$$$ Herbalife expects earnings above analysts’ estimates, to restart buyback [Reuters]

$$$ “We’ve got to get to a point where we stop destroying our shareholders’ capital,” said Corbat, who replaced Vikram Pandit after the former CEO was ousted last year. “I’d say that would certainly be at the top of our list. That we run a smart and efficient business that’s good at its allocation of its resources around its customer and client segments.” [Bloomberg]

$$$ Some penguins came to Blackstone’s offices, pooped [DealBook]

$$$ Wrangler Introducing First-Ever Line of Moisturizing Jeans [ABC]

$$$ Sorry for the continuing technical difficulties, but at least you’ve got Lenny to keep you company here. We’ll see you at Dealbreaker, or here, tomorrow!

$$$ American Airlines Repaints Its Planes, to Much Carping [BBW]

$$$ Goldman’s smart move on pay [Reuters]

$$$ Few Possibilities for Prosecution at JPMorgan [DealBook]

$$$ Cayman Islands to open up to scrutiny [FT]

$$$ Feds: Priest charged with selling meth [Stamford Advocate]

Earlier today, Barclays chief Anthony Jenkins sent out a memo to employees informing them that moving forward, there’d be a new way of doing things ’round the bank. Namely, that whereas during his predecessor’s tenure, manipulating interest rates and engaging in other forms of criminal activity was acceptable, such things would no longer fly. And not in a “this sort of thing is now frowned upon” way but in a “you actually can’t do this anymore/if that presents a problem for you than clean out your desk and leave” way.

Aware that change can be very difficult, that it often causes great anxiety, and that many resist it entirely, Jenkins used 1,479 words to get his message across, acknowledging that not all employees will be willing to sign on board re: acting “fairly, ethically and honestly,” rather than simply writing: “Hey, we have a new policy called ‘not doing illegal shit.’ It’s a little unorthodox and it may not be for everyone, so please take some time to think it over.”

Dear Colleagues,

We are at the start of a year which will be crucially important in building the ‘Go-To’ bank at Barclays.

Next month I will be setting out the results of our strategic review, which has looked at all of our operations more thoroughly and from a broader perspective than we have previously done, and provides the blueprint for Barclays for at least the next decade. Ensuring that we have the right shaped business, both in terms of the returns we make for our shareholders, and the role we play in society, is of course vital to our future as an institution.

Today I am unveiling something which is equally fundamental to Barclays long term success – our new Purpose and Values. These represent the set of standards under which all of us at Barclays will work, and against which the performance of every one of us will be assessed and rewarded.

There is no doubt that 2012 was a difficult year for Barclays and the entire banking sector. Again financial institutions found themselves too often in the news for the wrong reasons. This damaged trust in banks, which was already at a low ebb, and overshadowed the excellent and valued work you do.

The behaviour which made those headlines in 2012 took place in the past. But it helped underline how banking as a whole had lost its way, and had lost touch with the values on which reputation and trust were built.
Over a period of almost 20 years, banking became too aggressive, too focused on the short-term, too disconnected from the needs of our customers and clients, and wider society. We were not immune at Barclays from these mistakes.

Over this period much great work was done right across our bank. We helped large numbers of customers and clients buy homes, grow businesses and save for their futures. But there was also a tendency at times, manifest in all parts of the bank, to pursue short-term profits at the expense of the values and reputation of the organisation. In doing so we damaged our ability to make long-term sustainable returns.

Let me be quite clear. The notion that there must always be a choice between profits and a values-driven business is false. Barclays will only be a valuable business if it is a values-driven business. Unless we operate to the highest standards and our stakeholders trust us to behave with integrity, no business – and certainly no financial institution – can continue to be successful. Nor do they deserve to be. There is no choice between integrity and profit in this business, and to pose them as opposites fundamentally misunderstands the problems the banking sector faces. This is the difference between generating short term profits and long term shareholder value.

Having a firm commitment throughout the business to strong values is not something I want to do for public relations or political benefit. It is not window dressing. It is simply how I will run Barclays and make it a more valuable and sustainable institution.

