Category Archives: Big Banks

Are Whistleblowers Adequately Protected?

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Are whistleblowers protected in the US?

U.S. Sen. Elizabeth Warren, D-Mass., and Republican Chuck Grassley, of Iowa, urged the Securities and Exchange Commission this week for an update on the performance of so-called “whistleblower” protections created under the Dodd-Frank Act.

Warren and Grassley, in a letter to SEC Chair Mary Jo White, requested information on the agency’s Office of the Whistleblower, as well as asked about implementation of 2013 SEC Office of Inspector General recommendations, among other things.

According to Warren’s office, a 2013 OIG report regarding the implementation of protections created under the law, recommended that the Office of the Whistleblower establish standardized performance criteria for whistleblower complaints.

“The whistleblower program is an important tool in the SEC’s efforts to combat securities fraud and almost three years have passed since the SEC OIG evaluation of this program,” the senators stated in their letter. “We are writing to seek an update on the program’s performance and on OWB’s progress in implementing the OIG recommendations.”

Warren and Grassley urged the SEC chair to provide answers to several questions by Nov. 26, including: a description of progress in implementing the 2013 recommendations; the number of whistleblower tips, complaints and referrals received from July 2013 to June 2015; and the average time it took the office to review them upon receipt.

The senators also requested information regarding the average amount of time between posting a Notice of Covered Action and contacting the relevant whistleblower and the percentage of tips, complaints and referrals under investigation, among other data.

Under Dodd-Frank Congress expanded protections afforded to whistleblowers and provided incentives for reporting potential SEC violations, Warren’s office said. Two key provisions included in the law to expand whistleblower participation provided the SEC the authority to award cash payments to those who provide actionable tips and instructed the agency to create a new division to oversee the whistleblower program.

Warren’s letter came a week after the Democratic senator called on the SEC and Commodity Futures Trading Commission to implement rules that protect taxpayers and the financial system following Dodd-Frank changes.

whistleblower hat

How Disturbing is a Rising Dollar?

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Is the dollar going to rise?

Anatole Kaletsky writes: The US Federal Reserve is almost certain to start raising interest rates when the policy-setting Federal Open Markets Committee next meets, on December 16.

Janet Yellen, the Fed chair, has repeatedly said that the impending sequence of rate hikes will be much slower than previous monetary cycles, and predicts that it will end at a lower peak level.  There is good reason to believe that the Fed’s commitment to “lower for longer” interest rates is sincere.

The Fed’s overriding objective is to lift inflation and ensure that it remains above 2%. To do this, Yellen will have to keep interest rates very low, even after inflation starts rising.

In the 1980s, Volcker’s historic responsibility was to reduce inflation and prevent it from ever rising again to dangerously high levels. Today, Yellen’s historic responsibility is to increase inflation and prevent it from ever falling again to dangerously low levels.

Under these conditions, the direct economic effects of the Fed’s move should be minimal. It is hard to imagine many businesses, consumers, or homeowners changing their behavior because of a quarter-point change in short-term interest rates, especially if long-term rates hardly move.

Many Asian and Latin America countries, in particular, are considered vulnerable to a reversal of the capital inflows from which they benefited when US interest rates were at rock-bottom levels. But, as an empirical matter, these fears are hard to understand.

The imminent US rate hike is perhaps the most predictable, and predicted, event in economic history.

What about currencies? The dollar is almost universally expected to appreciate when US interest rates start rising, especially because the EU and Japan will continue easing monetary conditions for many months, even years. This fear of a stronger dollar is the real reason for concern, bordering on panic, in many emerging economies and at the IMF. Fortunately, the market consensus concerning the dollar’s inevitable rise as US interest rates increase is almost certainly wrong, for three reasons.

First, the divergence of monetary policies between the US and other major economies is already universally understood and expected. Thus, the interest-rate differential, like the US rate hike itself, should already be priced into currency values.

