4 C’s That Could Change The Financial World As We Know It, Again

Those 4 C’s are: Confirmation, Crisis, Contagion, Catastrophe.
What type of confirmation could send the financial markets into such turmoil it could rock the very bastions of finance as we now know it?
First: Scotland votes yes to leave the U.K. If this turns out to be so, it could send shock-waves throughout the markets that run the world. i.e., Forex or World currencies.
No one with any financial acumen can look seriously at the markets as they stand at the time of this writing, and seriously argue the markets are prepared for such a resolution happening this Thursday.
If Scotland truly does vote Yes and confirms independence from the U.K. the initial shock-waves in my opinion that will hit the markets will be akin to the video we’ve all seen 1000 times when a nuclear device is unleashed with a house being obliterated. Or, the one where trees are bent over near flat to then reverse back the same.
In my humble opinion this could be a metaphor of what could take place. The reason is simple: By proof of the markets as they stand today, it is proof prima facie that everyone (especially so-called “smart crowd”) thinks it won’t happen. And the odds via polling alone show it to be the equivalent of a coin toss!
If this happens it will also confirm something just as real, and quite possibly far more instructive: With both a Federal Reserve meeting being held just days prior to such an event, the language out of this meeting could not be more important.
If it’s some revised boilerplate “till conditions improve, extended period, blah, blah, blah” based press release and conference, it will again confirm what many believed from the start, The Fed is both deaf, blind, and ill prepared to handle what might be an event such as this. An event that has the potential to make the crisis of 2008 the equivalent of a firecracker as opposed to what might be unleashed if Scotland does indeed secede.
The ramifications are truly unknown, unquantifiable, and what might be worse – unmanageable.
Then we move to crisis.
Just how does the Federal Reserve handle such a dilemma of this scale? I use the word “scale” for good reason. As many may know the Forex markets dwarf what the lovingly referred to as “mom and pop investor” believe it to be.
The saving of the “stock market” (aka the Equity Markets) in 2008 vs a Forex market crisis is the equivalent of bailing out a local bingo hall as compared to dealing with such a crisis on the scale of Las Vegas casino.
If the Forex market suddenly gets rocked with a clear fundamental breakdown and breakup of everything now known as the E.U. Along with all the tentacle entangled carry trades? Crisis might be an understatement.
Contagion across the Forex exchanges will not only wreak havoc from within it will also spread directly to the Bond markets. (which many don’t realize is also considerably larger themselves than the equity markets)
Such sweeping turmoil will most assuredly plunge the equity markets themselves into complete and utter chaos as money managers, market makers, margin executives and more decree: “Sell Everything, Close Everything, Now!”
What chaos might also be unleashed as the High Frequency Trading (HFT) algos are set loose selling anything and everything into a market where it’s suddenly revealed via news reading computers that the jig is up?
Or, what no one (and I mean no one!) thought possible till this week. What if this was the week HFT decides to not skirt the laws, but to now – obey them?! i.e., CME Rule 575 as explained by ZeroHedge: These Kinds Of Market-Rigging “Practices” Will No Longer Be Allowed On The CME
This could make the current Ebola crisis and concerns about the speed and severity of contagion look like the sniffles in a kindergarten class.
The panic, fear, mistrust, alienation, ___________(fill in the blank) that holders of what once believed were liquid assets on their books will find out rather quickly nothing runs quicker down the drain than paper gains and wealth.
If all this plays out, what will follow will be a blow to the IPO market and all it has morphed into these last few years with “free money.” So much so that one will think they actually saw Thor’s Hammer. Alibaba™ stands to be “the” poster child for top ticking headlines like never before.
Friday their stock hits the market in what has been touted as one of the most sought after and highly demanded offerings. So much so that they were able to wrap their road show early.
All this in an era of low if not non-existent GDP figures of recent memory. Along with real unemployment, and other metrics screaming recession, however these are adjusted, tweaked or adulterated so much so – it would make a vocal harmonizer jealous.
If Alibaba finds itself trying to release an IPO in this potential melee it will have ramification not only for its own offering, but for every single current high flyer in the markets from now until who knows when. The issue is not just if this happens, but what happens for everything else -if?
A catastrophe is quite possibly in the making. But it is still all in the hands of nothing more than the odds in a flip of a coin. We’ll know more Thursday when Scotland votes. Until then what we truly know is less about what if, and more about – if not.
However we do know a couple of things today that we didn’t know just 5 years ago.
First is, we understand the markets are not what people think they are. Second, the Fed is not as omnipotent as most believe. Third, 70% to 80% of what the “mom and pop” 401K holders think are trades in the markets, is an illusion. Fourth: Everyone, including many of the very professionals that work and breathe Wall Street have learned absolutely nothing since the Lehman crisis.
And what’s maybe more important than all of those combined?
They believe the chances of it repeating are not only nil, they’re betting it wont. Besides they still believe: “The Fed’s got their back!”
Problem is – will the Fed be able to save its own rear end if it does happen? Let alone theirs.
We’ll know soon enough.