As part of the TRANSFORM programme, we have looked afresh at what we want to achieve and how we want to do it. We have reflected on our history – captured in the ‘Made by Barclays’ film we shared with you in December – which shows us what we can achieve when we are grounded in strong values and a common goal. By remaining grounded and committed in that way we will create a bank that does the right thing for colleagues, customers and clients, our shareholders, and indeed all of our stakeholders.

That is what will make us the ‘Go-To’ bank.

We have agreed a single cross-business Purpose for Barclays, and five core Values which underpin it. These are a product of extensive business-wide input and consultation, and the deliberations and drafting of the Executive Committee and the Senior Leadership Group.

Our Purpose is helping people achieve their ambitions – in the right way. Put simply this is the answer to the question ‘What is Barclays for?’ and it should guide our every action. By ‘people’ we of course mean our customers and clients, but more broadly every individual with a relationship to Barclays, including colleagues.

The phrase ‘in the right way’ is a critical qualifier to our intent to help people achieve their ambitions. We will not compromise our values to do so, and nor do we need to.

The Values are Respect, Integrity, Service, Excellence and Stewardship.

So what, briefly, do these mean?

Respect means respecting and valuing those we work with – our colleagues and other partners. It is about building trust and promoting collaboration.

Integrity demands we act fairly, ethically and honestly. This requires us to have the courage always to do the right thing, never tolerating the wrong thing, and to be accountable for our decisions.

Service means ensuring our clients and customers are always uppermost in our minds. We must strive to exceed their expectations so we automatically become their ‘Go-To’ bank.

Excellence calls on us to use all our energy, skills and resources to deliver great service for our customers and clients and outstanding sustainable results for shareholders.

Stewardship is about being determined to leave things better than we found them, so we constantly strive to improve the way we operate as an organisation and the impact we have on society.
In many ways, agreeing these core values was the easy part. The difficult challenge is to ensure we live by them.

Not just most of the time, but all of the time. Not just for most of us, but for everyone who works at Barclays.

Over the next few weeks, we will be training over a thousand colleagues so that they are able to explain the importance of our values to every single colleague in the bank, and how they must guide us in our decisions and delivery. This will help embed them throughout our business at every level.

If we are serious about making sure we believe in these values and live by them, then we also need to make sure they play a big part in how we measure and reward individual and business performance. Performance assessment will be based not just on what we deliver but on how we deliver it. We must never again be in a position of rewarding people for making the bank money in a way which is unethical or inconsistent with our values.

The new performance assessment approach will be introduced for senior leaders by the summer. It will be phased in for all employees over the following 12 months. In the meantime, all reviews will take account of performance against our values.

I have no doubt that the overwhelming majority of you, no matter in which area of the business or country you work, will enthusiastically support this move. But there might be some who don’t feel they can fully buy in to an approach which so squarely links performance to the upholding of our values.

My message to those people is simple: Barclays is not the place for you. The rules have changed. You won’t feel comfortable at Barclays and, to be frank, we won’t feel comfortable with you as colleagues.

For all the rest of us, becoming the ‘Go-To’ bank in a highly competitive environment will be very demanding. It will require each of us to work harder to make Barclays a better bank, and we will only achieve this ambition if our values guide us in all our decisions. Having seen how much you care about our business, how disappointed you were that trust in the way we operate was damaged, and how hard you work for our customers and clients, I have no doubt you will rise to the challenge.

We have very good foundations on which to build. Through a prolonged difficult economic environment, our performance has been strong. Customer satisfaction rates have improved. We have a record of innovation not just in the services we provide but in how we serve our communities.

I can’t pretend that 2013 will be an easy year. There is a great deal of hard work ahead. But I do believe it will be a fulfilling and successful 12 months. Sometimes we will falter, but the key will be that we make continuous progress. I am also confident, when you see the results of our strategic review on February 12, that you will be excited by what the future holds for this business.

Barclays has been around for 320 years. Its success and longevity has been based on integrity and its attention to customers and clients. When we have forgotten that, we have paid the price. If we combine the right values with the right strategy, we will build a more successful business not just this year but in the years and decades that follow.

Thank you for your continuing support.

