Posts Tagged ‘banking’

May21

Holder Colder but still Hot

By: Bartlett Naylor

In December, 2012, federal prosecutors failed to bring true justice to HSBC for massive, criminal money laundering because the giant UK bank was too big. An indictment, they thought, would ravage the financial sector.

In January, 2013, with a full month to reflect about the non-prosecution of HSBC, Attorney General Eric Holder acknowledged the policy: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.”

Since then, numerous bank regulators and Obama administration officials have attempted to refute their role in or even the accuracy of Holder’s assertion.  In testimony and speeches, officials from the Federal Reserve, FDIC, Comptroller of the Currency, and Treasury contradicted Holder’s claim that government deemed  some banks were just too big to jail.  Those denials may be explored when Justice Department official James M. Cole testifies before a House financial services subcommittee May 22.

On May 15, Attorney General Holder himself seemed bent on correcting the record as to whether some banks are too big to jail. “Let me make something real clear right away. I made a statement I guess in a Senate hearing that I think has been misconstrued. I said it was difficult at times to bring cases against large financial institutions because [of] the potential consequences that they would have on the financial system. But let me make it very clear that there is no bank, there’s no institution, there’s no individual who cannot be investigated and prosecuted by the United States Department of Justice.”

Notice that Holder did not disavow his earlier statement that it was difficult. He simply asserted that the department’s policy is to pursue warranted cases.

“Let me be very, very, very clear,” Holder continued. “Banks are not too big to jail. If we find a bank or a financial institution that has done something wrong, if we can prove it beyond a reasonable doubt, those cases will be brought.”

(“Very, very, very” clear?)

But, the fact is, the Department of Justice did find such a bank. It was HSBC.

In December, Holder’s own DoJ released a 30-page document in which it declared that HSBC violated anti-money laundering laws. In fact, the DoJ found at HSBC a “failure to adequately monitor over $200 trillion (yes, with a T) in wire transfers between 2006 and 2009 . . . including over $670 billion in wire transfers from HSBC Mexico.”

Did the DoJ’s lawyers think they could prove this? Well, yes. “If this matter were to proceed to trial, the Department would prove beyond a reasonable doubt, by admissible evidence, the facts alleged below and set forth in the criminal Information attached to this Agreement,” the DoJ’s document said. http://www.justice.gov/opa/documents/hsbc/dpa-attachment-a.pdfevidence, the facts.”

The government found not only that HSBC had done “something” wrong, to borrow Holder’s configuration, it found 200 trillion dollar’s worth of wrong.  But HSBC ended up paying a fine equal to a just month’s profit for numerous infractions. Meantime, in January, the DoJ caught a check-cashing manager of a small Los Angeles storefront failing to fill out the proper forms for $8 million in transactions. Her penalty? Five years in prison.

Violating money laundering laws can’t be dismissed as a clerical oversight. Unaccountable mega-bank money launderers enable drug trafficking and associated gun violence. They facilitate terrorism. They abet tyrants. It isn’t a small infraction, and the punishment should fit the crime.

Our insight into crucial decisions involving justice should not depend on a chance moment of candor by an attorney general. Any decision to pull a punch at HSBC based on the firm’s size should have been informed with rigor and care.  Recent documents Public Citizen received from a FOIA request don’t evince such care. The DoJ apparently did not even consult with bank experts about the central question—is HSBC too big to jail? –according to available evidence.

As MIT Professor Simon Johnson has asked: “Who exactly at the Department of Justice decides that a bank is too big to prosecute – and on what basis?  Is there a rule book or a list of criteria?  Or, more likely, is this something totally made up on the spur of the moment and on an ad hoc basis?”

The House oversight subcommittee hearing on May 22  will ideally explore why critical decisions about prosecuting large banks take place in the dark.

We’ve been here before. In 2008 during the financial crisis when too-big-to-fail banks derailed the world economy, ad hoc decisions by senior officials made the problem worse.  Uninformed by public input, they brokered back-room transactions in which JP Morgan obtained Bear Stearns and Washington Mutual, and thereby went from huge to huger. They handed Wachovia to Wells Fargo.

Preventing large banks from holding America hostage—to bailouts, to drug dealers and terrorists — will require ambitious reform. The Brown-Vitter proposal to require substantially greater equity capital for the largest banks constitutes a necessary and most welcome reform.  Shareholders, who legally control companies, should hold a bigger stake in a bank’s source of funding than the current 4 percent. That bill will require serious political efforts.