Moreover, monetary policy is not the only determinant of exchange rates. Trade deficits and surpluses also matter, as do stock-market and property valuations, the cyclical outlook for corporate profits, and positive or negative surprises for economic growth and inflation. On most of these grounds, the dollar has been the world’s most attractive currency since 2009; but as economic recovery spreads from the US to Japan and Europe, the tables are starting to turn.

Finally, the widely assumed correlation between monetary policy and currency values does not stand up to empirical examination. In some cases, currencies move in the same direction as monetary policy – for example, when the yen dropped in response to the Bank of Japan’s 2013 quantitative easing. But in other cases the opposite happens, for example when the euro and the pound both strengthened after their central banks began quantitative easing.

For the US, the evidence has been very mixed. Looking at the monetary tightening that began in February 1994 and June 2004, the dollar strengthened substantially in both cases before the first rate hike, but then weakened by around 8% (as gauged by the Fed’s dollar index) in the subsequent six months. Over the next 2-3 years, the dollar index remained consistently below its level on the day of the first rate hike. For currency traders, therefore, the last two cycles of Fed tightening turned out to be classic examples of “buy on the rumor; sell on the news.”

Of course, past performance is no guarantee of future results, and two cases do not constitute a statistically significant sample. Just because the dollar weakened twice during the last two periods of Fed tightening does not prove that the same thing will happen again.

Can Insiders Work Around Regulations?

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The systemic financial risk-taking in the lead up to the financial crisis was a product of untouchable insiders taking risks that favored the connected few. And the many still suffer. Cameron K. Murray write: Not only are there insider groups bridging Wall Street and financial regulators, but Defense Departments are a hotbed of revolving personnel into, and out of, private weapons and hardware manufacturers. At local government levels this type of revolving door of well-connected insiders is even more insidious, with land rezoning and infrastructure spending a constant battle between in the interests of the insiders and the community at large. The revolving door culture is now so pervasive that Federal Reserve Chairman Ben Bernanke, arguably the most powerful financial regulator in recent history, waltzed through the door to consult for a multi-billion dollar hedge fund with almost no media criticism. Few issues are more important than being governed in the interest of the few at the expense of the many. The economic costs of this behaviour are likely to be in the hundreds of billions of dollars annually. Yet from a standard economic viewpoint, the mechanism by which such favouritism occurs remains a mystery. To shine some light on the mechanisms in coordinating back-scratching, its costs, and potential institutional changes to combat it, I took the problem to the lab under computerised experimental conditions. While the results confirm a lot of common sense intuition, they are a leap forward in terms of our economic understanding of the problem. Regulatory capture is the name economists give to the perverse effects of the revolving door, yet its effects on behavior are not the product of a coherent theoretical framework. For regulators to act in the interests of their former, or potentially future, employers requires a level of implicit collusion that shouldn’t exist in a world of purely self-interested agents who would defect from any attempt to form a group of allied insiders. Something else must be going on. Another view in standard economics is that political favors are imagined to be auctioned by way of a lottery, where bidders devote their resources to non-productive activities, such as attending political fundraisers, up to the amount of their expected payoff from the political favor subject to the participation of others in the lottery. This is called rent-seeking. The prize of a political favour is open to anyone, and we should expect, just like we see in real lotteries, no specific entrenchment of particular interest groups and a high degree of randomness in allocation of political favors.  Back-scratching, corruption and regulation

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State Banks the Answer?

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Banking in the Spotlight in New Mexico
There was a recent Symposium in Albuquerque, New Mexico on November 7, 2015 to Promote Public Banking.

First of all, what is a Public Bank? I am not sure there is a good definition but presumably it is not a private bank or even a non-profit bank but in some sense is associated with government and I think we are talking here about something other than the Central Bank of a nation. Thus perhaps the best way to look at a Public Bank is that it is a bank owned by a political jurisdiction and intended to advance the interests of the political jurisdiction which presumably means the residents of that political jurisdiction. But there may be differences of opinion as to the range of services that need to be provided in order for this entity to be considered a bank. It is important to understand that certain banking functions are performed by governmental entities which do not have a bank charter. This could be important.

