What impact do primary dealers have on the economics of any country, the EU, or the world economy for that matter, Lee Adler asks.  Here is a table of primrary dealers he has prepared.  World Primary Dealers

Adler looks around at the central banks: The PBoC (China) is also playing a growing role as it integrates its financial markets with the rest of the world’s, but its system does not use Primary Dealers, per se, and its linkages to the rest of the world are more obscure. The BoE (UK) is a small player.

Adler aruges that Central Banks’ policy doesn’t mean much. With Quantitative Easing, the central banks bring the money into existence by making deposits in the Primary Dealers’ accounts at the central banks in payment for the securities the central banks purchase from the Primary Dealers, or by making loans to them. What the dealers do with the money from there is up to them, although they are loosely required to purchase government securities when the central government auctions them. Since there are always plenty of other bidders for the government paper, the Primary Dealers end up with billions in excess cash.

Certainly the US is making the break up of Big Banks a big issue, and this may be why it is important to simplify and clarify their role and divide up their functions.

Sen. Al Franken (D-Minn.) on Sunday called on supporters to reject one of President Obama’s nominees to the Treasury Department.  Franken criticized nominee Antonio Weiss in no uncertain terms, arguing Obama had nominated the wrong person for the job of Treasury undersecretary for domestic finance.

He argued Weiss would not put the middle class first, and that he was too close to Wall Street.  Franken wrote that Weiss has worked on manuevers called “inversions,” which are mergers that seek to lower a company’s tax burden in the United States.

“More than six years after the crash, the American economy is still recovering,” Franken writes. “We got into that mess because we were willing to let Wall Street police itself. Foxes make poor guards of henhouses. We know that through bitter experience, and I’m not willing to let it happen again.”

Franken is joining Sen. Elizabeth Warren (D-Mass.) and others in opposing Weiss, setting up an internal Democratic Party fight with Obama. Weiss is an executive at the investment banking firm Lazard.

When Gary Gensler direct from Goldlman Sachs was nominated to head the Commodities Futures Tradiing Commission, Carl Levin spoke to him early on. Cutting to the chase, levin asked, “Does speculation affect prices?”  “Yes,” said Gensler.  There was long silence.  The answer had come with astonishing ease,  Here was someone ‘tainted’ by Wall Street who was clearly capable of being honest.  Has anyone asked Weiss tough questions?  Asnwers could surprise?

The sudden dramatic collapse in the price of oil could cost trillions of dollars in oil derivative losses; and the FDIC could be liable, following repeal of key portions of the Dodd-Frank Act last weekend.  That means taxpapers will pay for mistakes the banks made — yet again.

Some have argued that the small section of Dodd-Frank that was repealed when the budget was passed came to not very much.  But why then did Jamie Dimon of JP Morgan Chase and President Obama lobby lawmakers to vote for the bill.

Ellen Brown writes:  Quibbling over a mere 5% of the derivatives business sounds like much ado about nothing, but Jamie Dimon and the president evidently didn’t think so. Why?

Under Dodd Frank, FDIC-insured banks were not allowed to put depositor funds at risk for their bets on derivatives, with certain broad exceptions.  At FDIC insured banks, interest rate, currency, gold/silver, credit derivatives referencing investment-grade securities, and hedges werepermissible activities within an insured depositary institution. Those not permitted included “equity, some credit and most commodity derivatives.”

A fraction, but a critical fraction, as it included the banks’ bets on commodities. Five percent of $280 trillion is $14 trillion in derivatives exposure – close to the size of the existing federal debt.  $3.9 trillion of this speculation is on the price of commodities.

Among the banks’ most important commodities bets are oil derivatives. An oil derivative typically involves an oil producer who wants to lock in the price at a future date, and a counterparty – typically a bank – willing to pay that price in exchange for the opportunity to earn additional profits if the price goes above the contract rate. The downside is that the bank has to make up the loss if the price drops.

The drop in the price of oil by over $50 a barrel was completely unanticipated and outside the predictions covered by the banks’ computer models. The drop could cost the big banks trillions of dollars in losses. And with the repeal of the Lincoln Amendment, taxpayers could be picking up the bill.

It may well be that the head of JPMorgan Chase, the President’s personal banker, wanted his losses covered and that’s what he got when the budget was passed.  Jamie Dimon got the public to pay again.

Howard Davies writes:  In November, the United Kingdom’s Financial Conduct Authority (FCA) announced a settlement in which six banks would be fined a total of $4.3 billion for manipulating the foreign-exchange market. And yet share prices barely reacted. Why?

The nefarious practices and management failings uncovered during the yearlong investigation that led to the fines were shocking. Semi-literate email and chat-room exchanges among venal traders revealed brazen conspiracies to rig the afternoon exchange-rate “fix” for profit and personal gain. Using nicknames like “the three musketeers” and “the A-team,” they did whatever they liked, at an enormous cost to their institutions.

But, despite the huge FCA fine, no top executive was forced to leave and investors did little more than shrug.  Even $4.3 billion is small change when compared to the total fines and litigation costs incurred by the major banks over the last five years. Morgan Stanley analysts estimate that the top 22 banks in the United States and Europe have been forced to pay $230 billion since 2009 – more than 50 times the cost of the FCA settlement. This is over and above the heavy losses that banks incurred from bad lending and overambitious financial engineering.

American banks have incurred more than half of these massive penalties. The European bill amounts to just over $100 billion – roughly half of which was paid by the top seven British banks.

In the US, the penalties have been dominated by fines for sales of misleadingly marketed mortgage-backed securities, often to the two government supported entities Fannie Mae and Freddie Mac.

