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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Protect the Banks at All Costs [Azizonomics]

Give a man a gun, and he can rob a bank. Give a man a bank, and he can rob a country.

Those are the very true words that two weeks ago had a man in Pennsylvania arrested. His purported crime? Terroristic threats, and the attempted robbery of the bank he was protesting!

From CBS:

An Occupy Easton protester faces an attempted bank robbery charge following an arrest at an organized event at a bank – during which the “Occupier” was holding a sign that reportedly read “You’re being robbed.”

According to The Express-Times, Dave Gorczynski allegedly held cardboard signs outside a Wells Fargo Branch that read, “You’re being robbed,” while the other said, “Give a man a gun, he can rob a bank. Give a man a bank, and he can rob a country.”

Occupy Easton reports on their Facebook page that Gorczynski “was at the bank protesting the theft of our tax dollars, our homes, and our economy by the criminal banksters.”

Welcome to the new America — where banks must be protected at all costs. Whether it’s a bailout or a trumped up charge to silence a protestor, if the banks want it, they get it.

The district attorney in the case has dropped the charge of attempted robbery. However, a terroristic threat charge remains.

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Apologetic Swiss banks sweat it out as U.S., Europe mull redress [Reuters]

(Reuters) – Swiss banks hoping to atone for decades of complicity in tax evasion may be left to sweat it out for months as the United States and Germanyponder the right level of punishment.

Lightning strike over the headquarters of Swiss banks UBS and Credit Suisse during a thunderstorm over the Paradeplatz square in Zurich in this August 24, 2011 file photo. Swiss banks hoping to atone for decades of complicity in tax evasion may be left to sweat it out for months as the United States and Germany ponder the right level of punishment. Switzerland has long dodged U.S. accusations of hiding money for wealthy Americans. But now eleven Swiss banks are under investigation in the United States and there is pressure too from Europe where burdened taxpayers want scalps after numerous banking scandals. The Swiss need a deal to remove the taint from their financial industry. REUTERS-Arnd Wiegmann-Files


Switzerland has long dodged U.S. accusations of hiding money for wealthy Americans. But now eleven Swiss banks are under investigation in the United States and there is pressure too from Europe where burdened taxpayers want scalps after numerous banking scandals. The Swiss need a deal to remove the taint from their financial industry.

However, Washington must factor forthcoming elections into its thinking, and Germany is delaying ratification of a tax deal key to Switzerland’s efforts to strike similar agreements elsewhere in Europe. So the Swiss may be in limbo for a while.

The wait is painful for a country which counts on banking for 7 percent of its economic output: until Swiss banks know how much information they need to share with foreign tax authorities they will struggle to attract new clients.

As a result the share prices of its top banks — Credit Suisse (CSGN.VX) and Julius Baer (BAER.VX) are among those being investigated — are falling as investors fret about earnings.

“We are prepared to sign a settlement with the U.S. for the Swiss banks today. We feel we have made a constructive proposal to the U.S. but it is up to them to accept it or not,” said Switzerland’s Finance Minister Eveline Widmer-Schlumpf.

“This depends on whether the U.S. is willing to reach a settlement before or after their elections, which is unclear at the moment,” she said.

Both Widmer-Schlumpf and chief negotiator Michael Ambuehl have dampened expectations for a U.S. deal by November, stoked as recently as last month by the finance minister herself.

“There is an open window after the summer lull, but it’s relatively tight. Otherwise, I think we’re looking at next year,” said Martin Naville, chief executive of the Swiss-American Chamber of Commerce in Zurich.

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U.S. Banks Told to Prepare for Collapse [wealthwire]

Regulators have instructed five of our nation’s biggest banks to develop some serious plans to ward off collapse in lieu of major problems. U.S. regulators were sure to remind these banks that they should not count on any government assistance this time.

Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N), Citigroup Inc, (C.N), Morgan Stanley (MS.N).

Perhaps those running these banks have learned from the mistakes of Lehman Brothers CEO Dick Fuld who was not quick enough to action, not decisive enough to stave off serious bank problems in the midst of financial crisis.

Reuters reports:

The two-year-old program, which has been largely secret until now, is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

The documents obtained by Reuters indicate that the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed the five big banks to design some realistic recovery plans back in May of 2010.

Such plans would need to be feasibly executed within three-six months following any disaster. Without plans in place, collapse would be imminent.

Recovery plans would vary from resolution plans – which are required under the 2010 Dodd-Frank financial reform law. “Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperiling the financial system.”

