FT : US sues Barclays for fraud over crisis-era loans


US sues Barclays for fraud over crisis-era loans
Deutsche Bank to pay $7.2bn over alleged mis-selling of mortgage-backed securities

Federal prosecutors have sued Barclays and two of its executives over allegedly fraudulent mortgage-backed securities the bank issued as the US housing bubble was at its peak.

The suit claims the bank “securitised billions of dollars of loans it knew had material defects” and financed lenders that it knew were issuing mortgages to customers who would be unable to repay them, prosecutors charged. The loans in question defaulted “at exceptionally high rates early in the life of the deals”.

It comes after the breakdown of talks aimed at reaching a negotiated settlement with the US Department of Justice and seeks unspecified civil penalties from the bank and the two men.


People close to the Barclays board said it had been prepared only to agree a settlement that was in proportion with those already reached by its US rivals, and was willing to go to court to fight more costly US demands.

Barclays felt it should pay a fine of only about $1bn if its settlement was to be proportional with those of its US rivals. It was prepared to settle for a total of roughly $2bn, including customer redress, according to two people briefed on the matter. But the DoJ pushed for something closer to the $5bn settlements that both Deutsche Bank and Credit Suisse were thought to be close to agreeing, the people said.

Deutsche said early on Friday that it had agreed to pay $7.2bn to resolve the DoJ probe — about half the sum authorities had originally claimed. The German bank said it would pay a $3.1bn civil penalty and also provide $4.1bn in relief to consumers.

Barclays has calculated that investors in the residential mortgage-backed securities it issued suffered half the losses of investors in similar products issued by Goldman Sachs and less than a third of those of Citigroup.
While some US banks bet against the RMBS products they sold and kept little if any exposure to them, Barclays told the DoJ that it held the equity tranches of most mortgage securities it issued and so lost money alongside other investors when they went bad.

The refusal of Barclays to bow to the DoJ’s demands poses a tricky dilemma for Credit Suisse, who must decide whether to settle now and risk being embarrassed if Barclays’ strategy proves successful.


The DoJ has been pushing the three European banks to agree an omnibus settlement before Donald Trump’s inauguration as US president in the third week of January. Mr Trump is expected to appoint a new leadership team at the DoJ, which is likely to oversee the case against Barclays.

From 2005 to 2007, Barclays fraudulently sold more than $31bn of mortgage-backed securities in 36 separate deals, prosecutors in New York said on Thursday.

“Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest,” said Loretta Lynch, the US attorney-general. “We are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people.”

The US government is charging the defendants with violations of the Financial Institutions Reform, Recovery, and Enforcement Act, via mail fraud, wire fraud, bank fraud and other misconduct.

The two Barclays executives named in the suit are Paul Menefee, its head banker on subprime residential mortgage-backed securities, and John Carroll, the bank’s head trader for subprime loan acquisitions.

In a statement, the bank rejected the government claims. “Barclays considers that the claims made in the complaint are disconnected from the facts. We have an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands. Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity.”

Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest
Loretta Lynch
The DoJ said the bank had falsely assured investors it had conducted adequate due diligence on the loans underlying its subprime securities and had excluded “unacceptable” loans. “In reality, Barclays’ due diligence on the subject deals was a sham,” prosecutors wrote.

Even investors in triple A-rated securities, which carry the same rating as US Treasuries, suffered steep losses.

At issue are loans originated by mortgage companies such as Fremont, New Century, WMC, Countrywide and IndyMac.

According to the complaint filed in federal court on Thursday, the bank misled investors and rating agencies about its loan selection criteria. In some cases, the lawsuit says, the bank found that more than half of the loans it reviewed contained defects, yet officials assured investors they were sound.

Companies that reviewed the loans for Barclays informed the bank that many did not meet underwriting guidelines or legal standards. “These vendors described some of these securitised loans as ‘craptacular’, others as ‘scariest collateral’, and others as having the ‘distinct aroma of default’,” the lawsuit says.

Mr Menefee, the Barclays executive in charge of due diligence on the subprime deals, is quoted as calling one loan pool “about as bad as it can be” and saying of a Wells Fargo pool that “we have to eat their sh*t loans”.

Mr Carroll, Barclays’ head subprime trader, allegedly told Mr Menefee to leave one group of 40 delinquent loans in a securitisation pool to save the bank $1m, even though it would make investor losses more likely.

Barclays ordered its vendors to change the grades they assigned on thousands of loans “for no legitimate reason”, the lawsuit says. “Even when loans were already delinquent or in default by the time a deal closed, it did not seem to matter to Barclays.”

Barclays prioritised its relationships with loan originators over protecting the investors who bought its mortgage-backed securities, the lawsuit alleges. As the housing bubble popped, the bank in some cases abandoned due diligence entirely.