In the UK, by contrast, the biggest penalties have come in the form of compensation payments made to individual mortgage borrowers who were sold Payment Protection Insurance.

The Morgan Stanley analysis suggests that we can expect another $70 billion in fines and litigation costs over the next two years from already identified errors and omissions.

The irony here – not lost on the major banks’ finance directors – is that as fast as banks add capital from rights issues and retained earnings to meet the demands of prudential regulators, the funds are drained away by conduct regulators.

Some of the money, especially in the UK, has gone back to individual customers. Today, the payments have become so large that the government has seized them and channeled revenues exceeding the regulator’s enforcement costs to veterans’ charities.

In the US, the end recipients are less clear; indeed, they are undisclosed. Charles Calomiris of Columbia University has challenged what he calls “a real subversion of the fiscal process” as funds are raised and spent in non-transparent ways.

Do fines on this scale serve as useful deterrents?  Clearly, the post-crisis period has revealed unacceptable behavior in many institutions. It will be some time before we know whether large fines on corporations, paid principally by their shareholders, contribute to keeping the system honest.

Whether the current approach serves as an effective deterrent is a question that should be widely debated. Senior bank managers and regulators have a common interest in developing a more effective system – one that punishes the guilty and creates the right incentives for the future.

Simon Johnson writes:  Citigroup took advantage of the budget approval process in te US Congress to tuck into thousands of pages of law the repeal of some of the 2010 Dodd-Frank financial reforms. The passages were drafted by Citigroup lobbyists and inserted in legislation at the last moment.

At a stroke, Citi executives demonstrated both their continued political clout in Washington and their continued desire to take on excessive amounts of financial risk.  This is exactly what Citi did during the 1990s and 2000s under Presidents Bill Clinton and George W. Bush – with catastrophic consequences for the broader economy in 2007-09.

Breaking up Citigroup is under serious consideration as a potential campaign theme. For example, in a powerful speech – watched online more than a half-million times – Senator Elizabeth Warren responded uncompromisingly to the megabanks’ latest display of muscle: “Let’s pass something – anything – that would help break up these giant banks.”
Warren is attracting a great deal of support from the center and the right.

Senator David Vitter of Louisiana is the most prominent Republican member of Congress in favor of limiting the size and power of the biggest banks, but there are others who lean in a similar direction. The vice chair of the Federal Deposit Insurance Corporatio consistently warns about the dangers associated with megabanks. Former FDIC Chair Sheila Bair, a Republican from Kansas, argues strongly for additional measures to rein in the biggest banks.

From the perspective of anyone seeking the nomination of either of America’s political parties, here is an issue that cuts across partisan lines. “Break up Citigroup” is a concrete and powerful idea that would move the financial system in the right direction. It is not a panacea, but the coalition that can break up Citi can also put in place other measures to make the financial system safer.

Megabanks are accused of abuse of power and the great rip-off of the middle class. Crony capitalism is implicit in the massive implicit government subsidies that these banks receive. Both left and right agree on the fundamental asymmetry that the recent “Citigroup Amendment” implies: Bankers get rich whether they win or lose, because the US taxpayer foots the bill when their risky bets fail.

Potential Republican presidential candidates have hesitated to take up this issue in public – perhaps feeling that it will inhibit their ability to raise money from Wall Street. Among the Democrats, however, the opportunity seems to be much more compelling; indeed, avoiding a confrontation with Wall Street might actually create problems for a candidate like Hillary Clinton who is close to Wall Street.

This idea would attract support from centrists. “Break up Citigroup, end dangerous government subsidies, and bring back the market.” The US presidential candidate who says this in 2016 – and says it most convincingly – has a good chance of winning it all.

Federal Court in New York Orders MF Global Holdings Ltd. to Pay $1.212 Billion in Restitution for Unlawful Use of Customer Funds and Imposes a $100 Million Penalty

The U.S. Commodity Futures Trading Commission (CFTC) has obtained a federal court consent Order against Defendant MF Global Holdings Ltd. (MFGH) requiring it to pay $1.212 billion in restitution or such amount as necessary to ensure that claims of customers of its subsidiary, MF Global Inc. (MFGI), are paid in full. The CFTC previously filed and settled charges against MFGI for misuse of customer funds and related supervisory failures in violation of the Commodity Exchange Act and CFTC Regulations (see CFTC Press Release 6776-13). MFGI was required to pay $1.212 billion in restitution to its customers, as well as a $100 million penalty. MFGH’s restitution obligation is joint and several with MFGI’s restitution obligation, pursuant to which a substantial portion of the restitution obligation has already been paid (see CFTC Press Prelease 6904-14). The consent Order, entered on December 23, 2014, by Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposes a $100 million civil monetary penalty on MFGH, to be paid after claims of customers and certain other creditors entitled to priority under bankruptcy law have been fully paid.

The consent Order arises out of the CFTC’s amended Complaint, filed on December 6, 2013, charging MFGH and the other Defendants with unlawful use of customer funds. In the consent Order, MFGH admits to the allegations pertaining to its liability based on the acts and omissions of its agents as set forth in the consent Order and the amended Complaint.

The CFTC’s amended Complaint charged that MFGH controlled MFGI’s operations and was responsible for MFGI’s unlawful use of customer segregated funds during the last week of October 2011. In addition to the misuse of customer funds, the amended Complaint alleged that MFGH is responsible for MFGI’s (i) failure to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, (ii) filing of false statements in reports with the CFTC that failed to show the deficits in the customer accounts, and (iii) use of customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid, in violation of CFTC regulations.

The CFTC’s litigation continues against the remaining Defendants, Jon S. Corzine and Edith O’Brien.