So far this summer, nine global banks have sent their living wills to the Fed and Federal Deposit Insurance Corp. Public portions of these documents have been released although they have not received much publicity at all.

Reuters was only able to get their hands on the names of the banks required to submit recovery plans through a Freedom of Information Act request.

In the meantime, experts remain deeply concerned with the potential of blow-ups at big banks resulting in another damaging dose of taxpayer bailouts.

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Black Dossier: HSBC & Terrorist Finance [antifascist-calling]

It’s tough being the world’s second largest bank.

HSBC, the London-based British multinational banking and financial services giant operates in 85 countries with 7,200 offices worldwide with assets totaling more than $2.6 trillion (£4.06tn).

They’re also caught-up in serial scandals: the Libor interest rate-fixing scam, serious charges of drug money laundering as well as suspicions that bank officers “palled around” with terrorist financiers.

Founded in 1865 when the British Crown seized Hong Kong as a colony in the aftermath of the First Opium War, British merchants (today we’d call them drug lords) needed a bank to handle the brisk trade in the illicit substance and launched the Hongkong and Shanghai Banking Company Limited. Rebranded “HSBC” in 1991, the bank expanded at breakneck speed in the heady days after The Wall fell.

While some might call them a success story, exemplars of financial wizardry in tough economic times, more appropriately perhaps, we might borrow a term from Mafia lore to describe their preeminent position in the capitalist pantheon of corrupt institutions: juiced.

‘Sorry, now Go Away’

Today, the “War on Drugs” rivals the “War on Terror” for top spot on the global hypocrisy index.

Moral equivalencies abound. After all, when American secret state agencies manage drug flows or direct terrorist proxies to attack official enemies it’s not quite the same as battling terror or crime.

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Waiting and Hoping for the Printing Presses to Roll [financialsense]

If The Central Bankers Disappoint Things Could Get very Dicey.

There are four key markets that are setting up for big moves. And when you put the charts together, the only logical conclusion that may be reached is that the market is betting on such a large move from global central banks that the world will literally be swimmingin paper money.

Last week, U.S. stocks and to some degree European stocks took off after European Central Bank (ECB) president Mario Draghi promised that the bank would do something dramatic. Now, every red blooded trader in his or her right mind would have to have a huge amount of doubt with regard to Mr. Draghi’s ability to actually do something substantial. But, if you put Mr. Draghi’s likely course of action, assuming he actually delivers, with the action that the central banks in Brazil and China have already begun, and if you factor in that the Federal Reserve has also been hinting at some kind of move, you may have something to consider.

Yes, the global economy is in deep trouble. Growth rates everywhere have been slumping. The U.S. GDP was reported to have fallen to 1.5% last week. And China’s own growth rate, whether you believe it or not (we don’t) has been trending lower, recently clocking in below 8%. Brazil’s own growth rates of late have been more akin to those of a developed country. And India, another growth economy has been in a slump. That means that the global economy is now synchronized. And that the global economy is heading lower, together.

The global central banks have printed trillions of dollars since the 2008 subprime mortgage crash. But much of it is either sitting in bank vaults, propping up decrepit balance sheets that resulted from bad subprime bets and the subsequent crash, or has been used by companies to boost their own balance sheets. That means that for all intents and purposes, the Fiat money from global central banks has been mostly dead money.

But what if, and this is a big if, those bank vaults are topped off. And what if the next round of cash from the printing presses doesn’t actually go into propping up balance sheets? Now, you’ve got a twofold situation. The bank vaults can’t hold any more money. And the frightened global central banks, fearing that the global economy is about to implode, may be ready to put such an overwhelming amount of money in circulation, that it has to do something?


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Debt crisis: ECB intervention hopes drive markets higher [Telegraph]

European markets rose sharply amid mounting speculation of a dramatic intervention by the European Central Bank to arrest the crisis engulfing the region.

Investors were buoyed as a meeting in Frankfurt between US treasury secretary Timothy Geithner and the Bank’s president Mario Draghi fuelled expectation of imminent policy action.

The IBEX 35 in Spain jumped 2.8pc to 6,801.8, while the DAX in Germany rose 1.3pc to 6,774.06, and the CAC 40 in France closed up 1.2pc at 3,320.71. In London the FTSE 100 rose 1.2pc to 5,693.63.

“Investors continued to gorge themselves on equities as on the prospects of further central bank stimulus in the very near term increased today,” said Angus Campbell, head of market analysis at Capital Spreads.