Here are statements by a state legislator. First, after eleven years in the Legislature, I was astonished to see, in a “weekly report of activity” from the LFC. The LFC is the Legislative Finance Committee which employs fiscal analysts who examine budgets and review the management and operations of state agencies, higher education institutions and public schools and participate in the state’s revenue estimating process. Buried in a paragraph updating us on department activity, the sentence that “the Department of Transportation had awarded a $6 million loan for a wastewater system with Estancia. The funds will be processed through the State Infrastructure Bank.”

I was astonished for two reasons: first, what is the Transportation Department doing lending money for waste water infrastructure? Second, what in the world is the State Infrastructure Bank? I confess in my time as a legislator, this entity had never been mentioned to me…at least I couldn’t recollect ever hearing about it. So I did a bit of internet research, and while the NM State Infrastructure Bank eluded my search, the general concept of state infrastructure banks produced a wealth of information. I now realize that we are among the states which have for years been utilizing this simple method of financing some of our projects for highways and water. I couldn’t determine for sure, but it appears in NM we have housed the “bank” in the department of transportation (bridges and roads would be one of the uses, so this makes sense).

State Infrastructure banks are “a well-regulated method for financing projects selected by the state. A low-interest, below market rate, loan is issued to finance the project. Repayments, including interest, return to the bank and are then available for lending out for additional projects.” What struck me about the existence of this mechanism is that it is precisely the way a public bank would function. We, in effect, already have one–just haven’t named it as such and haven’t made full use of its simple, elegant mechanism…so why not?

The power of the banking lobby. Their program fits with their overall strategy of convincing Americans that banking is far too complex an issue to be attempted by anyone but members of the banking brotherhood. Leave your financial dealings to us…you’ll just screw them up. This ignores the reality that is described in numerous books I’ve been reading on the topic following last fall’s symposium on public banking in Santa Fe. Ellen Brown’s “Web of Debt” is the cornerstone for the discussion. Michael Lewis, among others, has explored just how it was possible for the banking industry to get things so terribly wrong during the housing bubble and the resulting crash of 2008 in “The Big Short” and “Boomerang”. What becomes clear from these works is that bankers are NOT the smartest guys in the room; that in fact the incredible profit they are able to produce out of public financial dealings is in no way a necessity. Instead, there is plenty of room for a state (like North Dakota) or a City (as Santa Fe is attempting) to omit the banking industry from many (if not all) of its finances.

Like you, I think it would make sense to move slowly and carefully in incremental steps, building on those activities in state government that are already very much like public banking, like my new discovery of the State Infrastructure Bank (SIB) or the State Investment Council (SIC). What I would see happening first would be to expand the SIB’s role, increasing the amount and number of self-financed projects, projects in which we pay ourselves a modest return rather than see public money go into bankers’ vaults for no good reason. In time this could include issuing our own bonds. It could involve an initial deposit from the state operating reserves of a percent or two (each percent represents $62 million and we are currently carrying over 10% reserves, far more than actuaries say is necessary). That deposit, used to finance state or municipal projects (a la the SIB) would earn a better return than we now get from the reserves, which are not invested but retained in a private bank “until we need to withdraw it”.

Governance of a public bank is the big concern. It needs to be as independent as possible from the executive and the legislature. Decisions about its operation should be divorced from political considerations. We can do it…if North Dakota can. In time it could develop into a full-blown State Bank, one that buys a piece of commercial loans entered into by community banks, reducing the overall interest rate and fostering economic growth for local business. Banking in the Spotlight in New Mexico

State Banks

Central Banks Only Work at the National Level?

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One currency implausible?

Larry Hatheway and Alexander Friedman write: Central banks, while ideally independent from political influence, are nonetheless accountable to the body politic. They owe their legitimacy to the political process that created them, rooted in the will of the citizenry they were established to serve (and from which they derive their authority).

