Eleonora Casuela notes that perception of corruption in Italy is prevalent, especially in public administration.  Italy is tied with six other states, four of which are European. The NGO Transparency International in its new ranking on corruption sees Italy steady at sixty-ninth place in a ranking that includes 175 states.

Although ranked the same as Brazil, Bulgaria, Greece, Romania, Senegal and Swaziland, with 43 points, Italy did in fact record a potential value lower (34 points). This places it on the top rung of the ladder of the eurozone countries and the whole of Europe. The index of Transparency should be stated, is based on perception, not on a register of cases certified. The ranking does not necessarily reflect the real value of corruption cases certificates.

According to the report, however, the level of perceived corruption is increasing especially in countries with the highest rate of economic growth. These include Turkey, in particular, followed by Brazil, Russia, India and China. But at the center of the criticism by Transparency International, there are also important financial centers.  In some countries where the level of corruption is low, the multinational banks and major financial centers such as Frankfurt, London and New York are often corrupt.

This year Denmark defended his first place, followed by New Zealand and Finland.

North Korea and Somalia are tied for last place.  Germany isl twelfth and fourteenth is Britain. France is twenty-sixth, with the US seventeenth.

Corruption in China and Turkey has worsened dramatically over the past year according to the latest rankings released by Transparency International (TI).

The annual report showed an increase in corruption in some of the world’s fastest growing economies such as Turkey, China and Angola whose GDPs grew by 4 percent last year.

The anti-corruption NGO added that money laundering was the biggest barrier to economic development among the worst ranking countries.

“What is extremely important for emerging markets and developing countries is the return of laundered money which is sitting, for example, in Germany, in some bank somewhere or has been parked somewhere. These countries could put this money towards their economic development, once they have been able to get rid of their dictators,” explained Edda Mueller, head of TI in Germany, where the NGO has its headquarters.

But she went on to concede that this was easier said than done. “Tracking money laundering and finding where it is being hidden is a very difficult area of investigation and because of this is often neglected. So, a potential criminal drug dealer, if one can catch him, will be punished but not the real criminal cause of money laundering. This is a big problem that we have to address.”

The TI annual report shows perceived levels of corruption in 175 countries, with a 0 being highly corrupt and 100 being highly clean. China ranked 80 in 2013 and has slumped to 100 in 2014.

China’s drop will come as a blow to Chinese President Xi Jinping, who took office in 2012 vowing to root out graft. His anti-corruption office has fired 270,000 cadres.

Turkey dropped to 64th place. The country was struck by a corruption scandal in December last year, the worst since the AK party came to power more than ten years ago.

Denmark retains its title as the least corrupt country, while North Korea and Somalia were jointly named the most corrupt.

Business culture int he banking industry is favoring, or at least tolerating, fraudulent or unethical behaviors.

That’s what Ernst Fehr told reporters in a telephone interview last week.

Fehr is an economist at the University of Zürich in Switzerland who co-led a study about business behavior.  Fehr’s team conducted a laboratory game with bankers, then repeated it with other types of workers as comparisons. Participants were asked to toss a coin 10 times, unobserved, and report the results. For each toss they knew whether heads or tail would yield a $20 reward. They were told they could keep their winnings if they were more than or equal to those of a randomly selected subject from a pilot study. The results showed the control group reported 51.6% winning tosses and the treatment group – whose banking identity had been emphasized to them – reported 58.2% as wins, giving a misrepresentation rate of 16%. The proportion of subjects cheating was 26%. The same experiments with employees in other sectors – including manufacturing, telecoms and pharmaceuticals – showed they don’t become more dishonest when their professional identity or banking-related information is emphasized.

The U.S. Senate Permanent Subcommittee on Investigations finished up a two-day hearing Friday on whether banks like Goldman Sachs Group Inc, J.PMorgan Chase and Morgan Stanley should be restricted from owning or trading physical commodities such as oil and metals.

The Senate subcommittee has been investigating whether banks’ participation in markets, where they also control infrastructure assets, influence prices and harm consumers. Some lawmakers argue such activity – particularly banks’ ownership of power plants, shipping containers, and metals warehouses – creates the potential for anticompetitive behavior.

Banks don’t own all these hard-asset facilities just because they are profitable businesses to own and run. Banks own them to manipulate prices and markets, which is infinitely more profitable than just owning storage and transportation facilities.

Last week, Sen. Carl Levin (D-MI), chairman of the subcommittee, spent three hours accusing two witnesses from Goldman Sachs of manipulating aluminum markets. He then asked J.P. Morgan Chase and Morgan Stanley why they had tried to hide their supposed “investments” in metals and natural gas from regulators.