Jean-Claude Juncker, head of the eurogroup of eurozone finance ministers, added to the sense of urgency by warning the eurozone had reached a “decisive point” and has “no time to lose.”

Debt crisis: ECB intervention hopes drive markets higher

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The Size of the Big Banks Is – Literally – Destroying the Rule of Law [washingtonsblog]

ulitzer prize-winning journalist Ron Suskind quotes Treasury Secretary Timothy Geithner as saying:

The confidence in the system is so fragile still… a disclosure of a fraud… could result in a run, just like Lehman.

In other words, Geither said that the big bankers are “too big to jail”, because disclosing any portion of their massive fraud would cause bank runs.

Former IMF economist Simon Johnson notes:

The main motivation behind the administration’s indulgence of serious criminality evidently is fear of the consequences of taking tough action on individual bankers.


The message to bank executives today is simple: build your bank to be as big as possible – and then keep growing. If you manage to become big enough, you and your employees are not just too big to fail, but also too big to jail.

Glenn Greenwald notes:

To justify this lack of accountability for the nation’s wealthiest lawbreakers, the all-too-familiar excuses long used to shield the politically powerful are trotted out on cue. Once again, we are told that prosecutions are too disruptive; that it’s more important to fix the system than to seek retribution for the past; that because the wrongdoers’ reputation is in tatters, they have already suffered enough; that we need the goodwill of financial titans to ensure our common prosperity; and so on.

Indeed, the Obama administration has made it official policy not to prosecute fraud.

Top economists, on the other hand, completely contradict Geithner and the rest of the administration … saying that fraud caused the Great Depression and the current financial crisis, and that the economy willnever recover until fraud is prosecuted.

Top economists and experts on fraud say that fraud is not only widespread, it is actually the business model adopted by the giant banks. See thisthisthisthisthis and this.

Therefore, unless the big banks are broken up, financial fraud will grow exponentially like cancer, and the economy will be destroyed.

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@ritholtz – A concise list of recent bank fraud [MaxKeiser]

Here are some recent improprieties by the big banks:

  • Engaging in mafia-style big-rigging fraud against local governments. See thisthis andthis
  • Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Detailshereherehereherehereherehereherehereherehere and here
  • Pledging the same mortgage multiple times to different buyers.  See thisthisthis,this and this.  This would be like selling your car, and collecting money from 10 different buyers for the same car
  • Committing massive fraud in an $800 trillion dollar market which effects everything from mortgages, student loans, small business loans and city financing

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Apologies But No Change At The Banks [theinternationalforecaster]

Author: Matt Gilloti

As we moved through the week we saw another decrease in consumer confidence along with the price of gas rise and a jump in the cost of food as the price paid to producers rose. It is beyond the humorous point of stupidity that reports released said that the rise was unexpected. With the Eurozone debt crisis increasingly expanding affecting US markets, heavily damaged Midwest corn crops that will surely affect future food and feed costs, summer gas prices rising due mostly in part over the uncertainty with Iran which will in turn affect transport costs and these report posting morons act as if there was no prior economic signs that would signal a rise in the price of consumer staples such as food and gas with their rise in costs posted as unexpected is an absolute disgrace.

The world in which we live today has seemingly traded common sense for ignorance and stupidity. We now see that the manipulative market rigging that has been screamed from the bell tower is now beginning to rapidly play out in the public forum and yet we still see the majority of people turn their heads in disbelief and continue, along with life as usual… while the big companies that are brought to the forefront in huge manipulation scandals, are continuing with business as usual while being made to conform to minimal punishment practices… really HSBC found to be laundering money for drug cartels and possible terrorists and their course of action is to apologize at a hearing in front of the US Senate.

Are those not possibly the same drug cartels and terrorists killing people by beheading them and dumping their body parts on the side of the highway or those killing tourists and ICE agents or the terrorists who would so readily attack American soldiers? And what we get is a we are sorry from HSBC, as if the socialist run public media circus is not insulting enough on a daily basis as to our intelligence and understanding of how things really play-out in the world of the untouchable elitists.

It only helps to reassure us that the interconnection of power amongst the Fed, US government, Big Bankers, billionaire elitists and so on is completely untouchable as if the thought of doing so would be insulting to the remaining power parties. It would seen as we have seen lately that these socialistic global power players seem to look on with admiration instead of disgust at how long one another can play out their hand and how much wealth they can steal or degrade before getting caught.

As it would seem the continual attack against our personal wealth and severe degradation of our constitutional rights will continue on until public outrage outweighs the current head in the sand complacency we now see within fearful citizens struggling to get by while misguidedly trusting their future survival to the same group of people who so willingly to date have placed most of them in the position in which they now reside.