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By 
Emily Glazer
The whispers among employees had been around for years. They finally heard some facts during a conference call in June led by managers in Wells Fargo WFC +3.17% & Co.’s foreign-exchange operation: Some of its business customers had been cheated, according to two employees who were on the call.
An internal review showed that out of roughly 300 fee agreements based on anything from informal handshakes to emails to signed documents, only about 35 companies were charged the actual price they had been offered for currency trades handled by Wells Fargo, the employees say.
The phone call was part of a continuing cleanup that has led Wells Fargo to fire four foreign-exchange bankers and federal prosecutors to open their own investigation of the operation, people familiar with the matter have said.
“Wells Fargo remains committed to our foreign exchange business,” the bank said in a statement Monday. “If we find a problem, we fix it.” The bank said its foreign-exchange business is “under new management.”
The business is tiny compared with foreign-exchange operations at J.P. Morgan Chase & Co. and Citigroup Inc. but could become another huge headache for the San Francisco bank, still grappling with fallout from the sales-practices scandal in its retail operations. The scandal led to last year’s abrupt retirement of Wells Fargo’s chief executive, a $185 million regulatory settlement and numerous federal and state investigations, which are continuing.
Wells Fargo retail employees had to hit lofty goals to keep their jobs or get bonuses, which led some employees to open potentially 3.5 million accounts with fictitious or unauthorized customer information from 2009 to 2015.
Foreign-exchange employees got bonuses based solely on how much revenue they brought in, say more than a dozen current or former Wells Fargo employees. No other big bank in the U.S. calculated bonuses of currency traders in such a defined and individual way. Wells Fargo said Monday that it began making changes to those compensation plans earlier this year.
The bank also charged some of the highest trading fees around, according to current and former employees. For more than a decade, customers were sometimes charged anywhere from 1% to 4% on basic transactions such as converting euros to dollars and complicated trades like hedging.
Those percentages can be at least two to eight times higher than the middle-market industry average of 0.15% to 0.5%, depending on the trade, customer and volume, according to foreign-exchange bankers throughout the industry.
Wells Fargo disputes the descriptions of its foreign-exchange fees by current and former employees. The bank said Monday its fees in 2016 had a weighted average of 0.09 percentage point across all transaction sizes. Clients served by its middle-market banking team were charged a weighted average of 0.18 percentage point, according to Wells Fargo.
Some foreign-exchange bankers at Wells Fargo relied on the fact that customers often didn’t bother to double-check how much they were charged, fee levels weren’t straightforward, and complaints could be batted away, the current and former employees say.
‘Time fluctuation’
One former Wells Fargo manager says employees would tell customers who expressed surprise at the size of a trading fee that market prices were different at the moment when the transaction was executed and blame “time fluctuation” for any difference.
The bank’s foreign-exchange customers have included telecommunications firm CenturyLinkInc., vehicle-parts supplier Federal-Mogul Holdings Corp. and nonprofit groups such as the National Bone Marrow Donor Program.
Regulators have been investigating the foreign-exchange business at Wells Fargo, including a big trade involving Restaurant Brands International Inc., the owner of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, according to people familiar with the matter.
A Burger King in Tokyo. The fast-food chain’s owner got a refund from Wells Fargo after disputing a trade handled by the bank.
A Burger King in Tokyo. The fast-food chain’s owner got a refund from Wells Fargo after disputing a trade handled by the bank. PHOTO: KIM KYUNG-HOON/REUTERS
The trade resulted in a loss to Restaurant Brands, people familiar with the matter have said, which led to a dispute between the Oakville, Ontario, company and the bank. The dispute centered on how bank employees handled the trade, rather than its pricing. Wells Fargo refunded about $900,000 to Restaurant Brands, people familiar with the refund say.
The foreign-exchange business’s problems run far deeper than what is known inside Wells Fargo as “the Burger King trade” or what has been previously reported. The extent of the trouble seems to have become apparent to top Wells Fargo executives earlier this year.
Small FryForeign-exchange spot contracts as apercent of a bank's total derivativesportfolioTHE WALL STREET JOURNALSource: Office of the Comptroller of the Currency
Bank ofAmericaCitigroupJ.P. MorganWells Fargo0%102030
The business was moved in early 2017 from Wells Fargo’s international division into its investment-banking and capital-markets operation. Since then, executives have changed internal systems, added more stringent rules around pricing and required more frequent compliance checks, current and former employees say.
Issues with the Burger King trade were found following those checks and customer complaints, people familiar with the matter say. The continuing internal review of Wells Fargo’s foreign-exchange operation is separate from the review sparked by the sales scandal, some of the people said.
A compliance training session in early November detailed what Wells Fargo called “approved margins” for different volumes of foreign-exchange transactions, according to an internal document reviewed by The Wall Street Journal. Employees say fee levels remain higher than industry norms, and some compensation practices aren’t due to change until next year.