In 2007, the DoJ alleges, Barclays executives decided that checking the quality of loans originated by New Century was a waste of time since any defective ones could not be forced back on to the cash-strapped issuer. The bank took that decision even as Mr Menefee and Mr Carroll agreed that the loans “look(ed) like sh*t”, the suit says.

“Defendants repeatedly misled investors and kept to themselves critical information about the loans in the deals, knowingly putting those investors at risk of harm,” the lawsuit says.

It is not the first time that Barclays has stood its ground against US regulators. In 2014 it pulled out, at the last minute, of an omnibus settlement by six other banks with US and UK regulators over alleged manipulation of foreign exchange rates. In that case, the British bank had wanted to wait until all regulators were ready to settle but it ended up paying a record $2.38bn in fines.

Now, Barclays appears to believe that it can stand up to the US authorities because there are no other pending legal cases that would give prosecutors leverage, unlike rival Deutsche Bank, which is also being investigated for Russian mirror trades.

WSJ : Deutsche Bank Reaches $7.2 Billion Settlement Over Toxic Securities

Deutsche Bank Reaches $7.2 Billion Settlement Over Toxic Securities
U.S. separately files suit against Barclays over its mortgage products

The Obama administration scrambled to resolve its remaining crisis-era megabank mortgage cases, striking a $7.2 billion settlement Thursday with Deutsche Bank AG over toxic securities, while separately filing a lawsuit against Barclays PLC alleging more than $30 billion in fraud-tainted sales.

The dramatic back-to-back announcements show the urgency among senior Obama appointees in the Justice Department to resolve the outstanding probes of precrisis conduct at major banks before those officials leave office in mid-January. Part of the rush stems from a great deal of uncertainty about how a Trump administration might pursue, settle or drop the remaining probes, according to people familiar with the discussions.

The Deutsche Bank settlement is likely to bring some relief for the German bank’s shareholders, who earlier in the year worried about a much bigger penalty. The Justice Department had originally sought $14 billion from Deutsche Bank, The Wall Street Journal reported in September, raising concerns about whether the institution would be able to negotiate that down.


Less than half the settlement requires a cash payment that would have an immediate impact on Deutsche Bank’s bottom line. The settlement was divided into a $3.1 billion penalty and a pledge to pay $4.1 billion over time to a “consumer relief” fund to be distributed by the government.

The terms of that relief—including loan modifications to help consumers—still must be finalized between the bank and the government.

Deutsche Bank announced the pact Thursday evening in the U.S., saying it had reached an agreement “in principle” with the Justice Department.

A Justice Department spokesman declined to comment. In major corporate settlements, particularly when the deal isn’t yet finalized, it is not uncommon for firms to announce the framework of a deal before the government, often in the hopes of a garnering a positive reaction from shareholders.

The Deutsche Bank settlement follows similar multibillion-dollar agreements reached over the past three years with other big banks, like J.P. Morgan Chase & Co., Citigroup Inc. and Goldman Sachs Group. Inc.

It has been more unusual for talks to break down and for the Justice Department to file suit the way it did Thursday against Barclays—though it did file two lawsuits against Bank of America Corp. related to precrisis sales of mortgage-backed securities in 2012 and 2013. One of those was thrown out earlier this year on appeal.

Barclays said in a statement that it would seek the suit’s “dismissal at the earliest opportunity,” and that it considers the claims “disconnected from the facts.” Bank officials declined to elaborate on why the talks broke down, but one person familiar with the matter said that continuing the talks under “a fresh pair of eyes”—in a new presidential administration—might be more beneficial.

A prolonged legal battle would be handled by Justice Department officials appointed by President-elect Donald Trump. Neither Mr. Trump nor his aides have indicated how they might handle legacy financial-crisis fallout inherited from President Barack Obama. But Mr. Trump in 2013 criticized J.P. Morgan CEO James Dimon that year as “the worst banker in the United States” for reaching a $13 billion settlement in a similar case. “What happened to the days when you actually go to trial?” Mr. Trump said at the time.

The Deutsche Bank settlement and Barclays suit come as the Justice Department still has probes outstanding with three other big European banks— Credit Suisse Group AG, Royal Bank of Scotland Group PLC and UBS Group AG. While talks with Credit Suisse have been progressing, it wasn’t clear Thursday whether a settlement was certain before year-end, according to people close to the discussions.

The Justice negotiations this year have been a big cloud hanging over an already-fragile European banking industry, weighing on several major lenders’ stock prices. Investors have worried about whether those institutions’ capital is sufficient to cover any possible U.S. fines.

The Deutsche Bank settlement came together quickly in the latter part of this week following intense negotiations between lawyers representing the bank and the government, a person familiar with the matter said. Going into the week, the two sides still had significant differences to overcome, people close to the discussions said.

Deutsche Bank and the government were steadily closing in on terms, including the government’s statement of facts about alleged wrongdoing, each day this week, according to a person close to the talks. The final main issue boiled down to money, the person said.