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Can Bernanke Force Banks to Lend by Halting Interest on Excess Reserves? [Mish]


Several readers have ask me to comment on a King World interview of Michael Pento.

Before I offer my comments on Pento’s thoughts, let me say upfront that Eric King is a world-class interviewer. King lets his interviewees have their say, no matter what it is.

It is up to listeners to decide whether the message makes any sense or not. King merely wants the position to be well stated.

Email Request From US

 Hello Mish:

Have you listened to Mike Pento’s scenario where the FED will cease to pay interest on reserves held at the FED, as a result, forcing banks to loan out the money to seek some return. He believes that they will be encourage to purchase US treasuries:

Is this viable and/or probable?

Thanks for providing us with such a great blog.

All the best,


Email From Down Under 

 Dear Mish

I follow your work from Australia with great interest. I was impressed with your argument that the creation of new money will not lead to price increases because it is deposited with the Fed, and does not make it into the real economy.

You will no doubt be aware of recent comments by Michael Pento on King World News that the Fed is about to eliminate the incentives for the banks to deposit excess reserves with the Fed, and that this will force the banks to lend in the economy and cause significant inflation, and presumably a drop in the USD.

I would be greatly interested in your views on this, as a deflationist, because if Pento is right then the reason for deflation over inflation might be eliminated.  Furthermore, the worsening in key stats such as auto sales and official unemployment might just be the trigger that forces the Fed to squeeze the money out into the economy.

Best regards

Primer on Bank Lending

With that background out of the way, my first thought is “Here we go again. How many times does such silliness have to be rebutted before it stops?

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HSBC to pay $1 bln for money laundering [RT]

Britain’s largest bank HSBC has revealed it will have to pay a $1 bln fine to US authorities for money laundering offences that took place between 2004 and 2010.

The disclosure came as a leaked internal memo from the bank’s CEO Stuart Gulliver emerged in Hong Kong.“Between 2004 and 2010, our anti-money laundering controls should have been stronger and more effective, and we failed to spot and deal with the unacceptable behaviour,” Gulliver wrote.

The confession came just weeks after the UK’s second biggest bank, Barclays, was caught up in a rate-fixing scandal and had to pay a $450 mln fine. Chairman Marcus Agius, CEO Bob Diamond and COO Jerry de Misierstepped down under the subsequent pressure.

Men walk into of a branch of HSBC (Reuters/Nikhil Monteiro)

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“A quarter of Wall Street executives see wrongdoing as a key to success, according to a survey by whistleblower law firm Labaton Sucharow released on Tuesday.”

The financial system has become a culture of white collar crime and control fraud. We all know it by now.

Bad behaviour drives out the good, if the bad behaviour is seen to be a quick route to success amongst the morally weak and ambivalent.

As the former CEO of Citigroup, one of the biggest TBTF banks, observed during the widespread credit derivatives fraud:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

The government, the regulatory bodies, the media, economists, and the corporate executives bear a heavy responsibility for this.

They will not admit it, and they cannot reform it, because they themselves are caught in the credibility trap.

Right now white collar crime in the financial system is all carrots and no sticks. The problem is obvious.

Don’t whine. Don’t pout. Don’t complain. Do something.

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Central Bankers Are Not Omnipotent [Zerohedge]

A generation of market participants has grown up knowing only the era of central bankers and the ‘Great Moderation’ of (most of) the last two decades elevated the status of central bankers significantly and while central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world. Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS’ Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank’s stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves.Some monetary policy makers may be at the limits of their influence.


UBS Investment Research, Global Economic Comment:  Memento Mori (Remember You Are Mortal)

Victorious Roman generals accorded the honour of a triumph through the city were treated as demigods for the celebration. To remind them of the limits of their powers, a slave was required to ride alongside the general, whispering from time to time some ego deflating phrase. Apocryphally this was “memento mori” – “remember you are mortal”. A similar process could well be applied today to the world’s central bankers. To be fair, central bankers are generally aware of the limits of their own powers. The problem is that financial markets have embraced the cult of the central bank, and it is central bank watchers who need to be told “remember they are mortal.”

The great moderation of the last two decades elevated the position of central banks. By the 1990s central banks in the OECD had generally reduced inflation, and in doing so reduced the inflation uncertainty risk premium. This had lowered not only the nominal but also the real cost of capital (quite justifiably). This in turn facilitated investment, capital gains in asset classes, and fortuitously accompanied an extended period of economic stability for most economies.

