Does banking regulation impact the markets?  Matt Levine writes; . Since the Volcker Rule was just a glimmer in Paul Volcker’s eye, I have wondered when hedge funds and smaller independent investment banks would take over some of the market making businesses that regulation has made difficult for banks. The answer seems to be now. Or maybe “too late”:

In some respects, Citadel’s recent success has been a little like crashing a house party after the police have already busted it up.

Global banking rules intended to make the financial system safer have caused a retreat from the market in recent years. The total size of the credit-default swap market has shrunk to $12 trillion from $34 trillion in October 2008, according to DTCC data.

Broadly speaking, two things make it hard for newcomers to break into a financial market dominated by big banks. One is market structure: If people trade by calling their salespeople at the same three banks, it’s hard to get on their speed dial; if people trade by going to an exchange, it’s much easier to get a spot on the exchange. Much of the Citadel story is about its bitterly contested fight for more transparency, central clearing, electronic execution, etc. in the CDS market.

The other thing is balance sheet. Big banks have so much money. This has not stopped Citadel and other high-frequency trading firms from taking a lot of business from them in the stock market, because it turns out you don’t need that much money to trade a whole lot of stocks. (You just have to sell them quickly.) Traditionally, you need a lot of money to make markets in bonds or CDS, because you tend to hold on to them for a while. Central clearing of CDS helps with that problem, but even more helpful has just been a regulatory environment that negates the banks’ cash advantage. For all their money, banks can’t afford to hold on to trades any more than Citadel can.

Is there a right and wrong in taxation.  The Economist writes: American companies are driven to tax trickery by the combination of a high statutory tax rate and policies that allow taxes to be deferred if they are stashed abroad.  Cutting the rate, taxing only profits made in America, and ending deferral would encourage firms to bring money back home.

Firing broadsides at deals made long ago is not going to help.

 

Can Caribbean banks function under the spotlight of regulators?

The Caribbean Association of Banks (CAB) has welcomed recent remarks by Christine Lagarde, Managing Director of the International Monetary Fund (IMF), over the problem of correspondent banks in the region de-risking and hopes that the organisation can help stop the current trend. As larger, mainly North American banks end their relationships with regional banks because of perceived regulatory risk and small profits, the banking sector across the Caribbean is getting increasingly concerned that the constant withdrawal of partner banks will destabilize all of its economies.

The problem came to the forefront in the Cayman Islands last summer when a number of local money transfer firms lost their relationships with their US banks, making it very difficult for the thousands of overseas workers here to remit earnings back to their native countries or for Caymanians to help their friends and family overseas with cash transfers.

But the de-risking is having a wider impact on Caribbean banking in general and Lagarde has described it as a “collective action problem that calls for a collective solution” as banks pull out of the region.

The CAB said that it has been raising the alarm about the effects on the Caribbean region for two years and has requested intervention over the loss of correspondent banking relationships that could render the Caribbean region “unbankable and ultimately destabilize all sectors of the economies”.

Among the many negative impacts anticipated from the disturbing trend of de-risking on small nation states is the risk of financial exclusion, a shrinking financial sector, thriving underhand economies, increased use of unregulated payment options and a barrier to attaining the Millennium Development Goal 10.

As was demonstrated by the enormous level of concern last summer from Jamaicans in Cayman who regularly send money home, that country is extremely dependent on remittances. The CAB said average remittances to Jamaica from overseas work accounts for 15% of the entire GDP.

Lagarde said, “Correspondent banking is like the blood that delivers nutrients to different parts of the body. It is core to the business of over 3,700 banking groups in 200 countries.”

While the CAB is hoping the IMF will come up with a solution, so far the private banking sector in North America in particular is still pulling out of the region, which the CAB said is putting the livelihoods of Caribbean people in serious danger.

Chappatte

Ireland allowed Apple to pay an effective corporate tax rate of 1 percent on its European profits in 2003 down to 0.005 percent in 2014, according to EU Competition Commissioner Margrethe Vestager.

“If my effective tax rate would be 0.05 percent falling to 0.005 percent — I would have felt that maybe I should have a second look at my tax bill,” she told reporters..