The history of central banking, though comparatively brief, suggests that democratically derived legitimacy is possible only at the level of the nation-state. At the supra-national level, legitimacy remains highly questionable, as the experience of the eurozone amply demonstrates. Only if the European Union’s sovereignty eclipses, by democratic choice, that of the nation-states that comprise it will the European Central Bank have the legitimacy it requires to remain the eurozone’s sole monetary authority.

But the same political legitimacy cannot be imagined for any transatlantic or trans-Pacific monetary authority, much less a global one. Treaties between countries can harmonize rules governing commerce and other areas. But they cannot transfer sovereignty over an institution as powerful as a central bank or a symbol as compelling as paper money.

Central banks’ legitimacy matters most when the stakes are highest. Everyday monetary-policy decisions are, to put it mildly, unlikely to excite the passions of the masses. The same cannot be said of the less frequent need (one hopes) for the monetary authority to act as lender of last resort to commercial banks and even to the government. As we have witnessed in recent years, such interventions can be the difference between financial chaos and collapse and mere retrenchment and recession. And only central banks, with their ability to create freely their own liabilities, can play this role.

Yet the tough decisions that central banks must make in such circumstances – preventing destabilizing runs versus encouraging moral hazard – are simultaneously technocratic and political. Above all, the legitimacy of their decisions is rooted in law, which itself is the expression of democratic will. Bail out one bank and not another? Purchase sovereign debt but not state or commonwealth (for example, Puerto Rican) debt? Though deciding such questions at a supranational level is not theoretically impossible, it is utterly impractical in the modern era. Legitimacy, not technology, is the currency of central banks.

But the fact that a single global central bank and currency would fail spectacularly (regardless of how strong the economic case for it may be) does not absolve policymakers of their responsibility to address the challenges posed by a fragmented global monetary system. And that means bolstering global multilateral institutions.

The International Monetary Fund’s role as independent arbiter of sound macroeconomic policy and guardian against competitive currency devaluation ought to be strengthened. Finance ministers and central bankers in large economies should underscore, in a common protocol, their commitment to market-determined exchange rates. And, as Raghuram Rajan, the governor of the Reserve Bank of India, recently suggested, the IMF should backstop emerging economies that might face liquidity crises as a result of the normalization of US monetary policy.

Likewise, a more globalized world requires a commitment from all actors to improve infrastructure, in order to ensure the efficient flow of resources throughout the world economy. To this end, the World Bank’s capital base in its International Bank for Reconstruction and Development should be increased along the lines of the requested $253 billion, to help fund emerging economies’ investments in highways, airports, and much else.

Multilateral support for infrastructure investment is not the only way global trade can be revived under the current monetary arrangements. As was amply demonstrated in the last seven decades, reducing tariffs and non-tariff barriers would also help – above all in agriculture and services, as envisaged by the Doha Round.

Global financial stability, too, can be strengthened within the existing framework. All that is required is harmonized, transparent, and easy-to-understand regulation and supervision.

For today’s international monetary system, the perfect – an unattainable single central bank and currency – should not be made the enemy of the good. Working within our existing means, it is surely possible to improve our policy tools and boost global growth and prosperity.

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One Currency For The World?

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Today’s world is more economically and financially integrated than at any time since the latter half of the nineteenth century. But policymaking – particularly central banking – remains anachronistically national and parochial. Isn’t it time to re-think the global monetary (non)system? In particular, wouldn’t a single global central bank and a world currency make more sense than our confusing, inefficient, and outdated assemblage of national monetary policies and currencies?

Technology is now reaching the point where a common digital currency, enabled by near-universal mobile phone adoption, certainly makes this possible. And however farfetched a global currency may sound, recall that before World War I, ditching the gold standard seemed equally implausible.

The current system is both risky and inefficient. Different monies are not only a nuisance for tourists who arrive home with pockets full of unspendable foreign coins. Global firms waste time and resources on largely futile efforts to hedge currency risk (benefiting only the banks that act as middlemen).