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Foreign-exchange trading has been a problem area for many banks. In 2015, several large U.S. and European banks agreed to multibillion-dollar settlements with U.S. regulators and pleaded guilty to criminal charges filed by U.S. authorities over alleged collusion among currency traders.
Bank of New York Mellon Corp. agreed in 2015 to pay $714 million to resolve allegations it defrauded pension funds and other clients by overcharging them on currency transactions.State Street Corp. agreed in 2016 to pay $530 million to settle similar allegations.
Both banks admitted giving some clients far worse pricing on currency transactions than the banks implied the clients would get.
The Journal reported in October that the U.S. Attorney’s Office for the Northern District of California is investigating the Restaurant Brands currency trade and has subpoenaed information from Wells Fargo.
Potential issues related to that trade also are being examined by the Federal Reserve, the Journal reported. Examiners from the Office of the Comptroller of the Currency are auditing Wells Fargo’s foreign-exchange business, according to employees at the bank. A Wells Fargo executive says the audit is “normal course of business.”

Payment Plans

Some current and former Wells Fargo employees say its charges on foreign-exchange trades encouraged employees to cheat customers.

Fees for some currency trades
Industry average
Wells Fargo
Fee: 0.15 - 0.5%
Fee: 1% - 4%
For a $10 million trade
Fee:
$100,000 - $400,000
Fee:
$15,000 - $50,000
How Wells Fargo compensated bankers
If a banker had a revenue target of $5 million
and brought in $6 million ...
Revenue target: $5 million
Revenue that exceeded target: $1 million
.. the banker would earn a bonus of $100,000,
or 10% of the $1 million
Bonus
Source: People familiar with the bank
Current and former bank employees say its pricing practices were rooted in a culture and compensation system that looked to maximize revenue. Bonuses were defined as 10% of revenues exceeding revenue targets.
If a banker’s revenue target was $5 million and the person brought in $6 million, he or she would earn a $100,000 bonus, or 10% of the additional $1 million in revenue. Bankers typically received such bonuses twice a year in cash, rather than stock, as part of a signed contract, they added.
It’s rare among foreign-exchange groups in other banks to have so-called defined-bonus plans focused on individual earnings, according to people in the industry.
After Wells Fargo moved the foreign-exchange business into its investment bank earlier this year, managers began telling employees that bonuses would become “discretionary” by the end of 2017. Under this more typical arrangement, management would decide employee bonuses, and bankers wouldn’t know exactly how much they would receive. It would be based on a variety of factors, not just revenue.
Wells Fargo has 18 foreign-exchange sales and trading offices, including in New York, San Francisco, Charlotte, N.C., London and Hong Kong. A few hundred people work in the group world-wide.
Current and former employees say Wells Fargo’s foreign-exchange customers are largely midsize businesses that don’t tend to trade in large volumes. As a result, those clients don’t have the same insight into the market as larger firms that are more-active traders.
Some Wells Fargo clients have complained to the bank. In November 2016, Ecolab Inc., a water, hygiene and energy company based in St. Paul, Minn., bought and sold currency in a so-called swap arranged by the bank, according to people familiar with the deal. These people say Wells Fargo collected 1% on one part of the $100 million deal.
Ecolab contested the fee charged by Wells Fargo on a transaction arranged by the bank.
Ecolab contested the fee charged by Wells Fargo on a transaction arranged by the bank. PHOTO:ARIANA LINDQUIST/BLOOMBERG NEWS
After Ecolab compared the full trade, including fees, to overall market prices, the company contested the bank’s fee. Wells Fargo refunded hundreds of thousands of dollars to Ecolab in December 2016, according to current and former employees.
