Deaths and derivatives

Here

First towels off the beach

http://www.oftwominds.com/blogapr13/Cyprus-template4-13.html

Keep calm

One hundred and eighty G4S staff are being sent to Greek Cypriot bank branches to 'ensure calm' when they reopen.

Yesterday in Cyprus

http://www.theautomaticearth.com/Finance/bank-run-in-cyprus-whos-next.html

http://www.businessinsider.com/cyprus-bailout-risks-europe-bank-runs-2013-3

http://www.zerohedge.com/news/2013-03-16/everyone-shocked-what-just-happened-and-why-just-beginning

http://www.golemxiv.co.uk/2013/03/eu-imposes-collective-punishment-on-cypriots/?utm_source=rss&utm_medium=rss&utm_campaign=eu-imposes-collective-punishment-on-cypriots

http://theautomaticearth.com/Finance/the-cyprus-deal-is-already-under-threat-of-course.html

There are suggestions that the Cypriot government may try to meet public outrage by reducing the 'savings tax' on small depositors and increasing it on large - whom the powers that be like to characterise as Russian money launderers, glossing over the fact that any such that exist do so courtesy of the laxity of the banks and their regulators.

The Rock

But things are caught between a rock and a hardplace. Any such concession to the 'little people' on whom governments depend for votes wil transfer the burden more to international investors, on whom governments depend for loans.


The Hard Place

Habemus Papem!

After bicycling royalty, we now have a tram travelling pope, Well, he was a tram travelling, appartment dwelling, self cooking cardinal, but I presume he will not be allowed as pope to get on the trams very often. What next? Bankers on... what? Rickshaws probably - a Japanese invention of the mid-nineteenth century that replaced palanquins. Such is progress: the rich adopt the wheel after millenia. the catholic church had problems here as well. The third Council of Braga in the late seventh century AD ruled that bishops carrying the relics of martyrs in procession should get out of their litters and walk, relieving the white clad deacon bearers from their burdens.

A litter, I think, originally meant a bed, which formerly was likely to be made of cast down straw, and so the word came to be applied both to the human-borne conveyance and to the light trash we drop around us.

It was of course the democratic Americans who put the wheels on the sedan, and the engine, thus turning it into an auto mobile. The sedan now was democratic not just in that it was no longer carried by human bearers, but in that it consisted of a single compartment, including the driver, who was no longer a servant stuck out in front, outside the cab containing the passengers, but had come in from the cold.

There probably aren't any trams in Vatican City anyway, just as there are no cash machines. However white the pope's garments, his temporal state does not gain admittance to the European Union's 'white list' of those that comply fully with international standards aginst money laundering and tax abuse.

There is much discussion in the public news media as to what is the true character of the new pope, the man who regularly visited the poor in the Argentinian slums, and the man who resisted the conflation of religious and economic activism in liberation theology and, apparently, was not entirely comfortable with his Jesuit order. There is the uncomfortable question of whether or not he abandonned to their fate two Jesuit priests who were tortured by the Argentinian authorities forty years ago. I imagine it is entirely possible that he both vigorously tried to save them and that his previous stern attitude contributed to their peril.

Clearly he is both a man of authority and a man of the people, and perhaps no more able to solve that conundrum than any other.

Estela de la Cuadra, whose mother co-founded the Grandmothers of the Plaza de Mayo activist group during the Argentinian dictatorship to search for missing family members, when asked if she felt Francis had lived up to his reputation as a common, humble man, replied: "Yes, he has an arrogant humility." No doubt that is a spiritual condition with which the Catholic church has often struggled.

The air in their tires

http://www.bbc.co.uk/programmes/b01pw3lj

Corrections and clarifications - maybe

no individual - certainly not those in any senior position - is held to serious account in a way that discomforts them

Today it is reported that two former employees of UBS have been charged in the US over Libor manipulation.

The mark of the idiot

UBS corrupt payments exposed as bank pays £940m to settle Libor claims
...on 18 September 2008 a trader explained to a broker: "If you keep 6s [ie, the six-month Japanese yen Libor rate] unchanged today ... I will fucking do one humongous deal with you ... Like a 50,000 buck deal, whatever ... I need you to keep it as low as possible ... if you do that .... I'll pay you, you know, 50,000 dollars, 100,000 dollars... whatever you want ... I'm a man of my word."