The benefits of ridding the world of national currencies would be enormous. In one fell swoop, the risk of currency wars, and the harm they can inflict on the world economy, would be eliminated. Pricing would be more transparent, and consumers could spot anomalies (from their phones) and shop for the best deals. And, by eliminating foreign-exchange transactions and hedging costs, a single currency would reinvigorate stalled world trade and improve the efficiency of global capital allocation.

In short, the current state of affairs is the by-product of the superseded era of the nation-state. Globalization has shrunk the dimensions of the world economy, and the time for a world central bank has arrived.

One Currency for the World?

 

Migration: A Global Issue for the Group of 20

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The Rocky Road to Globalization

As the Group of Twenty leaders gather in Turkey this weekend, they will have on their minds heartbreaking images of displaced people fleeing countries gripped by armed conflict and economic distress.  The surge of refugees in the last few years has reached levels not seen in decades. And these numbers could increase further in the near future. 

The immediate priority must be to help the refugees — who bear the heaviest burden, and too often tragically — with better access to shelter, health care and quality education.

No country can manage the refugee issue on their own. We need global cooperation.

Cross-border migration, of course, comes in several forms. It includes both refugees who are forced to leave their country and economic migrants who voluntarily leave in search of opportunities. This total number of migrants has risen significantly in recent years, now accounting for over three percent of the global population.

Regardless of the motivation, the decision to uproot and leave one’s home is difficult and can be risky. But once people pass through the journey, resettle and find stability, migration can — with the right policies — have an overall positive economic impact: for migrants, their host country, and their country of origin (as shown in forthcoming staff analysis).

Migrants can boost a country’s labor force, encourage investment and boost growth. Preliminary IMF calculations show a modest positive impact on growth from migrants in EU countries, for example.

More importantly, migration can also help address the challenges from aging populations in a number of advanced countries.  What about countries experiencing an outflow of migrants?  Certainly, these countries often lose their youngest and brightest, with important implications for growth. This has been the case in Caribbean countries, for instance, which lost over 50 percent of their high-skilled labor between 1965 and 2000.

Remittances help to counterbalance some of these effects.  Indeed, they can be a very important source of income — which has been shown to lead to higher education and health spending.  In 2014, remittance flows to developing countries amounted to $436 billion, more than half of total net foreign direct investment and well over three times as much as official development assistance.

 

What does a well-designed integration policy include?

  • First, strengthening the ability of labor markets to absorb migrants — by enabling immediate ability to seek work and providing better job matching services.
  • Second, enhancing access to education and training — by providing affordable education, language and job training.
  • Third, improving skill recognition — by adopting simple, affordable and transparent procedures to recognize foreign qualifications.
  • Finally, supporting migrant entrepreneurs — by reducing barriers to start-ups and providing support with legal advice, counseling and training.

In Sweden, for instance, an introduction program for refugees provides employment preparation and language training for up to 24 months, together with financial benefits. The program is beginning to help the latest inflow of refugees to find jobs — even though it will inevitably take time to fully succeed.

Demographic forces, globalization and environmental degradation mean that migration pressures across borders will likely increase in the coming decades.  And cross-border challenges demand cross-border solutions.

Global policy efforts, therefore, must focus on better cooperation and dialogue among the affected countries.

The IMF will also do its part, including through our financing and capacity building. In addition, over the next few months, our analysis on this issue will feed into our policy advice to countries in Africa, Europe and the Middle East dealing with massive population movements.

Migration is a global issue. We must all work together to address it.

Resurrecting Dodd Frank?

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After reportedly finding that partial repeal of Dodd-Frank Act language allows banks to keep trillions in risky trades on the books, U.S. Sen. Elizabeth Warren, D-Mass., called on the Securities and Exchange and Commodity Futures Trading Commissions Monday to implement rules that protect taxpayers and the financial system.