The U.S. Treasury Department, which has pushed back hard against the EU state-aid probes, said the commission’s actions “could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU.”

Apple executives have shared concerns about the company’s tax treatment overseas with officials in President Barack Obama’s administration.

Administration officials are broadly concerned that what Earnest called the EU’s “unilateral approach” doesn’t undermine coordinated efforts to prevent an “erosion of the tax base.” Also, he said, they want to ensure that any actions are fair to U.S. taxpayers and U.S. businesses.

Apple, which employs about 6,000 people in Ireland, was one of the first companies caught up in the EU’s backlash against corporate tax-avoidance. The EU, like other global regulators, has targeted firms that sidestep taxes by moving around profits and costs to wherever they are taxed most advantageously — exploiting loopholes or special deals granted by friendly governments.

Issues of a wide variation in the percent of corporate taxes charged by different nations across the global in a global economy continue unresolved.

Mylan was assaulted by petitions from ordinary citizens when it doubled the price on a drug that is indispensable for people who suffer from severe allergies.  The pharmaceutical company that makes the expensive, life-saving EpiPen—an auto-injector that comes preloaded with anaphylaxis treatment—will launch a generic version of the product in the wake of intense criticism over recent price hikes. A new generic will cost $300 for a two-pack, which is about half the regular version’s market price. It will be available within the next several weeks. Mylan CEO Heather Bresch called her company’s move “an extraordinary commercial response” to patient anger and frustration over the rising cost of EpiPen. Last week, the drug maker had offered discounts on the shots for lower-income patients and triggered further anger. The company was widely criticized by parents and right-minded citizens following the latest price rises, which amounted to more than 400 percent over the past 10 years.

Roger Ailes, the CEO of Fox News, had a long history of preying on female employees of Fox.  He was dismissed because the sons of Rupert Murdock got tired of his behavior and hired a law firm to track his predatory history.

William E. Black writes:  The concepts of “control fraud” and whistleblowing are related. The many women who risked their careers to blow the whistle on Ailes were classic whistleblowers. A University of Michigan Law School professor who was instrumental in creating a civil remedy for sexual harassment wrote:

Victims of sexual harassment can see what happens to other victims who came forward. “It’s career suicide to come forward, You’re roadkill. Women know this, yet some come forward. That’s what courage looks like.”

The people, overwhelmingly women, who bring complaints of sexual harassment in the workplace are whistleblowers. As a co-founder of Bank Whistleblowers United (BWU) I can vouch professionally and personally that it takes “courage” to blow the whistle. The sexual harassment context can call for the particularly great courage among whistleblowers because blowing the whistle will provide highly personal information about the victim and inevitably leads to “slut shaming” abuse and trolls.

MacKinnon also rightly emphasizes the inherent role of the harasser’s power over the harassed.

“A lot of men have gotten away with sexual harassment with absolutely no consequences,” said Catharine A. MacKinnon, a professor of law at the University of Michigan and Harvard Law School who pioneered sexual harassment lawsuits. No matter what companies say, she added, “the real rule is that the more powerful a man is, the more he gets away with.”

“Control fraud” is a term and a theory that explains why the consequences of fraud are vastly more severe when the person who controls a seemingly legitimate entity uses it as a “weapon” to defraud. Sexual harassment is a fraud+ crime. The fraud is the deceitful statements by your boss that you were hired for your skills and would be advanced in the organization on the basis of the quality of your work. But sexual harassment is a broader crime that includes extortion. Like fraud, sexual harassment is an intentional wrong. For the sake of brevity, I will discuss for-profit firms, but the same logic applies to non-profits and government entities.

Control fraud theory explains why the combination of the seeming legitimacy of the firm and the unique power of the persons controlling the entity (I’ll use the term “CEO” for brevity) combine to create an environment in which the CEO can cause enormous harm. Bauer begins to get at that in his use of these key words: “rewarded,” “shielding,” “powerful,” and “culture.” What Bauer is describing are all important elements of how a CEO creates a criminogenic environment to optimize the use of the firm as a weapon. Ailes is alleged to have shaped such a criminogenic environment through the power to hire, fire, promote, compensate, and give or deny prominent air time. The goal according to public reports was not simply to reward other bosses for “shielding” Ailes, but to coerce younger women to have sex with Ailes, and not to go public with their complaints even if he was unable to successfully coerce them to have sex or he lost interest in them.