Antony

New Barclays Chief Tells Staff to Accept Changes or Leave [Dealbook]

Sheelah Kolhatkar’s cover story today in Bloomberg BusinessWeek about the SEC’s hunt to capture Steve Cohen is pretty amazing, and depending on your priors will leave you impressed or infuriated or both with the SEC. I vote both, but I always vote both.

The core of it is the story of how Sanjay Wadhwa, a senior enforcement lawyer at the SEC, got a tip from FBI agent B.J. Kang “that something big might have gone down during the summer of 2008 at SAC Capital,” though “It’s not clear whether Kang was motivated by information or intuition.” This nebulous tip led Wadhwa to research all previous SEC referrals about SAC. One that he found was a “multipage [September 2008] letter from NYSE Regulation … [that] said that someone from RBC Capital Markets had pointed out evidence of a market-moving information leak about Elan. ‘If there was a leak of information,’ the letter read, ‘it was probably during the ICAD [International Conference on Alzheimer’s Disease] conference,’ when doctors and investors would have been mingling and socializing.” Good tip!

This thesis turned out to be incorrect, but the letter did prompt the SEC to launch one of its largest investigations. It would end up issuing 140 subpoenas and amassing 2 million pages of documents as it built a case that kept leading in the direction of SAC Capital. … They tried to piece together an explanation for the astonishing amount of money SAC had made trading Elan. … The initial stages involved painstaking work: The firm’s trading records were a jumble of activity with nothing broken out. It was also difficult to discern which of SAC’s 900 employees they should focus on. …

After sifting for months through every phone call to SAC from anyone connected to Elan, the SEC team pinpointed Martoma and his source, a neurologist and Alzheimer’s expert named Dr. Sidney Gilman, who worked as a consultant to hedge funds through Gerson Lehrman. … As they tracked Martoma further back in time, a pattern emerged: Over the course of 2007 and 2008, Martoma and Gilman had spoken every time an Elan safety monitoring committee held a meeting.

Eventually they brought the case to prosecutors who arrested Martoma. Given the public information – mostly from the SEC and prosecutors at this point, but still – it’s pretty easy to believe that the SEC and prosecutors have Martoma dead to rights; Gilman has told prosecutors that he gave Martoma tons of inside information and Martoma then traded on it. So this really is – apparently – the story of a dogged team of investigators pursuing a thin lead and, through long hours of rigorous detective work, actually catching a criminal. Not Steve Cohen, but someone one level removed from him.

That is impressive. It’s hard dogged work; I am depressing myself just thinking about reading phone records for months on end. They get points for, like, the pure arete of it.

But it also sucks, doesn’t it? For one thing, I get an unpleasant whiff of data mining from the story. Lots of insider trading cases are built on circumstantial evidence: Insider X at Company Y called Trader Z on the phone, and two minutes later Trader Z bought a lot of Company Y stock, and then the next day Company Y announced it was being acquired. Insider X and Trader Z were social friends, and without a wiretap you don’t know what they discussed, but what are the odds that that would happen innocently?

That’s a good question but the answer depends on the sample set. If the odds are one in a million, and the SEC looked into twenty million phone calls between Insider X and Trader Z and other insider-and-trader friend pairs like them and brought only one set of charges, then … that looks a little different, doesn’t it?

This is sort of a churlish thing to point out in this case because by all non-circumstantial indications (Gilman’s cooperation, etc.) they got it right here, but still. The sheer amount of records reviewed might make you wonder a little about, say, Rajat Gupta, whose insider-trading tipping conviction was based mostly on an awkwardly timed phone-call-and-stock-buying situation. That call looks ridiculous in isolation, but knowing how many millions of other calls the SEC looked at might change your mind.¹

This line of thinking might get you worried about Kolhatkar’s discussion of “edge”:

When a former trader from Galleon Group was asked what the word “edge” meant to him, he laughed and said that from the day he started at Galleon to the day he left, it was probably the most commonly used term around the office. It was such a priority, the trader added, that if you didn’t have it, you’d be quickly left behind. It meant that you knew something that others didn’t. Another trader—a witness in the government’s insider-trading investigation—was asked if he knew of any hedge fund that didn’t traffic in illegal information, according to the person familiar with the inquiry: No, the source answered, they would never survive. In this way, trading on nonpublic material information is similar to doping in professional cycling: Once someone like Lance Armstrong starts doing it, everyone else has to as well. Proving that it’s happening is just as difficult. “These cases take real detective work,” says Tom Sporkin, a partner at Buckley Sandler and a former senior enforcement official at the SEC. “It’s like finding the needle in the haystack.”