Levin’s rhetorical quote of the day was this:

“If you liked what Wall Street did for the housing market, you’ll love what they’re doing for commodities.”

We don’t need to be reminded that bundling mortgages brought down the US economy.

Senate Hearing

Wall Street firms driving up commodity prices.  Machinations by financial firms that have bought up huge swaths of coal mines, aluminum warehouses, or natural gas reserves could be leading to higher prices for consumers and companies that rely on those natural products REPORT-Wall Street Bank Involvement With Physical Commodities alleges.

Furthermore, Wall Street titans may be exposing themselves to huge risks and reaping unfair trading advantages by investing heavily in physical commodities, according to the Senate Permanent Subcommittee on Investigations.

The report’s main author also criticized regulators for allowing financial firms to take increasing stakes in physical commodities, while those institutions also made hefty trades in the financial markets on those products, and called for an overhaul to limits on such activity.

“We simply cannot allow a large, powerful Wall Street bank the power to influence the price of a commodity essential to our economy, especially when that bank is trading in financial products related to that commodity,” said Sen. Carl Levin (D-Mich.).

The two-year investigation focused on three major financial firms that have made significant investments in commodities: Goldman Sachs, JPMorgan, and Morgan Stanley.

For example, in 2012 Goldman owned 1.5 million metric tons of aluminum, equal to roughly one-quarter of the nation’s annual usage of the metal. And Levin focused on Goldman, accusing the firm of orchestrating a “merry-go-round” system aimed at lengthening the lines for providing aluminum, which in turn lead to higher premiums for the metal — costs that could eventually be passed on to consumers.

The report claims that after purchasing aluminum warehouses in Detroit, Goldman approved contracts with warehouse clients where they paid them to load and move metal from one warehouse to another. Those repeated movements slowed down clients attempting to remove their aluminum, slowing its delivery and ultimately driving up the premium for the metal, the report claimed.

In a response to the report, Goldman said that most of the aluminum stored in the facility was not blocked by lengthened lines, and argued that metal movements were independent decisions of clients.

The 396-page report also delves into a host of other investments by financial firms, such as Goldman’s acquisition of a Colombian coalmine that was briefly shuttered due to protests, Morgan Stanley’s investments in jet fuel, and JPMorgan’s buying spree of power plants.  “Imagine if BP had been a bank, the liability resulting from the oil spill could have led to its failure and another round of taxpayer bailouts,” said Sen. John McCain (Ariz.), the top Republican on the panel.

In 2012, a team of Federal Reserve officials looking into commodities activity found that large institutions had a shortfall ranging from $1 billion to $15 billion each in capital and insurance to cover potential catastrophic losses from commodities investments.

The report also said that allowing banks to invest heavily in physical commodities could give them an unfair edge on trading in financial markets tied to those commodities. Firms could receive inside information about what is happening in those markets thanks to those investments, or even be able to sway how markets move by changing conditions at those physical facilities.

The report noted that after Goldman acquired the uranium company Nufcor, it increased trading activity in the company tenfold. Goldman said Wednesday it was in the process of whittling down the company’s operations to minimal levels.

Levin stopped short of specifically saying how regulators should curb physical commodity investments, but said regulators or future Congresses should seriously consider placing stricter limits on the activity.

Banks do face limits on the amount of physical commodities they can invest in, but the report claimed the Fed was relying on an “uncoordinated, incoherent patchwork” of limits on that activity, allowing banks to expand their investments, and also lacked data key to monitoring and policing that type of activity.

Whether as a result of an unprecedented scare campaign by the Swiss National Bank (most recently reinforced by Citigroup), or due to confidence that Swiss gold is as safe abroad as it is at home, or simply due to good old-fashioned “hanging chads”,  the Swiss population overwhelmingly rejected a referendum to force the Swiss National Bank to hold some 20% of its reserves in gold in a landslide vote, with about 78% voting against what AP politely termed “protecting the country’s wealth by investing in gold.”

The proposal stipulating the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($540 billion) balance sheet in gold was voted down by 78 percent to 22 percent. The initiative “Save Our Swiss Gold” also would have prohibited the SNB from ever selling any of its bullion and required the 30 percent currently stored in Canada and the U.K. to be repatriated.

SEC has charged HSBC’s private banking unit with providing unregistered broker-dealer and investment advisory services to
HSBC Private Bank (Suisse) agreed to admit wrongdoing and pay $12.5 million to settle the SEC’s charges. Said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement:

HSBC’s Swiss private banking unit illegally conducted advisory or brokerage business with U.S. customers. HSBC Private Bank’s efforts to prevent registration violations ultimately failed because their compliance initiatives were not effectively implemented or monitored.