A Deutsche Bank settlement was appearing more promising earlier Thursday even without the Barclays lawsuit, but the government’s move to sue the U.K. bank added incentive to close a deal, the person said.

The German bank said it will take a roughly $1.17 billion pretax charge this quarter as a result of the $3.1 billion penalty. The additional consumer relief has less immediate and less solid consequences, because it is to be paid out over at least five years, the bank said, adding that the settlement isn’t expected to have a material impact on its 2016 financial results.

Hours before the Deutsche Bank settlement was announced, the Barclays talks broke down as executives at the U.K.’s second-largest bank made clear they were wary of being pressured to make a big payout.

Barclays Chief Executive Jes Staley had told people in recent months that the bank wouldn’t give U.S. authorities a blank check, and wouldn’t settle if he felt the price was too high, according to people familiar with the discussions.

Government officials had discussed with Barclays lawyers the possibility of suing, but the bank only learned Thursday that a lawsuit was arriving the same day, according to a person familiar with the matter.

The impasse between the two sides was still big: They remained multiple billions of dollars apart, with Barclays unwilling to pay $5 billion—an amount the government had said was in the range of possibilities, according to a person familiar with the matter.

The 198-page lawsuit by the U.S. government says the bank “engaged in a fraudulent scheme to sell tens of billions of dollars of residential mortgage-backed securities (RMBS), in which it repeatedly deceived investors about the characteristics of the loans backing those trusts.”


Barclays sold the securities to a wide range of investors, including financial institutions, Fannie Mae and Freddie Mac, federal home-loan banks, credit unions, pension plans, charitable and religious organizations, and university endowments.

“Many of these investors suffered devastating losses,’’ according to the suit, which was filed in a U.S. District Court in New York. The suit singles out two former New York-based Barclays executives, Paul Menefee and John Carroll, who had been hired in 2003 to help run the bank’s asset-securitization team, according to an announcement at the time. Both were previously at Morgan Stanley and left Barclays in 2008.

The complaint is filled with expletive-laced conversations involving those men and others familiar with the loans, taken from transcripts of recorded phone calls and emails. In one, the complaint says that Mr. Menefee, who was in charge of due diligence on the subprime deals at issue, allegedly said that one loan pool “scares the sh*t out of me.’’ At another point, that same executive said about a Wells Fargo & Co. pool, according to the complaint: “We have to eat their sh*t loans.”

Mr. Menefee’s lawyer called the complaint “a misguided attempt’’ to blame his client and others for losses incurred by sophisticated institutional investors after an industrywide housing market collapse.

Mr. Carroll’s lawyer didn’t respond to requests for comment.

The suit also alleges that companies hired to conduct due-diligence checks on the mortgages warned the bank, and those warnings were essentially ignored. “These vendors described some of these securitized loans as ‘craptacular,’ others as ‘scariest collateral,’ and others as having the ‘distinct aroma of default,’” the suit says.

The allegations relate to activities and employees at Barclays, before the bank’s 2008 buy of the collapsed investment bank Lehman Brothers.

During Barclays’s settlement negotiations, one of the key arguments the bank made to Justice Department lawyers was that Barclays was the most-exposed investor in the securities in question, and had already taken a big write-down during the financial crisis as a result of losses.

Barclays also insisted that losses from the securities were related to broad market events, not its own practices, and argued that its due diligence on the deals was deemed at or above industry standards, including by government-backed entities that approved of Barclays’s methodology at the time.

In recent days, government lawyers were scheduling calls with Barclays lawyers, pushing for progress in the talks, a person familiar with the matter said.

On Thursday, the government gave the bank a brief heads-up before filing the complaint about 3 p.m. ET.

Lawyers for the bank could respond to the lawsuit as early as next month, people close the matter said.

WSJ : Italy Sets Up Fund to Help Troubled Banks

Italy Sets Up Fund to Help Troubled Banks
Move to create €20 billion fund comes shortly after Monte dei Paschi says it failed to raise capital

Italy’s government has set up a backstop fund to shore up troubled banks, setting the stage for the rescue of troubled Italian lender Banca Monte dei Paschi di Siena SpA.

At a cabinet meeting in the early hours of Friday, the government of Prime Minister Paolo Gentiloni approved the creation of a €20 billion ($20.9 billion) fund to help troubled banks. Shortly afterward, Monte dei Paschi said it will apply to tap this fund for fresh equity to shore up its balance sheet .

The government’s decision comes just hours after the Tuscan bank declared that a last-ditch effort to raise capital from private investors has failed. The bank, Italy’s No. 3 lender, attempted to raise €5 billion to stay afloat and avert a government bailout.


The government said that if a bank taps the newly created fund, its outstanding junior bonds will be forcibly converted into shares. European rules on bank rescues require that investors suffer at least some losses.