CEOs are the dominant creators of a firm’s “culture.” If, like me, you have had the misfortune of being forced to attend firm ethics presentations, you will have heard the same useless speechifying by business ethics “experts.” The expert will pronounce that the “tone at the top” of the firm is absolutely critical. The CEO will tell everyone how much he wants a world-class culture of ethics.

Talk by CEOs is cheap. CEOs establish the real tone at the top through their financial incentive systems and who they promote and make wealthy. If the CEO is honest, the incentive system and the personnel decisions will show that the most ethical, competent people are rewarded. If the opposite is true, then all the speeches by the CEO and the corporate “ethics statements” are simply part of crafting the criminogenic environment. The lawyers will help the CEO send out a barrage of self-serving praise for ethics in order to make it appear that the corrupt officers that the CEO has hired and promoted and incentivized to cheat were “rogues” acting in violation of the CEO’s orders. This is a subtler form of “shielding” the CEO from accountability.

Even when the victim, knowing it would destroy her career, persisted in bringing complaints for sexual harassment against Ailes, he shaped an environment at Fox News that was so criminogenic that it prevented the complaints from becoming public for over a decade. Like Soviet military doctrine, the CEO’s lawyers build “defense in depth” to protect the CEO from any personal accountability for sexual harassment. The goal is to make any victim of sexual harassment face the equivalent of attacking Kursk. The lines of defense Ailes used include:

• Requiring the employee to sign a confidentiality agreement
• Requiring the employee to sign an agreement waiving any right to sue, limiting any claim to arbitration, and making that arbitration secret (arbiters are also typically more hostile to claimants than are courts)
• Requiring the employee not to disparage the firm and its officers and employees
• Using the resources of Fox News to investigate and intimidate victims and reporters who might make their story public
• Smearing the victim through Fox News’ PR and legal staffs
• Allowing Ailes, secretly, to use millions of dollars in funds from Fox News to settle complaints of sexual harassment brought by the most committed victims – in return for non-disclosure agreements that would hide the “pattern and practice” of sexual harassment by Ailes
• Creating situations in which victims still with Fox News either had to praise Ailes to on-air reporters and interviewers or, effectively, destroy their careers. Those statements by the victims could then be used to portray the victims as liars if they later made public Ailes’ sexual harassment
• Ailes creation of a culture at Fox News of fear and enrichment that meant that most colleagues were hostile to the victims and would provide support for Ailes and attacks on victims
• The payment of enormous sums from the firm to Ailes when, after an extensive pattern of sexual harassment, he eventually left. A firm is supposed to “claw back” past compensation from its CEO in such circumstances, not give him a $40 million reward.

As with financial whistleblowers, the employees who blow the whistle on sexual harassment are the firm’s best employees. They have proven their courage in the hottest of crucibles.

Ed Caeser writing in the New Yorker gives an excellent and clear picture of “mirror trading” undertaken by Deutsche Bank in which Russians were able to launder money.  Between 2011 and 2015 Russian broker Igor Volkov called the trading desk at Deutsche Bank’s Moscow office to place two trades.  One was on the Russian market for a blue chip Russian stock like Lukoil.  The stock was then sold on the London exchange for dollars, euors or pounds. Both trades were made on behalf of the same company registered offshore.

Why would such “mirror trades” be made?   Because Russian rubles can be laundered in other Western currencies without calling much attention to the deal.

Did Deutsche Bank know what it was doing?  Probably yes.  There were a lot of trades and fees mount up.  Deutsche Bank has had a long and sordid history.