This period raised the status of central banks. Fiscal policy ceased to concern markets too much, with the possible exception of Japan (where monetary policy was demonstrably failing). Changes of government were not generally a macroeconomic concern, although specific sectors could still be impacted by specific policies. Stimulus was to come through monetary policy, and moderation would be enforced by the same means. Perhaps inevitably, at a time when a lower real cost of capital was driving economic prosperity, the arbiters of the cost of capital were seen as the drivers of economies.

A generation of investors and financial market participants has thus grown up knowing only the era of central bankers. The modern communication age further encouraged this. With twenty four hour business news, having a whole host of central bank speeches to cover must be something of a godsend. Federal Reserve Presidents (voting or not), ECB board members and participants in the Bank of England monetary policy committee all provide a wonderful way of generating newswire headlines and filling airtime.

Time to ask “why?”

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Spain’s Not Getting a Bailout… Neither is Italy… It’s the END GAME Folks [Zerohedge]

Spain got a “bailout” or so the media claimed. Because I cannot find any entity in Europe with the funds to actually bailout Spain (the EUFN is tapped out, the ESM has major political issues, and Germany is risking a credit downgrade and insolvency based on its backdoor EU props).

As one would expect in this situation, things are rapidly going into hyper-drive in Spain. The weekend before last the country implemented capital controls including

  • A minimum fine of  €10,000 for taxpayers who do not report their foreign accounts.
  • Secondary fines of  €5,000 for each additional account
  • No cash transactions greater than €2,500
  • Cash transaction restrictions apply to individuals and businesses

Does this sound like the actions of an economy with a sound banking system?

On a related note, Italy is once again back on the brink: in the last 2 weeks Italy’s Prime Minister Mario Monti has said that the country is “flirting with economic disaster… [and] in a crisis.” He, like Spain’s PM Rajoy, has pushed for the ESM to buy sovereign bonds. He’s also asked the ECB to implement a mechanism through which it would buy Italian sovereign bonds whenever the spread between them and German bunds grows too large (a type of bailout).

Indeed, things are so desperate that he invited German Chancellor Angela Merkel, French President Francois Hollande, and Spanish Prime Minister Mariano Rajoy to an emergency meeting in Rome over the weekend. His goal was to convince EU leaders to allow Italy to receive funding directly from the EFSF and ESM.

The ECB and Germany have already rebuked this idea:

ECB Weidmann: Strongly Against Monti’s Proposal For Unconditional Funding

European Central Bank Governing Council member Jens Weidmann strongly opposed the proposal of Italian Prime Minister Mario Monti through which Italy could receive billions of euros from the European rescue umbrellas (EFSF and ESM) without meeting the assigned conditions of the aid, Sueddeutsche Zeitung reported.

For Italy, the advantage of Mr. Monti’s proposal is simply to avoid meeting the strict saving and reform requirements that are conditional to receive the aid. That in turn would create a unique funding path for Italy unlike what other European countries like Greece and Portugal had to accept to get bailed out.

Mr. Weidmann on the other hand considered that as a “detour” that would result in a state funding which is prohibited by the EU treaties and would undermine the regulatory framework of the monetary union. Besides, Italy already tried a similar method in the 1970s and failed, according to the report.

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Paul Brodsky: Central Banks are Nearing the ‘Inflate or Die’ Stage


“It’s impossible to have a political solution to a balance sheet problem” says Paul Brodsky, bond market expert and co-founder of QB Asset Management.

The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global “debt jubilee” transpires, which Paul thinks is unlikely).

Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.

So how will this debt overhang be resolved?

Central bank money printing — and lots of it — thinks Paul.

At this point, the danger posed by the instability of our monetary and fiscal house of cards is so great that trying to time an investment program to when this avalanche of printing will occur too risky, in Paul’s opinion. It’s time to shift your remaining capital into hard assets and sit on the sidelines to watch the carnage play out.

Bob Diamond loves Barclays – and its culture. And that culture was what was wrong, not the failings of Libor [Telegraph]

Bob Diamond at the Treasury Select Committee

“I love Barclays”, was how Bob Diamond started his testimony to the Treasury Select Committee. It wasn’t quite as memorable as “this is the most humble day of my life”, but it had the same feeling as when Rupert Murdoch made his infamous appearance last summer. This man, who has become a target of public hate, is a brash American, an entrepreneur, who built a huge global business, Barclays Capital, out of nothing, exploiting every opportunity, every customer, eking out profit wherever it could be found – however morally suspect the means.