This is a deeply troubling passage, isn’t it? If all “edge” – everything that makes trading informed and markets efficient – is really insider trading,² then … well, then, for one thing, prosecuting insider trading might be really bad for market efficiency. But more important spending months pursuing one insider trading case would be crazy! If this witness’s theory is right, then sending Raj Rajaratnam or Mathew Martoma or Steve Cohen or anyone else to jail for insider trading is like a random lightning strike: of the thousands of hedge fund traders who, in this weird view of the universe, are all insider trading, why bother putting a couple of dozen in jail?³ Or, if the theory is wrong, but the SEC treats any edge as evidence of wrongdoing and a reason to start an investigation, then … then they’ll be doing a lot of data-mining on anyone who makes money trading?

The main reason to be worried about this investigation, though, is what it says about priorities. I mean, you don’t have to be worried about priorities here: if you believe that insider trading is The Most Important Crime, then catching it is The Most Important Thing We Can Do. I don’t believe that, and I feel like a lot of people are starting to doubt it, especialy after events of the last few years. Lots of financial misbehaviors were revealed, some of which (Madoff, mortgages, CDOs, whatever) had enormous consequences on the financial system and individuals’ life savings, and others of which were insider trading.

If you don’t believe that insider trading is the most important financial regulatory problem, then you might worry about the sheer person-hours devoted to this case; the millions of documents and thousands of phone calls that consumed all of several skilled SEC lawyers’ time for basically three years. Surely that time and money could be spent elsewhere.

But more than that, I feel like this investigation says something troubling about the skills the SEC develops and prioritizes. Finding needles in haystacks isn’t a great skill for a financial regulator. It’s okay! I mean, insider trading is a little bad, so someone should try to catch it. And other sorts of actually harmful financial crimes share similar characteristics. Would that someone at some regulator had gone looking for an actual bank statement for Peregrine Financial, for instance.

Others, though, less so. Imagine the sort of financial regulator who, blessed with complete granular information about the London Whale’s trading positions – which US financial regulators had⁴ – would call up Jamie Dimon and say “hey you gotta cut back risk in your whalery, not in a bullshit RWA-and-VaR-model-manipulation way but by actually paring down positions.” Or the sort of regulator who, after reading her tenth CDO-squared prospectus, would get a little nervous about home-price-appreciation and correlation assumptions and dig into the modeling and call banks to say “hey what is up with this?”

Two questions you might ask are:

• Would you want that sort of regulator? and
• Is that skill developed by finding the one phone call in a thousand that proves insider trading?

Your answers may vary but mine are “yes” and “no.” The paradigmatic SEC investigation – “find an insider trader through phone records” – is about drilling down, not broadening out. It starts from a suggestive general pattern – “boy SAC makes a lot of money” – and looks for the one specific fact to nail somebody. The financial regulators you’d really want would start from specific facts and look for the general pattern. They’d spend years looking for broad problems with systems, not phone records to prove a single instance of wrongdoing by a single person. These SEC lawyers – the ones held up as models of SEC enforcement, the ones responsible for the SEC’s one post-crisis success story – should have been finding Bin Laden, not overseeing a financial system.

On the Trail of SAC Capital’s Steven Cohen [BBW]

1. And you can even imagine something similar happening here. Not to Martoma, necessarily, but to Cohen, who ended up going from a large long to a large short in Elan stock after a meeting with Martoma, who was in possession of nonpublic information about bad drug trial results. “What are the odds,” you’d ask, “that Cohen and Martoma had a totally innocent meeting and then Cohen dumped all his ELN stock and put on a massive short the next day?” Well, low. One in N, for some large N, right? But if I told you that the SEC looked into 5N conversations that Cohen had just before making other big trades, where does that leave you?