But at the very least, Congress should support transparency on what the Department of Justice does when it decides some banks are too “difficult,” or “too large” to prosecute. The American public deserves that such policies be very, very, very, very clear.

 

Posted in: Uncategorized0 comments

October18

Tower of Basel

By: Bartlett Naylor

"Bart Naylor" "Financial policy reform"With a simple albeit ambitious decision, Wall Street regulators have a way to all but guarantee that there will be no more financial sector bailouts: require substantial at-risk equity investment.

On Monday, October 22, federal banking regulators will close the public comment period for proposed reforms of so-called capital requirements. Capital rules are the shorthand for the proportional amount of shareholder money that banks must add to any of its loans and other activities. This money joins borrowed money from depositors and other creditors to the bank. Together, stockholder and depositor money is loaned to businesses, home buyers, and other bank clients. If a client can’t repay the whole loan, that loss should come out of the pocket of the stock investor, not the depositor or taxpayer.

Going into the financial crisis, large banks had effectively loaned out $33 for every $1 in stockholder money. When the housing bubble burst, when complex special purpose vehicles exploded, when speculation deals vaporized, that $1 in shareholder investment was not nearly enough to keep these large banks solvent. American taxpayers were forced to invest $700 billion into bank capital accounts through the bailout, with the Federal Reserve shoveling trillions more in cheap credit for the banks.

In order to avoid a repeat of this disaster, the required investment from shareholders must be substantially increased.

Federal bank regulators now propose to improve the capital rules, as part of harmonizing with an accord negotiated in Basel, Switzerland. The regulators’ proposal spans 1,000 pages. The text contains more mathematical formulas than a calculus textbook. By comparison, the Volcker Rule, designed to terminate high risk bank speculation and much maligned for its complexity, is a Reader’s Digest at 300 pages.

These 1,000 of pages represent a lot of trees, both literally and figuratively, but the regulators fail to evince a view of the forest. Most problematic, the regulators essentially leave basic capital levels untouched, at about the same 33-1 level that prevailed during the crash. That upsets leading Washington policy-makers, both Republican and Democrat.

On Oct. 17, Sens. Sherrod Brown (D-Ohio), and David Vitter (R-La.) fired a letter to the regulators declaring that capital requirements must be strengthened. There is “bipartisan consensus among members of the Senate Banking Committee that it is appropriate to require banks to fund themselves with equity sufficient to withstand sufficient economic shocks,” the senators wrote.

Earlier this month, two dozen former regulators, both Republican and Democrat, led by former FDIC Chair Sheila Bair, and Federal Reserve Chairman Paul Volcker called for investor capital equal to 16 percent of the bank’s activities. Sitting FDIC Vice Chair Thomas Hoenig agrees that capital should be substantially higher than currently proposed. Other experts, such as MIT economist Simon Johnson and Stanford professor Anat Admati, call for 20 percent at-risk investment. Admati emphasizes that high capital won’t sit idly in a cookie jar, such as a rainy day fund. Other firms finance themselves entirely with at-risk equity capital, such as the computer company, Apple Inc.

With sound capital, the regulators can dispense with the second major problem with their proposal, namely risk-weighting. This counterproductive exercise allows banks to hold less capital for some activity. If implemented, JP Morgan would need less investor capital for a loan to a faltering big bank like Bank of America than a loan to a profitable, growing company like Apple Inc. Absurd.

The risk-weighting rules are complex, a “tower of Basel,” according to Bank of England director Andrew Haldane. In effect, the weights become “central planners’ determination of risks, which creates its own adverse incentives for banks making asset choices,” according to the FDIC’s Hoenig.

Banks want simplicity? Here you go: In Public Citizen’s comment letter, we call for a strict capital requirement of 20 percent, with no hall passes for risk weighting.

Bartlett Naylor is Public Citizen’s financial advocate. Follow him on Twitter @BartNaylor.

Posted in: Activism, Financial Reform, Regulation, Uncategorized0 comments

September17

The 99 Percent Solution

By: Bartlett Naylor

"Bart Naylor" "Financial policy reform"Four years ago this month, the world’s financial sector exploded, shooting shrapnel through the economy. Wounds fester to this day.