It becomes tedious to highlight reports such as these, it becomes the mark of the idiot who has no place under this amazing panoply of corruption, greed and veniality, where the perpetrators apparently feel no necessity to hide their doings, where they subborn the very language of the ethics they betray, where no individual - certainly not those in any senior position - is held to serious account in a way that discomforts them, where corporations may be 'fined' but are beyond the criminal law, where men of substance and leaders of nations can hardly be unaware of what lies beneath their feet and into which the latter comfortably descend on their retirement from public office.

The long arm of the law

It's official: big banks are beyond the law:

The department spared HSBC a criminal prosecution only because it considered the bank too big to prosecute. Listing a catalogue of mistakes by HSBC over almost a decade, the DoJ admitted that "collateral consequences" were a factor in its decision not to pursue criminal charges. Those consequences, it said, could have included a ban on doing business in the US, resulting in huge job losses.

Corporations are 'regulated'; private citizens are prosecuted; senior executive are (once in a while) deprived of their honours (but not their pensions).

The message on the street



We are big



A bigger bomb. a longer fuse

"So basically they are making the bomb bigger but have succeeded in lengthening the fuse."

One last point – a general one but an important one. Whoever buys the risk from the banks, no matter what claims are made for how separate they are from the banks and how much this removes the risk from the banks, ask yourself where these other people got the money to buy the risk from? The fact is 98% of all the money in the world is credit backed bank created money. No one is insuring bank risk or buying risky assets with sovereign backed money. They are buying it with credit backed money – credit that at some point was created by and loaned from a bank. Somewhere back along the chain a bank counts that loan as an asset and has a risk attached to it. That one simple fact means that it doesn’t really matter who ‘buys’ a bank’s risk. Ultimately it is still tied to a bank and the banking system. The risk never ever goes away until the loan it is part of is paid down. The risk from the bad loans that are still crippling our banking and financial system have not been removed or dealt with in any way other than to move them from the regulatory spot light to a darker corner where they can fester un-noticed. They will not be dealt with until the loans are paid down or written off. The losses must be cleared from the system and will be – by bankruptcy or bail outs. In the mean time all this insurance is, at best, moving the mines around the mine field.

For the full article see here.

Where next for the banking 'crisis'?

China's shadow banking sector has become a potential source of systemic financial risk over the next few years. Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.

Moreover, many WMPs are not even linked to any specific asset, rather, just to a pool of assets, whose cash inflows may often not match the timing of scheduled WMP repayments.

China's shadow banking is contributing to a growing liquidity risk in the financial markets. Most WMPs carry tenures of less than a year, with many being as short as weeks or even days. Thus in some cases short-term financing has been invested in long-term projects, and in such situations there is a possibility of a liquidity crisis being triggered if the markets were to be abruptly squeezed.

In fact, when faced with a liquidity problem, a simple way to avoid the problem could be through using new issuance of WMPs to repay maturing products. To some extent, this is fundamentally a Ponzi scheme. Under certain conditions, the music may stop when investors lose confidence and reduce their buying or withdraw from WMPs. The rollover of a large share of WMPs could weigh heavily on formal banks' reputations, because many investors firmly believe that banks won't close down and they can always get their money back.

The article quoted is written by Mr Gang and appeared in China Daily, a state controlled publication and the country's largest English language paper. The financial activity that concern Mr Gang would of course show up in the statistics as part of China's current economic growth.

I am indebted to Golem XIV for this reference and more comment on the article and the situation in China can be found on his blog.

Debt, Japanese style

Properly directed, the national debt becomes the spending money of the people. It stimulates demand, stimulating productivity. To keep the system stable and sustainable, the money just needs to come from the nation’s own government and its own people, and needs to return to the government and people.

http://www.globalresearch.ca/the-myth-that-japan-is-broke-the-worlds-largest-debtor-is-now-the-worlds-largest-creditor/

Other views of the Japanese government's management of its economy, and of its suport of its insolvent banks, are possible.