Yeah yeah this is different – his secret conversation was with a guy who had inside information – but nobody knows what was said. If Martoma said “my inside source told me to dump ELN,” Stevie’s cooked. If he gave a deeply researched fundamental argument that made no evident use of inside information, Stevie’s just an innocent victim. Again, “what are the odds?” is the right question, but the answer depends on the sample size.

2. By the way you don’t have to believe that – I obviously don’t – to notice another thing I harp on, which is that all of the evidence is that some sort of insider-trading-lite is pervasive, so why put such emphasis on imprisoning people who do the slightly more obvious version?

Note here that the SEC “sift[ed] for months through every phone call to SAC from anyone connected to Elan.” There were apparently months’ worth of calls between Elan insiders and SAC. A few of those calls constituted insider trading, in the SEC’s telling. The rest did not. Were they purely social?

3. A more subtle theory would distinguish “edge” – just, like, having an idea or information or insight or model or whatever that you believe to be better than what others have – from “black edge,” which is apparently SAC’s hilarious term for illegal inside information:

[An SAC trader] wrote that Martoma was acting like he had “black edge.” A trader’s edge is his advantage; it’s the work he’s done and the things he knows about a company. “Black edge,” according to people familiar with the inquiry, is likely a term for information that cannot be doubted and that no one else has. It’s the kind that can make a trader millions and the kind that can put a trader in jail.

And the kind that can get a trader laughed at on Twitter.

4. I’m stretching a little because the Whale is topical; he’s really more of the Fed’s/OCC’s purview than the SEC’s. Part of that is because the investment banks who were in the SEC’s purview all disappeared due, in part, to inept SEC oversight.

Citigroup Earnings Miss Analysts’ Estimates on Litigation (Bloomberg)
Net income climbed 25 percent to $1.2 billion in the fourth quarter, or 38 cents a share, from $956 million, or 31 cents, a year earlier, the New York-based lender said today in a statement. Earnings adjusted for one-time items including restructuring costs were 69 cents a share. Twenty-one analysts surveyed by Bloomberg estimated 96 cents on average, with some items Citigroup didn’t include. Chief Executive Officer Michael Corbat, 52, took over in October and last month announced plans to eliminate about 11,000 employees and pull back from some emerging markets, undoing part of the expansion strategy of his predecessor, Vikram Pandit. Litigation costs included $305 million from a settlement between U.S. banks and federal regulators, who were probing claims that lenders improperly seized homes.

Goldman Profits By Going On Offensive (WSJ)
The value of Goldman Sachs’s investment portfolio doubled last year. Bond underwriting hit a five-year high. The firm’s workforce shrank and remaining employees were paid a smaller chunk of overall revenue. Those were just some of the ingredients in a bigger-than-expected profit jump by the New York company, which said net income almost tripled to $2.83 billion in the fourth quarter from $1.01 billion a year earlier. Wednesday’s results were packed with evidence of Goldman’s discipline in cutting costs, taking less risk with its own money and riding out financial crises in the U.S. and then Europe.

Goldman Agonized Over Pay Cuts as Profits Suffered (Reuters)
Top executives at Goldman Sachs have been considering deep cuts to staffing levels and pay for at least two years, but feared too many layoffs would leave the firm unprepared for an eventual pickup in business, people familiar with the bank said. They instead chipped away at staff levels and focused on non-personnel expenses that are less painful to cut. But investors pressured the bank to cut costs further, the sources said, and on Wednesday, Goldman gave in. The largest standalone investment bank said in the fourth quarter it cut the percentage of revenues it pays to employees in half to 21 percent. That brings the ratio for the entire year to its second-lowest level since the bank went public in 1999.

Fed Concerned About Overheated Markets Amid Record Bond-Buying (Bloomberg)
Now, as central bankers boost their stimulus with additional bond purchases, policy makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are on the lookout for financial distortions that may reverse abruptly when the Fed stops adding to its portfolio and eventually shrinks it. “Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” George said in a speech last week. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.”

