSE:BCS), Britain’s second largest bank by assets, said it will pay $453.6 million to settle a multi-year investigation by U.S. and U.K. regulators on allegations that the bank manipulated the London Interbank Offered Rate. The Libor is the average interest rate that major banks in London charge when lending to other banks. It affects everything from interest rate swaps to mortgage and credit card rates.
The WSJ explains, “The CFTC said there were two areas of unlawful conduct by Barclays. The first concerned senior management, the regulator said. In late 2007, as banks came under pressure in the early rumblings of the financial crisis, Barclays managers didn’t want the bank to be seen to be paying high rates to borrow, it said. After discussions ‘among high levels of management’ within the bank, an order was sent to keep Barclays’ submissions to U.S. dollar Libor at an artificially low level, the CFTC said.” The second unlawful conduct involved Barclays traders in London, Tokyo and New York attempting to manipulate Libor to aid their derivatives trading positions. The CFTC fined Barclays $200 million, the biggest fine ever imposed by the regulator.
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To make matters worse, the manipulation investigations do not end at Barclays. Other major financial institutions that have disclosed they are also under review include Deutsche Bank (NYSE:DB), Citigroup Inc. (NYSE:C), HSBC Holdings (NYSE:HBC), UBS (NYSE:UBS), JPMorgan Chase (NYSE:JPM) and Royal Bank of Scotland (NYSE:RBS).
Financial stocks declined across the board on Thursday. Barclays plummeted more than 15 percent and JPMorgan dropped 4 percent on Thursday — both continued their decline on Friday, though less dramatically. The Jamie Dimon-led bank also received added pressure as a New York Times article claimed the infamous London Whale trading loss may grow to as high as $9 billion. The firm reported, “As JPMorgan has moved rapidly to unwind the position — its most volatile assets in particular — internal models at the bank have recently projected losses of as much as $9 billion. In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.”
Citi Investment Research also added to the weakness by cutting price targets and second-quarter outlook on several major banks. The brokerage reduced its price target on Goldman Sachs (NYSE:GS) to $110 from $145, on Bank of America (NYSE:BAC) to $8 from $9, on Morgan Stanley (NYSE:MS) to $16 from $20 and on JPMorgan to $43 from $45.
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