However, under the terms attached to the Italian government’s new fund, the losses suffered by holders of Monte dei Paschi’s junior bonds appear to be fairly limited.

The government said that for the Tuscan bank, some junior bonds held mainly by institutional investors will take a 25% haircut on their face value when converted into shares when the bank taps the fund.

In the case of those held by retail investors, however, their bond holdings will also be forcibly converted into shares, but at their full value. MPS will swap the shares obtained by retail investors from the forced conversion of their junior bonds with senior bonds and then the government will buy those shares from the bank.

A Treasury official said the government believes the mechanism to rescue Monte dei Paschi—which other troubled banks can also tap—abides by European rules, even though the government hasn’t received a specific green light by the European Commission.

>>> Deutsche Bank agrees to pay $7.2bn to settle DoJ probe

Deutsche Bank agrees to pay $7.2bn to settle DoJ probe
Deutsche Bank has agreed to pay $7.2bn to resolve the Department of Justice’s probe into the alleged mis-selling of mortgage securities – about half the sum authorities that had originally claimed.

After months of talks with the US authorities, the German bank said early on Friday it had agreed “in principle” to pay a $3.1bn civil penalty and also provide $4.1bn in relief to consumers. The figure compares with the Justice Department’s opening request of $14bn.

>>> Swatch Is Going To Make Car Batteries To Compete with Tesla

Business News Swatch Is Going To Make Car Batteries To Compete with Tesla
In what sounds like a move out of left field, watchmaking mega conglomerate Swatch Group is moving ahead with its plans to develop and sell high-tech batteries for electric vehicles. The strategy actually has deeper roots at Swatch than you'd expect and the seemingly banal story has enough twists and intrigue to make it rather interesting. On the heels of some new reports around the web, here's a look at what we know now, what we're still trying to figure out, and why any of us should care.

Starting back in 2015, Swatch Group CEO Nick Hayek started dropping hints in interviews that its Renata battery company and Belenos Clean Power (a research company in which Swatch Group has a 51% stake) were working on a new chemistry for electric vehicle batteries that would have major business implications. (Renata began life as a movement component supplier in 1952 and was acquired by Swatch in 1982; they now make a huge range of both consumer and industrial batteries for watches, hearing aids, and so on.) According to a Bloomberg report from October 2015, Hayek even considered taking Belenos public in the wake of the Volkswagen emissions scandal, claiming at the time that the Belenos battery would be dramatically superior to those in use by Tesla.

When I first heard about this, I started doing some poking around, digging into the history of the Smart Car (a partnership between Swatch and Mercedes-Benz) and calling up anyone I could find who might know something. Almost universally, Swatch Group representatives would do everything short of hanging up the phone on me the moment I asked about Belenos or Renata by name. I figured I had to give the story some space to develop, and it looks like it's finally starting to take shape publicly.

Vanadium flow battery energy storage facility, UniEnergy Technologies.
I won't get too into the weeds on the technical side here (you can find those details elsewhere if you're interested), but the new battery chemistry Belenos and Renata are using is actually a mix of old and new. The battery's cathodes use a vanadium pentoxide solution, a technology that dates back to the 1980s, but with a new electrolyte composition that Swatch claims offers higher energy storage density, longer battery life, and better recharge rates. In fact, the company has previously claimed that its batteries will have 50% more energy storage capacity than the most advanced lithium-based batteries available.

Importantly, Swatch also claims that these new batteries will be much safer than lithium ion batteries; one of the advantages of vanadium pentoxide batteries is that they're liquid based, and non-flamable. There are disadvantages, though; historically, their greater weight and the addition of pumping systems has confined vanadium pentoxide battery use mostly to backup energy storage in static installations. Additional details on the chemistry and safety will surely come as Swatch gets closer to actual production.

Today's report from Reuters paints an interesting, if not very optimistic, picture of Swatch's venture though. Quotes from investors and analytics point to Hayek's timeline of spinning up a $10 billion per year business in three years as both technologically and logistically impossible. Hayek has run into issues like this before, most notably with his 2014 and 2015 comments about crushing Apple in the smartwatch game. We're yet to see that materialize in any meaningful way. In the 2015 Bloomberg report, Hayek said, "Swatch will begin production in June through its Renata unit, which makes batteries for timepieces. Initially Renata will produce as many as 200 a day, in various sizes. The technology will be used and tested in e-bikes, drones and electrical scooters in 2016, and it’ll be ready for cars from 2017." As of now, however, Renata does not appear to have shipped vanadium pentoxide batteries for any application.


The last thing to note is the context for this move. Swatch Group hasn't had the best year on the watch side of things. Operating profit and net profit were both down over 50% year-over-year for the first half of 2016 and share prices are down 10% this year (after falling over 20% last year). Unlike other groups, Swatch hasn't made the massive job cuts to reduce costs, and the short term strategy to fix the problem isn't entirely clear.

