Basel’s Capital Curse, Beating the Drums of Bank Recapitalization [marketoracle]

In the aftermath of the financial crisis, the oracles of money and banking have been beating the drums for “recapitalization” — telling us that, to avoid future crises, banks must be made stronger. To accomplish this, governments across the developed world are compelling banks to raise fresh capital and strengthen their balance sheets. And, if banks can’t raise more capital, they are told to shrink the amount of risk assets (loans) on their books. In any case, we are told that one way or another, banks’ capital-asset ratios must be increased — the higher, the better.


Virtually all the establishment figures in economics and politics have jumped on this bandwagon. In 2010, the world’s central bankers, represented collectively by the Bank of International Settlements (BIS) handed down Basel III — a global regulatory framework that, among other things, hikes capital requirements from 4% to at least 7% of a bank’s riskweighted assets.

For some time, I have warned that higher bank capital requirements, when imposed in the middle of an economic slump, are wrong-headed because they put a squeeze on the money supply and stifle economic growth. As we can see in the accompanying table, this is cause for concern, because the quantity of money and nominal national income are closely related.

Not surprisingly, as banks have pared their balance sheets in anticipation of Basel III’s 2013 implementation, broad money growth in most participating economies has stagnated, at best. The result, thus far, has been financial repression — a credit crunch. This has proven to be a deadly cocktail to ingest in the middle of a slump.

One would think that upon observing the miserable results of their labor over the past few years, the oracles of money and banking would now be looking to undo their blunder. Or, at least they would begin to question the efficacy of the recapitalization frenzy.

On the contrary, central bankers (BIS, the Bank of England, the Fed, etc.), along with an alphabet soup of regulatory bodies — from Britain’s Financial Services Authority (FSA), to the United States’ Financial Stability Oversight Council (FSOC), to the G20’s Financial Stability Board (FSB), to the European Union’s European Banking Authority (EBA) — have begun to clamor for yet another round of hikes in bank capital adequacy requirements. The most recent calls have come from outgoing Bank of England Governor Mervyn King, who, as we will see, is among the “founding fathers” of the recapitalization movement. Why would the oracles want to saddle the global banking system with another round of capital-requirement hikes — particularly when Europe has just gone into a doubledip recession, and the U.K. and U.S. are mired in growth recessions? Are they simply unaware of the devastating unintended consequences this creates?

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Banking on Criminality: Drug Money & the Above-the-Law Global Banking Cartel


In what the New York Times declared as a “dark day for the rule of law” on December 11, 2012, HSBC, the world’s second largest bank, failed to be indicted for extensive criminal activities in laundering money to and from regimes under sanctions, Mexican drug cartels, and terrorist organizations (including al-Qaeda). While admitting culpability, and with guilt assured, state and federal authorities in the United States decided not to indict the bank “over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.” Instead, HSBC agreed to pay a $1.92 billion settlement.

The fear was that an indictment would be a “death sentence” for HSBC. The U.S. Justice Department, which was prosecuting the case, was told by the U.S. Treasury Department and the Federal Reserve that taking such an “aggressive stance” against HSBC could have negative effects upon the economy. Instead, the bank was to forfeit $1.2 billion and pay $700 million in fines on top of that for violating the Bank Secrecy Act and the Trading with the Enemy Act. In a statement, HSBC’s CEO stated, “We accept responsibility for our past mistakes… We are committed to protecting the integrity of the global financial system. To this end, we will continue to work closely with governments and regulators around the world.” With more than $7 billion in Mexican drug cartel money laundered through HSBC alone, the fine amounts to a slap on the wrist, no more than a cost-benefit analysis of doing business: if the ‘cost’ of laundering billions in drug money is less than the ‘benefit,’ the policy will continue.

As part of the settlement, not one banker at HSBC was to be charged in the case. The New York Times acknowledged that, “the government has bought into the notion that too big to fail is too big to jail.” HSBC joins a list of some of the world’s other largest banks in paying fines for criminal activities, including Credit Suisse, Lloyds, ABN Amro and ING, among others. The U.S. Assistant Attorney General Lanny A. Breuer referred to the settlement as an example of HSBC “being held accountable for stunning failures of oversight.” Lanny Breuer, who heads the Justice Department’s criminal division, which was responsible for prosecuting the case against HSBC, was previously a partner at a law firm (along with the U.S. Attorney General Eric Holder) where they represented a number of major banks and other conglomerates in cases dealing with foreclosure fraud. While Breuer and Holder were partners at Covington & Burling, the firm represented notable clients such as Bank of America, Citigroup, JP Morgan Chase and Wells Fargo, among others. It seems that at the Justice Department, they continue to have the same job: protecting the major banks from being persecuted for criminal behavior.

