Will snoopgate fell the Bloomberg giant?

JPMorgan Chase CEO Jamie Dimon testifies is taking legal action against Bloomberg for alleged snooping practices. Source: AP

JP MORGAN was in the eye of a storm. Bruno Iksil, a trader in the Wall Street bank's London office, had made big bets that were starting to go wrong.

The firm was on the hook for losses that would total more than $6bn. Jamie Dimon, the usually unflappable chief executive, was on the rack.

Scenting blood, the world's financial press was trying to track down French-born Iksil. Was he a rogue trader? Or had Dimon always known about his huge positions in the derivatives market?
Amid the deluge of calls to the bank's press office was one from Bloomberg that caught the spin doctors off guard. Had Iksil been sacked, the reporter asked, or had he just been suspended? Reluctant to air the bank's dirty linen in public, the press officer fielding the call refused to comment.
Matter of factly, the reporter added that Bloomberg's records showed Iksil had not logged into his terminal for days. Neither had several colleagues in his team. Were they suspended too? The press officer was stunned that the reporter had access to such information.

The truth was that Bloomberg staff could easily find out exactly who on Wall Street or in the City was at their desk.
By simply tapping "FON Bruno Iksil" into the Bloomberg system, the reporter had learnt that the bond expert was not at his desk. From Iksil's name it was easy to trace the other traders linked to him - and see that they, too, were offline.
It's a trick known to hundreds of thousands of traders around the world who rely on the $20,000 a year terminals supplied by Bloomberg to finance houses, regulators, governments and central banks. Yet JP Morgan's press team had not realised that the company's news reporters had access to the same information.
Bloomberg is the world's biggest provider of financial data - the definitive source of prices on every type of stock, share and derivative. Alongside the information business it runs a news service, staffed by thousands of journalists, that operates on television, radio and the internet as well as the terminals.
The business has created an estimated $27bn fortune for its founder, Michael Bloomberg, 71, the mayor of New York. He is the world's 13th richest person according to Forbes magazine.
JP Morgan let its dispute with Bloomberg drop: Iksil, nicknamed "the London Whale", was a far more pressing problem for the bank to deal with.
One year on, however, new questions have emerged about how Bloomberg uses the data gathered from its customers.
Senior executives at Goldman Sachs got wind of the fact that its reporters had been using the terminals to get scoops on the departures of senior partners at the firm. After demanding answers from Bloomberg, the Wall Street bank was informed that the reporters had seen more than just traders' log-in details.
By typing the right codes into the system, they were able to get an insight into what the company's customers had been viewing on their screens. It was not possible to see which particular stocks they were looking at, Bloomberg claims, but generic information could be gleaned about what they looked at and how often.
"This is extremely serious," said a top trader at one of the world's biggest hedge funds. "I can't live without my Bloomberg terminal. Just imagine that guys at Bloomberg were able to spy on [former US Treasury secretary] Hank Paulson at the height of the financial crisis."
The Bank of England, which also relies on Bloomberg terminals, has condemned the practice as "reprehensible". The European Central Bank, the US Federal Reserve, the Swiss National Bank and China's central bank are all investigating whether Bloomberg has spied on them.
JP Morgan has sent a legal letter demanding full details of which reporters have accessed information since 2008, and exactly what they viewed.
Reporters' access to certain data has now been curbed. Matthew Winkler, editor-in-chief of Bloomberg News, has issued a public apology. Yet it seems there may be more than just the company's whiter-than-white reputation now at stake.
MICHAEL BLOOMBERG set up his eponymous data firm in 1982, after being laid off by Salomon Brothers. The bank had been taken over by Phibro, the commodities trader, and he had been squeezed out.
Although he started on the dealing floor, Bloomberg worked his way up to head of information systems, responsible for Salomon's increasingly important computer systems. When he was axed, he decided to process and sell information about the prices and performance of investment securities, a business dominated by Reuters.
The roots of the Reuters news agency went back to 1848, but since the 1960s it had been using computers to send financial data around the world. And in 1973 it began selling terminals displaying foreign exchange prices.