Sad and possibly unrelated news.

Old news

What was revealed in the audit was startling: $16,000,000,000,00.00 had been secretly given out to US banks and corporations and foreign banks everywhere from South Korea to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious — the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

http://www.standupamericaus.org/politics-washington-dc/reprise-fed-audit-16-trillion-in-secret-bailouts/

  •Citigroup: $2.5 trillion ($2,500,000,000,000) •Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
•Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
•Bank of America: $1.344 trillion ($1,344,000,000,000)
•Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
•Bear Sterns: $853 billion ($853,000,000,000)
•Goldman Sachs: $814 billion ($814,000,000,000)
•Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
•JP Morgan Chase: $391 billion ($391,000,000,000)
•Deutsche Bank (Germany): $354 billion ($354,000,000,000)
•UBS (Switzerland): $287 billion ($287,000,000,000)
•Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
•Lehman Brothers: $183 billion ($183,000,000,000)
•Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
•BNP Paribas (France): $175 billion ($175,000,000,000),and many many more including banks in Belgium of all places.

A few bad apples

Some banks appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable.


Over half the banks we visited failed to apply meaningful enhanced due diligence (EDD) measures in higher risk situations and therefore failed to identify or record adverse information about the customer or the customer’s beneficial owner. Around a third of them dismissed serious allegations about their customers without adequate review.

More than a third of banks visited failed to put in place effective measures to identify customers as PEPs. [Politically Exposed Persons] Some banks exclusively relied on commercial PEPs databases, even when there were doubts about their effectiveness or coverage. Some small banks unrealistically claimed their relationship managers (RMs) or overseas offices knew all PEPs in the countries they dealt with. And, in some cases, banks failed to identify customers as PEPs even when it was obvious from the information they held that individuals were holding or had held senior public positions.

Three quarters of the banks in our sample failed to take adequate measures to establish the legitimacy of the source of wealth and source of funds to be used in the business relationship. This was of concern in particular where the bank was aware of significant adverse information about the customer’s or beneficial owner’s integrity.

Some banks’ AML [Anti Money Laundering] risk-assessment frameworks were not robust. For example, we found evidence of risk matrices allocating inappropriate low-risk scores to high-risk jurisdictions where the bank maintained significant business relationships. This could have led to them not having to apply EDD and monitoring measures.

Some banks had inadequate safeguards in place to mitigate RMs’ conflicts of interest. At more than a quarter of banks visited, RMs appeared to be too close to the customer to take an objective view of the business relationship and many were primarily rewarded on the basis of profit and new business, regardless of their AML performance.

At a third of banks visited, the management of customer due diligence records was inadequate and some banks were unable to give us an overview of their high-risk or PEP relationships easily. This seriously impeded these banks’ ability to assess money laundering risk on a continuing basis.   Nearly half the banks in our sample failed to review high-risk or PEP relationships regularly. Relevant review forms often contained recycled information year after year, indicating that these banks may not have been taking their obligation to conduct enhanced monitoring of PEP relationships seriously enough.

At a few banks, the general AML culture was a concern, with senior management and/or compliance challenging us about the whole point of the AML regime or the need to identify PEPs.   ... continues

What standards? What charter?

"Simply the best, better than all the rest," was one analyst's verdict on Standard Chartered last week, reflecting the sense that the bank is different from any other listed in London.

Apparently it is all the fault of a 'rogue regulator'. Maybe so, but from Wikipedia:

The Shanghai branch of Chartered bank began operation in August 1858. Initially, the bank's business dealt specifically with large volume discounting and re-discounting of opium and cotton bills. Although there was a gradual rise in opium cultivation in China, the imports of opium still increased from 50,087 picul in 1863 to 82,61 picul by 1888. Transactions in the opium trade generated substantial profits for Chartered bank.

 In 1992, scandal broke when banking regulators charged several employees of Standard Chartered in Mumbai with illegally diverting depositors’ funds to speculate in the stock market. Fines by Indian regulators and provisions for losses cost the bank almost 350 million pounds, a third of its capital.