Caeser wrutes: “Since 2008, it has paid more than nine billion dollars in fines and settlements for such improprieties as conspiring to manipulate the price of gold and silver, defrauding mortgage companies, and violating U.S. sanctions by trading in Iran, Syria, Libya, Myanmar, and Sudan. Last year, Deutsche Bank was ordered to pay regulators in the U.S. and the U.K. two and a half billion dollars, and to dismiss seven employees, for its role in manipulating the London Interbank Offered Rate, or libor, which is the interest rate banks charge one another. The Financial Conduct Authority, in Britain, chastised Deutsche Bank not only for its manipulation of libor but also for its subsequent lack of candor. “Deutsche Bank’s failings were compounded by them repeatedly misleading us,” Georgina Philippou, of the F.C.A., declared. “The bank took far too long to produce vital documents and it moved far too slowly to fix relevant systems.”

by Anna Parini

Jamie Dimon and his Chase bank are crucial to the success of a €5 billion capital raised by Monte dei Paschi di Siena, which was recently found to be the worst lender in Europe by regulators. J.P. Morgan is the lead bank on the deal, charged with finding investors for the huge share sale. That is a tall order since MPS is trying to raise a sum equivalent to 7 times its current market value. No matter. Senior figures in Italy’s banking elite draw confidence from the fact that Dimon has personally been involved. “If Dimon thinks we can do this, then we probably can,” one banker told me.

Dimon was in Rome in July, ostensibly to celebrate a century of J.P.Morgan’s activities in Italy. But he paid a visit to Matteo Renzi to discuss MPS. While there, he gave a slightly od interiew odd interview to Il Sole 24 Ore, in which he was reported as saying that “government intervention in banks could have its merits.” I say odd because Dimon is a well-known critic of government.

The best solution may be to have MPS’ capital raise after the referendum. That way, if the capital raise fails, Renzi could launch a public rescue of the Siena bank without risking a public backlash that could boost the 5Star Movement in the referendum campaign. (Hey, nobody said that Italian politics was straightforward …). Since Renzi can call the referendum between October and December, that means MPS will have to wait a while to tap investors.

J.P.Morgan and the many other banks who are working on these deals will get some pretty hefty fees to arrange the share sale. Dimon’s bank should also get handsomely rewarded if in fact the bank is providing a €7 billion bridge loan to help the Atlante Fund buy MPS’ bad loans. Plus, of course, the gratitude of, and further deals from, the Italian government for helping out when needed. Plus, bragging rights. Don’t forget bragging rights.

It is difficult for people living outside the US to understand the draw of Donald Trump. It has to do with the US economy. No matter what rosy tint we put on economic figures, the US economy is struggling. People believe that Trump has a better chance of helping matters than Mrs. Clinton.

Ed Rogers writes:

Median household income in June 2016 was $57,206 — only $59 more than before the recession began in December 2007. The national debt has increased by almost $10 trillion under President Obama. The debt per taxpayer is now approximately $162,252. And again, the average American household income has gone up by $59. Think about that. As Phil Gramm and Michael Solon point out in their latest smart piece for the Wall Street Journal, “Why this recovery is so lousy,” “average real per capita income grew five times faster during the Clinton recovery, seven times faster during the Reagan recovery and 10 times faster during the Kennedy/Johnson recovery than during the Obama recovery.”

GDP growth for the second quarter of 2016 was a mere 1.2 percent, meaning that “economic growth is now tracking at a 1 percent rate” this year and “an annual average rate of 2.1 percent growth since the end of the recession, the weakest pace of any expansion since at least 1949.

According to Census Bureau data, more firms went out of business than were started, and since 2011, the number of start-ups has only barely surpassed the number of businesses that have closed.

For the first time in 130 years, adults ages 18 to 34 >were found to be “more likely to be living in their parents’ home than they were to be living with a spouse or partner in their own household.

This month, the labor force participation rate was 62.8 percent — the same rate it was in March 1978, the year economic malaise was born.

Ninety-three percent of counties in the United States still have not fully recovered from the recession when factoring in job creation, the unemployment rate, GDP and median home prices in each county across the country.

Clinton might still be experiencing a convention bounce, plus a flurry of self-inflicted wounds from Donald Trump have led to a boost in the polls for her.

It is only August, and there is a lot of time remaining in the race. Trump could become sane — or mute. Clinton needs to find a way to satisfy people’s quest for a leader who “tells it like it is” — and that includes telling it like it is when it comes to the economic deficiencies of the past seven years. So far, she’s doing the opposite.