Estonian president’s Twitter fight with Paul Krugman becomes an opera (RS)
A Twitter feud in June between the Estonian president and New York Times columnist Paul Krugman who questioned the impact of Estonia’s austerity measures, is being turned into an opera, US composer Eugene Birman told AFP on Wednesday. “Our short opera will be first performed by Iris Oja and the Tallinn Chamber Orchestra conducted by Risto Joost during Tallinn Music Week on April 7,” Birman, who moved from Riga to the US at age of six, told AFP. The piece, in two movements, uses two voices, those of Krugman and Estonian President Toomas Hendrik Ilves, reflecting their exchanges on the Twitter social network…The bow-tie loving Ilves went on a tweet-rant after Krugman, the winner of the 2008 Nobel Prize for Economics, argued in a short article entitled “Estonian Rhapsody” that while Estonia had been globally praised for its austerity measures, its recovery was in fact lukewarm. “Let’s write about something we know nothing about & be smug, overbearing & patronizing…Guess a Nobel in trade means you can pontificate on fiscal matters & declare my country a ‘wasteland,’” Ilves responded on his page on the on the micro-blogging site Twitter. “But yes, what do we know? We’re just dumb and silly East Europeans,” he added, before writing in his final tweet, “Let’s sh*t on East Europeans.”

Deutsche Bank Derivative Helped Monte Paschi Mask Losses (Bloomberg)
Deutsche Bank designed a derivative for Banca Monte dei Paschi di Siena SpA at the height of the financial crisis that obscured losses at the world’s oldest lender before it sought a taxpayer bailout. Germany’s largest bank loaned Monte Paschi about 1.5 billion euros ($2 billion) in December 2008 through the transaction, dubbed Project Santorini, according to more than 70 pages of documents outlining the deal and obtained by Bloomberg News. The trade helped Monte Paschi mitigate a 367 million-euro loss from an older derivative contract with Deutsche Bank. As part of the arrangement, the Italian lender made a losing bet on the value of the country’s government bonds, said six derivatives specialists who reviewed the files.

BlackRock Net Jumps 24% (WSJ)
The company said net inflows in long-term products totaled $47 billion at the year’s end, reflecting equity, fixed income and multiasset class product net inflows of $31.2 billion, $12.4 billion and $4.1 billion, respectively. The net inflows were partially offset by alternatives net outflows of $700 million. Total assets under management were $3.792 trillion as of the end of the fourth quarter, versus $3.513 trillion a year earlier and $3.673 trillion in the third quarter.

Jobless Claims Drop To 5-Year Low (Reuters)
Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000, the lowest level since January 2008, the Labor Department said on Thursday. It was the largest weekly drop since February 2010.

Khuzami defends corp. settlements (NYP)
Robert Khuzami, the Securities and Exchange Commission’s enforcement chief, is on his way out the door — but he says in an interview with The Post that the agency’s much-maligned practice of settling cases is here to stay. Khuzami, 56, defended the SEC’s policy of allowing targets to settle cases — usually without an admission of wrongdoing — despite recent criticism. “There are certain myths about SEC practices, including how ‘neither admit nor deny’ works and why we use it,” said Khuzami, who is leaving his post after heading the agency’s crackdown on big banks following the financial crisis. “I speak out against these myths in the hope of reducing the level of cynicism felt by the public, which are often fueled by mischaracterizations or misunderstandings of how we operate.”

Commissioners approve regulations governing sexy coffee stands (Kitsap Sun)
Owners of adult-themed coffee stands in unincorporated Kitsap County will have to post signs warning would-be customers about their scantily-clad baristas, and they’ll have to do more to protect passers-by from seeing into their businesses. That’s according to an ordinance passed Monday in a unanimous vote of the Kitsap County commissioners. The stands have 60 days to comply with the changes, which include a site visit by county planning staff to check the signs are posted and additional screening is added…The ordinance requires adult espresso stands — the three existing stands and any new ones — to install an 8-foot-high fence or landscape buffer, approved by the county Department of Community Development, in front of windows that face the street or other businesses, blocking views by the public. Businesses also must receive a one-time certification from DCD to guarantee the regulations are met. A boiling point was hit more than a year ago when five stands — three of them within a half-mile stretch of Highway 303 — advertised employees in pasties and lingerie. Unhappy parents demanded commissioners regulate the businesses. The health department doesn’t require clothing, instead it looks at whether employees have food handler permits, said Department of Community Development associate planner Heather Adams. The state Department of Labor and Industries also has no rules dictating required clothing at coffee stands, Adams said.