You can bet we'll be following this story closely as it develops and we'll be reaching out to various sources inside and outside Swatch Group to learn more over the coming week. Stay tuned, this one is bound to be nothing short of strange.

You can check out the earlier reports from Watches By SJX and Reuters for additional analysis.

UniEnergy vanadium flow battery storage installation via Wikipedia and UniEnergy Technologies.

Tesla S battery pack image via Wikipedia,

>>> Hollywood Reporter-Billboard Media Group to buy Spin, Vibe, and Stereogum fr

Hollywood Reporter-Billboard Media Group to buy Spin, Vibe, and Stereogum from SpinMedia

The Hollywood Reporter-Billboard Media Group, a New York City-based media giant, will acquire the music assets of Spin, Vibe, and Stereogum from SpinMedia, a Los Angeles, California-based publisher. No financial terms were divulged.
The deal is expected to build out The Hollywood Reporter-Billboard Media Group's music assets and its online audience to 45 million readers a month, and boost its revenues to more than USD 100m a year.
The Hollywood Reporter-Billboard Media Group reaches almost 30 million readers a month online globally, with a social footprint of about 20 million via its digital and print publications. The firm is a division of Prometheus Global Media.

Press release:
The Hollywood Reporter-Billboard Media Group today announced that it has signed a definitive agreement to acquire SpinMedia's storied music assets Spin, Vibe, and Stereogum, establishing the world's largest music brand by digital traffic, social reach, and audience share.
"In recent years, we set out to own the topic of music online, and the acquisition of these incredible music assets helps us do just that," said Media Group co-president John Amato. "By making these brands part of our family, The Hollywood Reporter-Billboard Media Group will be able to fully capture the value of millennials and music, and continue to strengthen its leadership position in this critical arena."
"Bringing in these historic brands under Billboard allows passionate music audiences to enjoy rock to urban to pop in one massive portfolio," said Media Group co-president Janice Min. "The power and scale of these combined, complementary digital assets will deliver more ways to reach our audience through TV, video, live events, social and online through these brands."
SpinMedia CEO Stephen Blackwell will be named Chief Strategy Officer of the newly acquired company and will oversee revenue, digital growth, and product, reporting to Amato.
The deal expands The Hollywood Reporter-Billboard Media Group's online audience to 45 million readers a month, strengthening its reach among social-media savvy millennials who value listening to music digitally and live experiences in equal measure. The Hollywood Reporter and Billboard both launched aggressive moves into video earlier this year, with the brands currently delivering over 100 million video views monthly. The Media Group has also partnered with Facebook to create custom content for the recently launched Facebook Live.
In all, the acquisition will boost the Media Group's revenues to more than USD 100m a year, two-thirds of which will come from digital and video.
SPIN magazine became fully digital in late 2012 after BuzzMedia acquired the 27-year-old publication and rebranded it as SpinMedia. It bought the hip-hop and R&B magazine VIBE and its digital properties the following year, growing its footprint in music and entertainment.

WSJ : The World’s Largest Hedge Fund Is Building an Algorithmic Model From its E

The World’s Largest Hedge Fund Is Building an Algorithmic Model From its Employees’ Brains
Bridgewater wants day-to-day management—hiring, firing, decision-making—to be guided by software that doles out instructions

Deep inside Bridgewater Associates LP, the world’s largest hedge-fund firm, software engineers are at work on a secret project that founder Ray Dalio has sometimes called “The Book of the Future.”
The goal is technology that would automate most of the firm’s management. It would represent a culmination of Mr. Dalio’s life work to build Bridgewater into an altar to radical openness—and a place that can endure without him.
At Bridgewater, most meetings are recorded, employees are expected to criticize one another continually, people are subject to frequent probes of their weaknesses, and personal performance is assessed on a host of data points, all under Mr. Dalio’s gaze.

Bridgewater’s new technology would enshrine his unorthodox management approach in a software system. It could dole out GPS-style directions for how staff members should spend every aspect of their days, down to whether an employee should make a particular phone call.

The system remains under development, and the exact details of its operations are still being debated inside the firm. One employee familiar with the project described it as “like trying to make Ray’s brain into a computer.”
Bridgewater manages $160 billion, the most of any hedge-fund firm. It has earned clients twice as much total profit as any rival, says LCH Investments NV, a firm that puts client money into hedge funds. Mr. Dalio personally earned $1.4 billion last year, according to research firm Institutional Investor’s Alpha.
Bridgewater’s flagship fund, however, was down about 12% on the year at one point in 2016, causing alarm inside the firm. The fund has since recovered to being up 3.9% in mid-December. A lower-fee fund was up 8.1%.