Bloomberg decided to take on the market leader. After only 10 years he had 10,000 clients. In 1990 he began competing with Reuters in the business of breaking news, too.
Winkler, then a 35-year-old reporter with The Wall Street Journal, was appointed as editor-in-chief and started hiring reporters. As an upstart new agency, he resolved that Bloomberg had to be the most reliable source of information in the world. He wrote a 30-page manifesto on what he considered to be good journalism, dubbed The Bloomberg Way. Reporters were encouraged to keep a close eye on what their highly specialised audience of financiers was reading most.
"The recent complaints go to practices that are almost as old as Bloomberg News," Winkler said in his apology last week. "Since the 1990s, some reporters have used the terminal to obtain, as The Washington Post reported, 'mundane' facts such as log-on information. There was good reason for this, as our reporters used to go to clients in the early days of the company and ask them what topics they wanted to see covered. Understanding how clients used the terminal was more important then."
Over the subsequent 23 years, as Bloomberg's competitiveness and innovation has crushed Reuters into second place, that feedback process has evolved. The reporters get brownie points for mining data on the terminals to support stories. Some users fear that their ability to snoop may amount to industrial espionage.
A TRADER'S Bloomberg terminal is more than just a computer. During trading hours, it could be his or her only contact with the outside world.
It is an intimidating machine - a plain black screen with mostly orange text, and a constant stream of numbers flashing as prices change. The complex system relies on a knowledge of commands rather than mouse clicks. Those who master it can produce charts and data of remarkable complexity. It can also be used to buy or sell securities.
As the financial markets exploded in the 1990s, leading to the creation of sub-prime mortgages, collateralised debt obligations, credit default swaps and countless other complex instruments, the Bloomberg terminal became ubiquitous.
The volume of data to be priced and analysed increased exponentially. Bloomberg's profits started to soar - as did the wealth of its founder, now a high-profile philanthropist.
In 2001, Michael Bloomberg stepped back from the firm to become mayor of New York. Then there were about 160,000 terminals installed at the world's big banks and fund managers. Now 315,000 are in use, at a cost of up to $24,000 a year, or $20,000 for bulk buyers.
The terminal has evolved along the way. At its heart is a private messaging system known as Bloomberg chat. It allows bankers, fund managers and analysts at different firms to gossip away from recorded phone lines or heavily monitored email systems. It is the electronic equivalent of a 1980s City wine bar.
It was on Bloomberg chat that the traders accused of conspiring to rig Libor interest rates promised one another bottles of champagne. Yet it's also how analysts flag new pieces of research and investment bankers discuss deals.
"I have about 25 group chats going at any time and maybe half a dozen one-to-ones," said a fund manager. "Bloomberg chat is how the City talks. It was that function that blew away Reuters. That's what made the [Bloomberg] service so sticky. You had everything in one place."
Vast amounts of inside information have been exchanged on Bloomberg chat. The company has denied that reporters have ever had access to personal messages. Paranoia has set in, nonetheless.
Last week, just as Bloomberg seemed to be bouncing back from Goldman's allegations, it emerged that 10,000 messages sent between users in 2009- 2010 had been leaked online. The information had got out during a technology project at the firm, and was not related to the snooping scandal.
On Thursday the investment bank Citigroup banned some currency traders from using Bloomberg chat, ordering them to move to an internal platform. It insisted the move was not a response to the eavesdropping controversy.
One of the advantages, Citi says, is that it will force staff to share Bloomberg terminals.
Banks have been seeking an excuse to pay Bloomberg less for years. It's not only that each terminal costs dollars 20,000. The firm has long been known to use information gleaned from the terminal to create products to sell back to the banks.
"We were very concerned about the increasingly monopolistic power of Bloomberg," said a former senior executive at one of the world's biggest banks. "They accessed bank data regularly, with full cooperation from banks, and then moved to disintermediate the banks with the objective of getting users to buy more terminals. Despite the concerns, banks never got their act together to present any kind of a concerted counter."
That may be about to change. Just as banks clubbed together to challenge the power of stock exchanges by creating rival trading platforms, so "snoopgate" may be the spur they require to establish a challenger to Bloomberg.