Scandal erupted again in 1994, when the Sunday Times of London wrote that an executive in the bank’s metals-trading arm had bribed officials in Malaysia and the Philippines in order to win business. The bank, in a statement on 18 July 1994, said there were “discrepancies in expense claims” that “included gifts to individuals in certain countries to facilitate business, a practice contrary to bank rules.'

In 1997, Standard Chartered sold its metals trading arm to Toronto-based Scotiabank for US$26 million. In 1994, the Hong Kong Securities and Futures Commission found that Standard Chartered’s Asian investment bank had illegally helped to artificially support the price of new shares they had underwritten for six companies from July 1991 to March 1993. The bank admitted the offense, apologized and reorganized its brokerage units. The commission banned the bank from underwriting IPOs in Hong Kong for nine months. Standard Chartered’s Asian investment banking operations never recovered, and in 2000 the bank closed them down.

The bank fully recovered in late '90s, during this time, the bank sold off holdings in continental Europe and the Americas, sold the headquarters building (lease-back) and branch properties in Hong Kong. In 2000, Standard Chartered acquired Grindlays Bank & Chase Manhattan Bank Hong Kong retail banking business. The ethics issues and financial losses triggered turmoil in Standard Chartered’s London executive suite. The bank went through three CEOs in three years: Malcolm Williamson was replaced in 1998 by Rana Talwar, who was in turn unseated by Mervyn Davies in 2001. By the time Davies took over, his predecessors had systematically sold off the bank’s holdings in continental Europe and the Americas.

Superstars

Could the existence of such superstars help explain extreme wage inequality? First it should be noted that Gabaix and Landier (2008) use such arguments to explain the large rises in CEO pay over the last two decades. In their model, CEOs differ in managerial talent and are matched to firms competitively. If the marginal impact of a CEO’s talent increases with the value of the firm under his control, then the best CEO manages the best firm. Furthermore, even very small differences in talent can produce large differences in remuneration. For example, they calibrate the model and find that the value of a firm increases by only 0.016% if they replace the 250th best CEO with the best CEO. Yet these small differences in talent translate into large pay differences as they are magnified by firm size. The same calibration shows that the number 1 CEO is paid over 500% more than the 250th CEO.

BANKERS’ PAY AND EXTREME WAGE INEQUALITY IN THE UK, Brian Bell and John Van Reene, April 2010

Little people pay taxes; little people commit crime

Dr Mejia said: "It's an extension of the way they operate at home. Go after the lower classes, the weak link in the chain – the little guy, to show results. Again, transferring the cost of the drug war on to the poorest, but not the financial system and the big business that moves all this along."

With Britain having overtaken the US and Spain as the world's biggest consumer of cocaine per capita, the Wachovia investigation showed much of the drug money is also laundered through the City of London, where the principal Wachovia whistleblower, Martin Woods, was based in the bank's anti-laundering office. He was wrongfully dismissed after sounding the alarm.

Gaviria said: "We know that authorities in the US and UK know far more than they act upon. The authorities realise things about certain people they think are moving money for the drug trade – but the DEA [US Drugs Enforcement Administration] only acts on a fraction of what it knows."

"It's taboo to go after the big banks," added Mejía. "It's political suicide in this economic climate, because the amounts of money recycled are so high."

http://www.guardian.co.uk/world/2012/jun/02/western-banks-colombian-cocaine-trade

Apart from that, Mr Dimon ...

"We made a terrible, egregious mistake," Dimon said in an interview on NBC's Meet the Press on Sunday. "There's almost no excuse for it."

He said bank executives were completely wrong in public statements made in April after being challenged over the trades in media reports.

"We got very defensive. And people started justifying everything we did. We told you something that was completely wrong a mere four weeks ago."

Dimon added: "In hindsight we took far too much risk, the strategy was barely vetted, it was barely monitored. It should never have happened."

... how is the teapot?

Bankiest

…the balance sheet of the euro system, isn’t only gigantic in size but also shocking in quality.

former European Central Bank board member Juergen Stark

the idea is to get two cripples to lean on each other. As long as the two cripples stay very still you can see them as propping each other up.