Rules for Bridgewater’s staff are laid out in a 123-page public manifesto known as the “Principles,” which every employee is expected to know and diligently apply. Along with maxims such as “By and large, you will get what you deserve over time,” the Principles are filled with advice from Mr. Dalio such as “Don’t ‘pick your battles.’ Fight them all.”
Bridgewater says about one-fifth of new hires leave within the first year. The pressure is such that those who stay sometimes are seen crying in the bathrooms, said five current and former staff members. This article is based on interviews with them and more than a dozen other past and present Bridgewater employees and others close to the firm.

Mr. Dalio returned to run Bridgewater earlier this year after stepping back to a mentor role six years ago. Within a few weeks, he gathered managers under a tent and said the firm had grown bloated and inefficient. The fix, he said, would be a “renovation,” in which weak employees were let go.
Staff cuts began almost immediately. Since his return, head count is down by about 150, or 10%. Hundreds more may be cut in coming months, though some are expected to be replaced eventually. The budget for the holiday party, which in the past has had elaborate decorations, such as Christmas trees hanging inverted from the ceiling, has been trimmed by 20% this year.
Stung by public disclosures early this year of internal tumult, Mr. Dalio changed a decades-old system of making all high-level deliberations and decisions known to every member of staff. Instead, he decided to let only around 10% have the full measure of what he calls “radical transparency.”
He wrote a new principle, not yet public, that says, “Expect those who receive the radical transparency to handle it responsibly and don’t give it to them if they can’t.”

When an employee challenged Mr. Dalio in an open meeting on whether the response was proportionate to the leaks, he replied that as the inventor of the firm’s management system, he determined it was.
Mr. Dalio founded Bridgewater in 1975 as a research shop based in his two-bedroom Manhattan apartment. He earned attention for his ability to predict macroeconomic trends.
The underpinning to his success, Mr. Dalio often says, is his belief that markets reflect the workings of a misunderstood economic machine, and interpreting its mechanics requires a relentless and often painful dedication to getting to the truth through “thoughtful disagreement.” That’s why employees are encouraged to challenge each other repeatedly and without reservation.
The economy, Mr. Dalio has written, is “really just a zillion simple things working together.” Decades before computer-driven trading came into vogue, Bridgewater began tracking relations among what are now 100 million separate data points, such as international interest rates and retail sales, and creating investment algorithms.
The main hedge fund embodying these algorithms, Pure Alpha, uses the data to buy and sell stocks, bonds, currencies and other assets. The fund has long anticipated booms and busts around the world, including the looming financial crisis as early as 2006, the firm has told investors.
Mr. Dalio also believes humans work like machines, a word that appears 84 times in the Principles. The problem, he has often said, is that people are prevented from achieving their best performance by emotional interference. It is something he thinks can be overcome through systematic practice.
That applies to managing, too. Successful managers “design a ‘machine’ consisting of the right people doing the right things to get what they want,” he wrote in the Principles.

The “Book of the Future” software to automate management, a project Mr. Dalio has also sometimes referred to as “The One Thing,” later gained the more formal name of Principles Operating System. Abbreviated PriOS, it is an attempt to make management nearly as systematic as the firm’s investing process.
Data are incorporated from a phalanx of personality tests that Mr. Dalio requires of his employees. In one, managers undergo written exams to determine their “stratum,” an unconventional score for conceptual skills developed by the late Canadian-born psychoanalystElliott Jaques.
Ray Dalio's Management Machine
The founder of the world's biggest hedge fund, Bridgewater Associates, is working on automating day-to-day decisions to match his ‘Principles’ manifesto. Here is how it would work.