A spokeswoman for Ecolab confirmed the details of the trade and said it was the only fee issue Ecolab had with Wells Fargo.
Fee issues arose for some Wells Fargo clients even when they had a pricing agreement. The bank agreed within the past 18 months to a specified rate with data-management firm Veritas Technologies LLC, according to bank employees. After making one trade on behalf of Veritas, Wells Fargo bankers told Veritas that the bank’s fee was 0.05 percentage point higher than the agreed rate, the employees say.
Unusually high fees
The result: The bank made an extra $50,000 on a $100 million trade, the employees say. Wells Fargo later made a refund to Veritas, according to people familiar with the matter. A Veritas spokeswoman declined to comment.
Wells Fargo’s foreign-exchange business also charged unusually high fees for trades with different currency conversions, known as “Bswift” transactions, current and former employees say.
“And if anybody did complain, it was an easy tap dance,” one former employee says. He says employees would say the pricing had been done automatically by the bank’s computer system so “there’s no accountability for the spread.”
Wells Fargo sent an internal email Nov. 2 detailing new guidelines for Bswift transactions, according to a copy of the email reviewed by the Journal. The guidelines include specific handling and pricing procedures for those trades.
The operation also charged high fees to other parts of Wells Fargo. Wells Fargo Rail, which leases locomotives and railcars, and the bank’s corporate-trust division are often charged 1% to 1.5% on currency transactions, according to current and former employees.
The bank’s foreign-exchange management often celebrated big trades and the money they made for the bank, the current and former employees say. Sara Wardell-Smith, who led the foreign-exchange group, emailed the group to hail big trades, naming clients and spelling out revenue generated. The employees say managers used to encourage employees to ring a brass bell in the San Francisco office when the bank made a lot of money on a trade.
In mid-October, the bank announced that Ms. Wardell-Smith would lead its financial institutions group in the Americas region, according to a memo reviewed by the Journal and confirmed by a bank spokeswoman.
Current employees say the move was viewed within Wells Fargo as a demotion, coming just months after Ms. Wardell-Smith had been promoted to co-lead the bank’s division focusing on trading of rates, currencies and commodities. She didn’t respond to requests for comment.
The other co-leader, Ben Bonner, now leads that group on his own and is overseeing foreign-exchange trading, a bank spokeswoman confirms.
Mr. Bonner has been working with other executives to fix the problems in the currency business, according to several current employees.
Last month, the bank sent a memo to foreign-exchange employees that instructs them not to create informal or oral pricing agreements. The memo, reviewed by the Journal, also said employees are “responsible for ensuring customers are not misled regarding” pricing.
Current and former employees say some Wells Fargo employees expressed concerns about pricing practices to top executives before the bank’s internal cleanup efforts began earlier this year. Some employees say they were reluctant to press for sweeping changes, citing what they saw happen to one manager in the foreign-exchange operation about a decade ago.
During a meeting of foreign-exchange managers in the mid-2000s, Cathy Witt said it wasn’t right to celebrate high fees by ringing a bell, people familiar with the situation say. Ms. Witt, an employee in the bank’s Chicago foreign-exchange group, warned that Wells Fargo could become known as a “bucket shop,” a derisive term for a disreputable finance firm, some of the people say.
A few weeks later, Ms. Witt was summoned to a meeting in St. Louis, told that her comments had been offensive and demoted on the spot, according to people familiar with the matter. She also was told to apologize to other managers for her unprofessional behavior, the people say. She later left the bank.
—Aruna Viswanatha contributed to this article.

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