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How A Handful Of Unsupervised MIT Economists Run The World [Zerohedge]

Ever get the feeling that the entire global economy is one big experiment conducted by several former Keynesian economists from MIT with a bent for central planning, who sit down in conspiratorial dark rooms in tiny Swiss cities and bet it all on green until they double down so much nobody even pays attention to the game? No? You should. Jon Hilsenrath, of all people,explains why.

From the WSJ:

Every two months, more than a dozen bankers meet here on Sunday evenings to talk and dine on the 18th floor of a cylindrical building looking out on the Rhine.

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China’s Huaxia Bank says rogue employee sold troubled wealth product [newsdaily]

The deposit products, issued by the Zhongding Wealth Investment Center, were sold by an employee at Huaxia’s Jiading branch, in a Shanghai suburb, Huaxia said in a statement late on Sunday.

Huaxia did not say what position was held by the employee, who has left the bank, nor did it say whether the employee had been dismissed or had left voluntarily.

The bank also did not say how much money might be involved. It said only that it was “aware” of reports that the investments could not be repaid when the product matured, but Huaxia did not confirm those reports.

In a separate statement on Monday, Huaxia said the products the employee sold were four Zhongding-issued instruments, available since 2011, which were backed by returns from a pawn shop and a car sales company in the poor but populous inland province of Henan.

Chinese banks offer proprietary and third-party wealth management products that offer higher investment returns than regular savings accounts to attract and retain wealthy depositors.

Typically, each bank generally sells a number of financial instruments it has approved. In most cases, the small print reminds investors that the bank does not guarantee performance.

Investment products packaged by private equity firms, like the one issued by Zhongding, are not routinely offered by bank branches.

Critics worry that the wealth management products are poorly regulated and might potentially conceal overlapping obligations that the distributing banks would be required to honor if an economic slowdown led to widespread default.

Huaxia, which distributes other third-party wealth management products, said those products are operating normally and are up to date in their payments.


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More Americans opting out of banking system [washingtonpost]

In the aftermath of one of the worst recessions in history, more Americans have limited or no interaction with banks, instead relying on check cashers and payday lenders to manage their finances, according to a new federal report.

Not only are these Americans more vulnerable to high fees and interest rates, but they are also cut off from credit to buy a car or a home or pay for college, the report from the Federal Deposit Insurance Corp. said.


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Spain creates bad bank, injects funds in Bankia [Reuters]

Spain overhauled its banks for the fifth time in three years on Friday in order to secure up to 100 billion euros ($125 billion) in European aid, and injected emergency funds into its biggest problem bank, Bankia.

Spain’s banks are saddled with 184 billion euros in bad loans and repossessed buildings four years into a property market crash and are in urgent need of rescue because most are cut off from funding other than from the European Central Bank.

The government created a so-called bad bank to take over tens of billions of euros in defaulted loans and unsaleable property to meet the conditions of the European rescue of the financial sector, Economy Minister Luis de Guindos said.

Spanish banks’ difficulties are at the heart of the euro zone debt crisis, but the rescue has not cleared up doubts about the sector and Spain is under pressure to ask for a full sovereign bailout like Greece or Portugal.

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Citigroup pays £373m to settle debt claims [Telegraph]

The class-action suit, which was filed in New York in 2009, accused Citi of employing a “CDO-related quasi-Ponzi scheme” to conceal the growing risks on its balance sheet from the mortgage-backed debt and collateralised debt obligations (CDOs) it owned. Citi told the investors that the CDOs had been sold when, in fact, the bank still remained liable for any losses the products suffered, the lawsuit claimed.

The settlement is one of the largest to emerge from the financial crisis and comes almost four years after Citi turned to the US taxpayer for a $50bn bail-out. Fears about the health of the bank’s balance sheet had sent its shares tumbling following the demise of Lehman Brothers in September 2008, eventually forcing then US Treasury Secretary Hank Paulson to step in.

Citi, which denies the investors’ allegations, said it had settled to avoid a protracted legal fight. “This settlement is a significant step toward resolving our exposure to claims arising from the period of the financial crisis,” the bank said.

The investors who brought the legal action acquired shares in Citi between February 2007 and April 2008, when they tumbled 55pc. The shares eventually sank below $2 before the US government engineered a rescue.

The packaging of US mortgage loans into fresh financial products, such as CDOs, created a bonanza for Wall Street banks until American house prices began to falter in 2007. Until then, investors from around the world were quick to snap up such products because of the higher yield they offered at a time when interest rates were still relatively low. Charles ‘Chuck’ Prince, the former chief executive of Citi, famously said in the summer of 2007, that “as long as the music is playing, you’ve got to get up and dance. We’re still dancing”.

Citigroup has had a $285m settlement with the SEC thrown out by a New York judge


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