Last year this month, public outrage at Wall Street and general corporate corruption exploded in the form of the Occupy Wall Street movement. Benefits abound.

Defying easy definition, with no leadership structure, no official spokesperson, no office, not even a proverbial mission statement, “Occupations” rapidly proliferated through the United States and overseas. And the accomplishments of this otherwise amorphous energy have been concrete and sweeping. Here are a just a few:

  • OWS unburied from overlooked economics studies and made common knowledge the harsh reality of income inequality. “We are the 99 percent,” declared this movement. Among the alarming statistics: The wealthiest 400 Americans have more savings that half the entire national population.
  • Sniffed at by some for unformed/nebulous views, the OccupyTheSEC group penned an authoritative 300-page analysis of the complex Wall Street Reform Act Volcker Rule. While Wall Street’s high paid lawyers publicly complained about the rule’s difficulty, this Occupy group, composed of former derivative traders surgically dissected each detail of the federal proposal, identifying strength and weaknesses. Since then, senior staff at Washington regulatory agencies have consulted these Occupy experts.
  • Oppressed American workers, including those in beleaguered unions, drew energy from Occupy help. In New York City, for example, Occupy protestors joined in a symbolic 99 picket lines at work sites and banks. Occupy’s support for Con-Edison workers in New York locked out of their resulted in reciprocal support for specific OWS actions.
  • OWS increased attention to the corruption of corporate money in politics. Occupy proved important in approval of the STOCK Act, making members of Congress subject to the same anti-insider trading laws as average Americans. Occupy drew attention to the Supreme Court’s decision in “Citizens United” that reduced restrictions on corporate spending. That resulted in further support for the DISCLOSE Act as well as a constitutional amendment to reverse the court’s decision.

Movement or moment? Traditional conflict has supplanted OWS in the media, namely political elections. But self-identified Occupy members remain vigilant. The OccupyTheSEC gang, as noted, has continued its expert efforts on a widening front. But just as communication revolutionizes yearly (email, social networking, Twitter, livestreaming), it may be impossible to track the trajectory of Occupy. Rather, Occupy may be shattering such distinctions as movement and moment. This non-organization organization Occupy, may, in fact, be a verb.

Bartlett Naylor is Public Citizen’s financial policy advocate. Check out his piece, “Wall Street and the Cost of Forgetting” and follow him on Twitter @BartNaylor.

Posted in: Activism, Campaign Finance, Financial Reform, Open Government, Regulation, Social Justice, Uncategorized0 comments

September12

LIBOR scandal(s) revisited

By: Micah Hauptman

Much has already been written about how a substantial number of banks have manipulated and misrepresented their LIBOR submissions for their economic benefit. But thus far, the flickr by 401(k)2012 conversation surrounding the LIBOR scandal has been primarily focused on how long the scandal has been occurring, and who knew what, when. Levy Economics Institute senior scholar Jan Kregel takes a different look in a policy note, “The Libor Scandal: The Fix is in—the Bank of England Did It!” He examines why the scandal happened in the first place, and what should be learned from it.

As background, LIBOR (London Interbank Offered Rate) is an index that represents a rough estimate of the rate at which banks are able to borrow or willing to lend on a short term basis. A select group of large banks in London submit their respective rates to Thomson Reuters, which then calculates and distributes the average rate on behalf of the industry trade group, British Bankers’ Association (BBA). That rate, despite being unverified and not subject to regulatory scrutiny, is used as a benchmark for a wide array of private lending arrangements. What this means is that many consumer loans, including adjustable-rate mortgages, private student loans, and credit cards, as well as more complex financial instruments, such as derivatives contracts, are pegged to LIBOR.

Returning to Kregel’s analysis, he finds that there were really two LIBOR scandals, perpetrated at different times, in different ways, to achieve different results.

The first scandal, according to Kregel, occurred before the 2008 global financial crisis, when traders manipulated rates up or down, depending on their positions to make as much money as possible. Kregel characterizes this rate setting as motivated purely by traders’ “venal greed.”