According to the SEC’s order instituting settled administrative proceedings, HSBC Private Bank and its predecessors began providing cross-border advisory and brokerage services in the U.S. more than 10 years ago, amassing as many as 368 U.S. client accounts and collecting fees totaling approximately $5.7 million. Personnel traveled to the U.S. on at least 40 occasions to solicit clients, provide investment advice, and induce securities transactions. These relationship managers were not registered to provide such services nor were they affiliated with a registered investment adviser or broker-dealer. The relationship managers also communicated directly with clients in the U.S. through overseas mail and e-mails. In 2010, HSBC Private Bank decided to exit the U.S. cross-border business, and nearly all of its U.S. client accounts were closed or transferred by the end of 2011.

According to the SEC’s order, HSBC Private Bank understood there was a risk of violating the federal securities laws by providing unregistered broker-dealer and investment advisory services to U.S. clients, and the firm undertook certain compliance initiatives in an effort to manage and mitigate the risk. The firm created a dedicated North American desk to consolidate U.S. client accounts among a smaller number of relationship managers and service them in a compliant manner that would not violate U.S. registration requirements. However, relationship managers were reluctant to lose clients by transferring them to the North American desk. HSBC Private Bank’s internal reviews revealed multiple occasions when U.S. accounts that were expected to be closed under certain compliance initiatives remained open.

The SEC’s order finds that HSBC Private Bank willfully violated Section 15(a) of the Securities Exchange Act of 1934 and Section 203(a) of the Investment Advisers Act of 1940. HSBC Private Bank agreed to admit the facts in the SEC’s order, acknowledge that its conduct violated the federal securities laws, and accept a censure and a cease-and-desist order. The firm agreed to pay $5,723,193 in disgorgement, $4,215,543 in prejudgment interest, and a $2.6 million penalty.

Mark Roe writes about the role of the NY Fed in the Federal Reserve System.  He questions the Fed’s role in regulation and suggests some changes.

“The New York Fed also has a particularly important role in bank supervision – most of America’s “too big to fail” banks are located in its jurisdiction (and most global banks have a presence there). And the New York Fed has long been the Fed System’s eyes and ears on Wall Street.
Or perhaps it has become the other way around. At least over the past decade, senior New York Fed officials have consistently sided with the interests of very large banks. (To be clear, I also know many Fed officials who are outstanding public servants). Though Wall Street interests have long been well represented on the board of the New York Fed, under Timothy Geithner, its president from 2003 to 2009, the big players became even more powerful – with some rather unfortunate consequences for the rest of us.
In his recent memoir, Stress Test, Geithner says, “I basically restored the New York Fed board to its historic roots as an elite roster of the local financial establishment.” His choices included Dick Fuld, CEO of Lehman Brothers, which failed spectacularly in September 2008, and Stephen Friedman, a Goldman Sachs board member, who resigned as chair of the New York Fed’s board after being accused of inappropriately trading Goldman stock during the financial crisis. Geithner also established a tangled web of connections between the New York Fed and JPMorgan Chase, some of which linger to this day.
Some senior Fed officials become angry when pressed about this reality. But the Fed’s legitimacy – and its ability to make sensible policy – is not boosted by having major banks represented, directly or indirectly, on a board that chooses and oversees a key policymaker.
Now, finally, US politicians on both the left and the right are focusing their attention on a long-overdue reform of the Fed’s governance. One important proposal comes from Senator Jack Reed, a Democrat from Rhode Island, who proposes, quite reasonably, that the president of the New York Fed should be nominated by the president and confirmed by the Senate, just like members of the Board of Governors – or any other important economic policymaker. The president of the New York Fed would also be required to testify before Congress on a regular basis.

The function of an investment bank is to get people to buy and sell securities, Matt Levine suggests. Should the clients accept the recommendations or question them.

Of course, in order for a security to change hands, one party has to buy and the other has to sell.  Can the same person perform both functions full-heartedly?

The Financial Regulatory Aurhority fined Citibank $15 million for mixed behavior.

For example, at an idea dinner that occurred in July 2011, a CGMI equity research analyst identified a stock as a “short” pick. Before the dinner, however, the analyst had upgraded that stock from Sell to Hold and reiterated his Hold rating on the company in the last report that he published prior to the dinner. Thus, the analyst’s characterization of the company as a “short” pick was inconsistent with his published research on the company at the time. Moreover, the analyst identified other companies, on which he had Hold or Neutral ratings, as “short” picks at six subsequent idea dinners between October 2011 and June 2013. These picks were therefore inconsistent with the ratings identified in the analyst’s published research.

Analysts have to certify in writing that they believe what they are saying.  Is this possible?  To Buy, To Sell or To Hold, That is the Question