As applied at the firm, questions include “What is the biggest problem Bridgewater faces today?” The highest marks go to those found to have an innate ability to spot long-term trends.
Mr. Dalio has the highest stratum score at Bridgewater, and the firm has told employees he has one of the highest in the world.
Likewise, Bridgewater’s software judges Mr. Dalio the firm’s most “believable” employee in matters such as investing and leadership, which means his opinions carry more weight.
Mr. Dalio is always in search of new data with which to measure his staff. He once raised the idea of using head bands to track people’s brain waves, according to one former employee. The idea wasn’t adopted.
The push to automate management addresses a larger challenge, which is how this culture would survive without Mr. Dalio, who is 67 years old.
When he temporarily retreated from day-to-day management, Mr. Dalio spent weeks at a time away from the firm’s Westport, Conn., campus indulging pursuits such as scuba diving and, until he gave it up, bow hunting. He bought a submarine-equipped yacht, MV Alucia, for research expeditions in the open ocean.
To run Bridgewater in his absence, he brought in a collection of big-name outsiders.
Before long, he was expressing frustration with some in senior roles. There was James Comey, whom Mr. Dalio hired as general counsel in 2010, saying he would act as a “godfather” figure to improve justice at the firm.
Within three years, according to two former employees, Mr. Dalio had taken to calling Mr. Comey something else, a “chirper” who repeats stale ideas, as opposed to a “shaper,” the Bridgewater ideal of a visionary leader.
Mr. Comey left in 2013, telling colleagues his personality didn’t fit. Now director of the Federal Bureau of Investigation, he declined to comment.
An executive long seen as Mr. Dalio’s heir apparent, Greg Jensen, ran afoul of his boss a year ago for allegedly talking about him beyond his back, which at Bridgewater is a sin second only to dishonesty. In a tribunal the firm convened, Mr. Jensen was found to have broken the rules. He lost his co-CEO title but remains co-chief investment officer. Mr. Jensen declined to comment.
ENLARGE
David Ferrucci led IBM’s Watson artificial-intelligence project and now heads a lab at Bridgewater that is developing software to automate decision-making. PHOTO: BLOOMBERG
“These types of interactions go on in any workplace in America,” Bridgewater said in a written statement for this article. “The difference here is that instead of pretending it doesn’t exist we address it openly and deal with it honestly. We show them to everyone and if necessary conflicts are decided by a vote.”
Mr. Dalio frequently develops new ways to enforce his philosophy. He recently created a job category called Overseer, whose roughly dozen members are spread through the firm and act as the eyes and ears of the top leadership.
At the core of the technology project now under way is a walled-off group called the Systematized Intelligence Lab, headed by David Ferrucci, who led development of the artificial-intelligence system Watson at International Business Machines Corp. before joining Bridgewater in 2013.
Though outsiders expected Mr. Ferrucci would use his talents to help find hidden signals in the financial markets, his job has focused more narrowly on analyzing the torrent of data the firm gathers about its employees. The data include ratings employees give each other throughout the work day, called “dots.”
The Systematized Intelligence Lab is involved in several iPad applications that are part of employees’ everyday lives, among them the “Dot Collector.” It allows employees to rate each other on dozens of attributes and to hold snap polls on issues during meetings, including asking blunt questions such as whether a current conversation is a waste of time.
The data blend with others to produce “Baseball Cards” that show people’s strengths and weaknesses in various categories, such as “touching the nerve,” a prized attribute.
A job advertisement for the Systematized Intelligence Lab said it sought to “extract meaning and domain understanding from the wealth of text-based data our innovative applications generate.” Several employees said they have felt that working at Bridgewater was as much experimental research into human decision-making as it was investing.
New apps in recent months shed light on Mr. Dalio’s expanding technological vision. Software called “The Contract,” loaded on staff iPads, instructs employees to formalize goals to be achieved over time and tracks how reliably they follow through.
An app called “The Coach” lets people input a question and directs them to the relevant passage in Mr. Dalio’s Principles document. The goal is an evolution of The Coach into an intelligent system that can assist in decision-making.
Those are initial uses of PriOS, the management software Mr. Dalio is developing. Future uses would include the ability to scan open positions at the company and have PriOS sort through the staff to find people with particular talents and strengths to fill jobs.
In other instances, employees at loggerheads over decisions wouldn’t have to hash out each debate out loud. They would key their opinions into PriOS, and the software would rank their perspectives, consult with Mr. Dalio’s Principles, and spit out the best way to proceed.
The ultimate vision is that PriOS would be able to predict outcomes of meetings before they are completed, and to guide people to take certain actions throughout the day. Within five years, Mr. Dalio aims for nearly three-quarters of management decisions to be determined by PriOS.
The role of many remaining humans at the firm wouldn’t be to make individual choices but to design the criteria by which the system makes decisions, intervening when something isn’t working.
Mr. Dalio’s original written manifesto nods to the goal of automating decision-making. With greater use of the Principles, it says, “not only will they be understood, but they will evolve from ‘Ray’s principles’ to ‘our principles’ and Ray will fade out of the picture.”

>>> US Close Dow -012% S&P -0.19% Nasdaq -0.44% Russell -0.90%

Closing Market Summary: Cyclical Sectors Pace Second Consecutive Retreat

The stock market recorded its second consecutive loss on Thursday, but once again, investor participation was on the light side as some participants decided to sit out the pre-holiday session. The S&P 500 shed 0.2% while the Nasdaq (-0.4%) underperformed. Small caps faced a bit more selling, sending the Russell 2000 lower by 0.9%.

Equity indices were confined to negative territory for the duration of the session with influential sectors responsible for the weakness. The consumer discretionary space (-1.0%) spent the day at the bottom of the leaderboard with Bed Bath & Beyond (BBBY 41.38, -4.18) falling 9.2% after weak results and guidance. Retailers in general had a rough day, sending the SPDR S&P Retail ETF (XRT 44.74, -1.62) lower by 3.5%.