The second scandal, according to Kregel, occurred during the global financial crisis. As banks were on the verge of calamity, there were disparities between banks’ rate submissions. Specifically, British financial regulators were concerned that Barclays’ rate submissions were higher than others’ rate submissions, and that this likely meant other banks were only willing to lend to Barclays at higher rates. This would suggest that Barclays was in trouble and might need government aid. According to the Commodity Futures Trading Commission (CFTC), to counteract regulators’ concerns as well as any market perception that the bank’s condition was deteriorating, Barclays’ senior management directed the bank’s rate submitters to lower their rate submissions to be closer to the rates submitted by other banks. Thus, Kregel argues that the second instance of rate manipulation and misrepresentation was not due to “venal greed,” but instead self-preservation efforts.

Based on Kregel’s analysis of each LIBOR scandal, we can learn two lessons. The first is that big banks will do whatever they can to make as much money as they can, even if those activities skirt the law. The second is that big banks were propped up by regulators (foreign and domestic) in more ways than was originally apparent. Based on the facts, it is very possible that British regulators were aware of—and possibly condoned or even encouraged—Barclays’ LIBOR rigging because it would provide confidence to the market during a time of immense turmoil.

While Barclays has paid for its misdeeds to the tune of $450 million in fines and some heads have rolled, the problems that caused the misrepresentations remains the same. LIBOR continues to be a poor gauge of borrowing and lending costs, and of underlying market fundamentals. Additionally, banks that pose systemic risks such as Barclays continue to exist in a form that would again make it likely that regulators will turn a blind eye to suspicious activities, if they believe it’s necessary for economic stability.

Posted in: Financial Reform, Regulation2 comments

August20

A Lesson From The Heritage Foundation’s Economic Freedom Index

By: Micah Hauptman

What do Hong Kong, Singapore, Australia, and Switzerland have in common? They are four of the top five ranked countries in the conservative Heritage Foundation’s 2012 Index of Economic Freedom.

The Heritage Foundation scores countries based on a variety of factors, including the extent to which they depend on the rule of law, have limited government and regulatory efficiency, and the openness of their markets. The Freedom Index then ranks each country based on its score, categorizing them as “Free,” “Mostly Free,” “Moderately Free,” “Mostly Unfree” or “Repressed.”

For those wondering, the United States ranks tenth and is “Mostly Free.”

While Public Citizen does not endorse the index or its criteria, we do find one unique commonality between Hong Kong, Singapore, Australia, and Switzerland that is particularly noteworthy: Each of these countries imposes taxes on financial transactions to curb speculation.

Take Hong Kong for example. The top-ranked country on the index imposes a “stamp tax” of 0.3 percent on stock trades. And the Heritage Foundation extols Hong Kong’s “robust and transparent investment framework,” saying that it “has demonstrated a high degree of resilience during the ongoing global turmoil and remains one of the world’s most competitive financial and business centers.”

Thus, despite frequent scaremongering on both sides of the political spectrum that financial speculation taxes would destroy markets and devastate the economy, the top-ranked countries in the conservative think tank’s estimation prove that such taxes, when implemented properly, have done no such thing.

In fact, financial speculation taxes would likely restore the economy. That’s because they have the dual ability to curb some of the worst excesses of financial market speculation and simultaneously raise significant amounts of money to heal the ailing budget.

Short-term speculation doesn’t add value to the real economy, and it threatens near- and long-term economic havoc. This is not just speculation. (Pardon the pun.) We have witnessed the continued fallout from Wall Street’s excessively risky short-term trading activities, from the 2008 financial crisis to the 2010 flash crash and, most recently, Knight Capital’s rogue algorithm trading debacle.

A financial speculation tax in the U.S. would redirect activities to more productive and efficient allocation of capital and foster long-term investment that would boost job creation and strengthen our economy.

Even a miniscule tax, such as the 0.03 percent fee—that’s three pennies on $100 of Wall Street trading and is one-tenth the size of Hong Kong’s “stamp tax” rate—as proposed by U.S. Sen. Tom Harkin (D-Iowa) and U.S. Rep. Peter DeFazio (D-Ore.), would cut down on speculative activities like computer-driven high-frequency algorithm trading. At the same time, those pennies would quickly add up, raising more than $350 billion dollars over the next decade, according to the nonpartisan Joint Committee on Taxation.

Other countries are using financial speculation taxes successfully; it’s time we do too. The United States is in desperate need of a permanently robust and resilient economy. A financial speculation tax can help get us there.

Posted in: Congress, Financial Reform3 comments

© Copyright . All Rights Reserved.