And he now has to explain himself to an austere MP, the Chairman of the Committee Andrew Tyrie, under the watching eyes of the nation’s media. But it was pretty easy, really. Diamond was fully in control from the beginning – you could tell that he’s used to chairing meetings when he thanked the MPs for turning up. By the time Jesse Norman, a Conservative MP who used to work for Barclays, began questioning, he was cruising, pointing out his former colleague’s job at every opportunity, and referring to all the sitting MPs by their first names, even as they called him Mr Diamond.

Bob’s argument is that the Libor rate wasn’t fair on Barclays at the time of the phone call to Paul Tucker, the deputy governor of the Bank of England. “Barclays had constistently been at the high end [of Libor] throughout the financial crisis… I said, did you explain to ministers the real story? Which is that other banks are posting rates below ours, and they’re not borrowing at those levels”, he said.

His argument was that the unrepresentative Libor rate undermined Barclays at a time when it needed confidence to raise funds from the market, and from the Middle East, to avoid being nationalised, and that his conversation with Tucker was about trying to get that message back to “officials” in Whitehall. Other banks could not borrow at all, and so their submissions were meaningless – except in so far as they undermined Barclays.

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Gold investors putting their eggs in the QE basket [mineweb]


When the US launched its first quantitative easing programme at the end of 2008, it is fair to say the world was in a fairly parlous state and in the four months following that significant liquidity injection gold rose around 36%.

When QE2 was announced gold rose again but, by not nearly as much. As ETF Securities points out in a new note, by the end of the second round of QE  the gold price rose by 11% to US$1,500oz.

While these were impressive moves, the real price action happened in September of 2011 when gold hit its record high, not on a third bout of liquidity in the US but, rather, on the expectation that the Fed would have to step in again to help out the ailing economy.

Now, granted, the situation in the US did not evolve in a vacuum, indeed, many would point to the ever-worsening sovereign debt crisis in Europe as another significant factor in gold’s solid move higher but, it is clear that US monetary policy has a very significant impact on the metal.

Indeed, as ETF Securities points out, while gold has traditionally been considered a hedge against financial risk, “with the end of the second round of quantitative easing on June 30 2011, the positive correlation between the gold price and risk, as measured by the VIX index, began to fall, turning negative in October 2011.”

Adding, “In recent weeks, it has become increasingly clear that another round of quantitative easing from the US Fed is the main catalyst investors are waiting for – both for US dollar weakness and gold price performance.”

According to the group, if non-farm payrolls and other growth indicators such as the monthly ISM surveys do not quickly show substantial and sustainable improvement, a new round of QE seems increasingly likely and, this would be good for gold.

Jeff Nichols, MD of American Precious Metals Advisors and senior economic advisor to Rosland Capital made a similar point to Mineweb in a recent podcast saying, that recent moves in the gold price are much more dependent on developments in the US than on the continued unfolding of the euro zone crisis.

He too maintains that QE3 is inevitable and, is likely to be the catalyst for the next significant upleg in the gold price.

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Draghi-King Push May Mean Bigger Step Into Zero-Rate Era [Bloomberg]

The European Central Bank and the Bank of England may drive global monetary policy deeper into the world of zero interest rates and unorthodox methods today as they seek to stimulate their flagging economies.

The ECB will take its benchmark interest rate below 1 percent for the first time, cutting it by a quarter percentage point to a record low of 0.75 percent, and reduce its deposit rate to zero, according to a Bloomberg News survey of economists. The Bank of England will raise its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds, anothersurvey shows.

The moves would push JPMorgan Chase & Co.’s average interest rate for developed economies to a crisis-era low of about 0.5 percent and add to the balance sheets of major central banks, which have already swelled 40 percent in five years of global financial turmoil. The jury is out on whether the monetary medicine will work or whether policy makers will be forced to deploy further measures.

“A big part of the world economy has become fairly stagnant and so central banks are in easing mode again,” said Joseph Lupton, a global economist at JPMorgan in New York. “We’re probably at the point of diminishing returns, but it can still be argued that it helps somewhat.”

Global Easing

The Bank of England, which has been drawn into the scandal over Barclays Plc’s rigging of Libor rates, will announce its decision at noon in London. The ECB will follow at 1:45 p.m. in Frankfurt and President Mario Draghi holds a press conference 45 minutes later.

Easier monetary policy in Europe would follow the lead of central bankers in the U.S., China and Australia, who were among those to act in the past month.

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