Three other large sectors like financials (-0.3%), technology (-0.3%), and industrials (-0.2%) also spent the day in negative territory. The top-weighted technology space narrowed its weekly gain to 0.5% as losses in large cap components offset gains in chipmakers. The PHLX Semiconductor Index rose 0.5% with Micron (MU 23.19, +2.61) surging 12.7% after beating bottom-line estimates. Staying on the earnings front, software company Red Hat (RHT 68.71, -11.08) reported disappointing billings and revenue, which outweighed above-consensus earnings, sparking a 13.9% dive in the stock.

Only one cyclical sector—energy (+0.5%)—ended in the green, taking a lead from crude oil, which climbed 0.8% to $52.97/bbl. The commodity-sensitive sector will enter Friday with a 0.1% decline for the week.

The countercyclical side had a better showing as telecom services (+1.0%), utilities (+0.3%), and health care (+0.1%) registered gains while consumer staples (-0.1%) and real estate (-0.1%) recorded slim losses.

Treasuries ended the day on a mostly lower note with the 10-yr yield rising one basis point to 2.55%.

Intraday investor participation was below average, but a volume surge into the close lifted the NYSE floor total above yesterday's level of 850 million to more than 875 million.

Economic data included initial claims, the third estimate of Q3 GDP, Durable Orders, FHFA Housing Price Index, Leading Indicators, Personal Income, Personal Spending, and core PCE Prices:

  • Initial claims for the week ending December 17 increased 21,000 to 275,000 (consensus 256,000)
    • Continuing claims for the week ending December 10 rose 15,000 to 2.036 million
  • Q3 GDP was revised up to 3.5% (consensus 3.3%) from 3.2%. The GDP Deflator was left unchanged at 1.4%
    • Real final sales, which exclude the change in inventories, increased 3.0% versus 2.7% in the second estimate
  • Durable orders declined 4.6% (consensus -4.5%), with a 73.5% decline in orders for nondefense aircraft and parts acting as the major drag
    • Excluding transportation, durable orders were up 0.5% (consensus +0.2%)
  • The FHFA Housing Price Index for October rose 0.4% to follow a 0.6% increase in September
  • Personal income was little changed in November (consensus 0.3%) after increasing a downwardly revised 0.5% (from 0.6%) in October
    • Personal spending increased 0.2% (consensus 0.4%) following an upwardly revised 0.4% increase (from 0.3%) in October
    • The PCE Price Index and the core PCE Price Index, which excludes food and energy, were both unchanged
  • The Conference Board's Leading Economic Index was unchanged in November (consensus +0.1%) following an unrevised 0.1% increase for October.

Tomorrow's economic data will be limited to the 10:00 ET release of November New Home Sales (consensus 573,000) and the final reading of the Michigan Sentiment Index for December (consensus 98.2).

  • Russell 2000 +20.1% YTD
  • Dow Jones Industrial Average +14.3% YTD
  • S&P 500 +10.6% YTD
  • Nasdaq Composite +8.8% YTD

>>> Apple to Buy Hollywood Studio Next year...Disney ? After Pixar/Jobs history

Apple Buying Hollywood Studio Next Year, Claims Kim Dotcom

Mega founder and infamous internet entrepreneur Kim Dotcom claims to have inside information about an acquisition that Apple is planning to make in 2017. He claims that Apple is going to acquire a Hollywood studio next year. The claim was made on Twitter and Kim Dotcom has not provided any information about where he received this “#InsiderIntel” from. Keeping with its usual policy of not commenting on rumors, Apple has not sent out an official comment on the matter.

It merits mentioning here that Apple has long been rumored to be harboring intentions to enter the movie and TV industry. The company is believed to be working on its own standalone internet TV streaming service as well.
That’s not all. Apple is also producing its own show called Planet of the Apps. It also had a small presence at the Sundance Film Festival earlier this year. It’s not hard to see why one might come to believe that Apple might make a major move into this space by acquiring a Hollywood studio.
Kim Dotcom’s tweet only mentions that Apple might acquire a Hollywood studio in 2017. There are no further details available about this possibility and it’s unclear what studio Apple might be looking at if it’s going to do this at all.

>>> US Gapping down:

Gapping down:

Earnings/Guidance: RHT -12.0%, FINL -3.8%, BBBY -3.4%,

Other news:
  • OVAS -31% (Provided business update, CEO & COO to step down, company to reduce workforce by 30%)
  • FRED -3.2% (following RAD results showing comps -3.4%, as FRED is acquiring 865 stores from Walgreens/Rite Aid)
  • SGY -2.4% (announces resolution of a motion to appoint an equity committee, updated the status of the restructuring plan solicitation and announced the bankruptcy court's approval of Stone's First Day Motions)
  • TWTR -1.3% (lower in early trade after M&A blog Betaville updated on its previous reports of potential interest from Disney (DIS), now saying that said talks have been put on hold)
  • BABA -1.3% (after US black lists the company's Taobao marketplace resulting from counterfit concerns)