Warren, who joined Maryland Rep. Elijah Cummings in investigating the risks posed to taxpayers following the 2014 partial repeal of the law, also asked the Government Accountability Office to analyze the impact of the modified Dodd-Frank provision.

According to Warren and Cummings’ review, rollback of the section of the law designed to prevent taxpayer bailouts of federally insured banks with risky swaps holdings, now allows banks to keep nearly $10 trillion in swaps trades on their books. The Democrats also found that regulators have failed to analyze the financial and taxpayer risks posed by the repeal.

In a letter to the CFTC and SEC, Warren and Cummings urged the federal agencies to “act quickly to mitigate the risks posed by uncleared swap activities by imposing strong margin requirements for swaps between bank affiliates and other entities under (their) authority.”

Warren and Cummings urged the GAO Comptroller of the total value of swaps U.S. banks originally would’ve been required to “push out” under the provision; an estimate of the total value of swaps U.S. banks will now be required to “push out” under the revised language; and a quantified assessment of the risks implementation of the section would’ve created for U.S. banks.

“The failure to assess the impact on banks and the economy of the repeal of Section 716 raises critical questions about whether federal policymakers are sufficiently attentive to the risk posed by nearly $10 trillion in risky swaps now primary held – and allowed to be traded and held on an ongoing basis – by a handful of the country’s largest FDIC-insured banks,” they wrote. “Understanding this risk is critical as policymakers continue to make decisions about how banks are regulated.”

The 2015 Consolidated and Further Continuing Appropriations Act modified the Dodd-Frank Act section.

Warren and Cummings, who contended that the change was made without debate and after intense lobbying from the financial industry, launched their own investigation into its potential impacts.

Securing Dodd Frank

Islamic Finance to Benefit Women and Everyone Else

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Christine Lagarde speaks about possibilities for Islamic finance.

Lagarde, the head of the International Monetary Fund, says Islamic finance offers the possibility of extending banking services to many who are underserved in the Muslim world.

Lagarde told an audience in Kuwait City that only a quarter of Muslim adults have access to a bank account.

Lagarde said on Wednesday that “Islamic finance has the potential to contribute to higher and more inclusive economic growth by increasing access of banking services to underserved populations.”

Lagarde took no questions at the end of her speech.

She has recently said that Kuwait should consider imposing taxes on commercial profits and address the massive subsidies the oil-rich tiny country offers its citizens in the wake of low global oil prices.   Lagarde Speech 11/11/2015

Possibilities for Islamic Finance

Bank Hackers Accused in US

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U.S. prosecutors on Tuesday unveiled criminal charges against three men accused of running a sprawling computer hacking and fraud scheme that included a huge attack against JPMorgan Chase & Co and generated hundreds of millions of dollars of illegal profit.

Gery Shalon, Joshua Samuel Aaron and Ziv Orenstein, all from Israel, were charged in a 23-count indictment with alleged crimes targeting 12 companies, including nine financial services companies and media outlets including The Wall Street Journal.

Prosecutors said the enterprise dated from 2007, and caused the exposure of personal information belonging to more than 100 million people.

“By any measure, the data breaches at these firms were breathtaking in scope and in size,” and signal a “brave new world of hacking for profit,” U.S. Attorney Preet Bharara said at a press conference in Manhattan.

The alleged enterprise included pumping up stock prices, online casinos, payment processing for criminals, an illegal bitcoin exchange, and the laundering of money through at least 75 shell companies and accounts around the world.

Tuesday’s charges expand a case first announced in July, and according to U.S. Attorney General Loretta Lynch target “one of the largest thefts of financial-related data in history.”

The charges are also the first tied to the JPMorgan attack, which prosecutors said involved the stealing of records belonging to more than 83 million customers, the largest theft of customer data from a U.S. financial institution.

Authorities said Shalon and Aaron executed that hacking, using a computer server in Egypt that they had rented under an alias that Shalon often used.

Hacking