Category Archives: Big Banks

Ladies’ Day for Greece: Merkel and Lagarde

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Aug 16 German Chancellor Angela Merkel said  that she expected the IMF to participate in a new rescue package for Greece, saying the Washington-based institution’s chief Christine Lagarde had promised to lobby for this with the IMF board.

“The IMF took part in the negotiations. It suppports (the Greece deal),” Merkel told German public broadcaster ZDF. “I have no doubts that what Mrs. Lagarde said will become reality.”

Merkel ruled out a so-called “haircut” on Greece’s debt but said there were other ways to provide relief by extending debt maturities and reducing interest rates.

Lagarde and Merkel

What Are Banks? Investing for the Good?

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What are Banks?

Joseph E. Stieglitz writes:  The Third International Conference on Financing for Development recently convened in Ethiopia’s capital, Addis Ababa. The conference came at a time when developing countries and emerging markets have demonstrated their ability to absorb huge amounts of money productively. Indeed, the tasks that these countries are undertaking – investing in infrastructure (roads, electricity, ports, and much else), building cities that will one day be home to billions, and moving toward a green economy – are truly enormous.

At the same time, there is no shortage of money waiting to be put to productive use. Just a few years ago, Ben Bernanke, then the chairman of the US Federal Reserve Board, talked about a global savings glut. And yet investment projects with high social returns were being starved of funds. That remains true today. The problem, then as now, is that the world’s financial markets, meant to intermediate efficiently between savings and investment opportunities, instead misallocate capital and create risk.

There is another irony. Most of the investment projects that the emerging world needs are long term, as are much of the available savings – the trillions in retirement accounts, pension funds, and sovereign wealth funds. But our increasingly shortsighted financial markets stand between the two.

Much has changed in the 13 years since the first International Conference on Financing for Development was held in Monterrey, Mexico, in 2002. Back then, the G-7 dominated global economic policymaking; today, China is the world’s largest economy (in purchasing-power-parity terms), with savings some 50% larger than that of the US. In 2002, Western financial institutions were thought to be wizards at managing risk and allocating capital; today, we see that they are wizards at market manipulation and other deceptive practices.  Savings and Investment

How are Savings Used?

Feminist Alert: Banking Pillow Talk Dangerous

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Michael Gillard: The inner sanctum of the Bank of England was penetrated by a “powerful criminal network” linked to money laundering, terrorism, and contract killings, according to the police and MI5 investigation.

Detectives tapped the mobile phone of a Ferrari-driving businessman suspected of laundering money “on a vast scale” for organised crime gangs and reported hearing him receiving secrets from inside the Bank.

Although police warned senior bankers that a mole was passing inside information to a businessman connected to organized crime, the leaker was never identified, no one was sacked, and the businessman remains at large.

The Bank of England is now facing serious questions about how gangsters gleaned Britain’s most closely guarded financial secrets and how the public can be confident no such breach will occur again.

In 1998, detectives reported that they had eavesdropped on a high-rolling young stockmarket speculator receiving highly sensitive information about the bank’s monetary policy committee (MPC).

The committee meets in private each month to set Britain’s base rate of interest, which affects every aspect of the country’s economy, and the confidentiality of its deliberations is sacrosanct. Policymakers are made to sign a “declaration of secrecy” and are subject to “strict purdah rules” before decisions about interest rate changes are announced publicly. It is not suggested that the leak came from a member of the MPC.

But the businessman was believed to be exploiting a sexual relationship with the wife of a Bank of England insider to garner tip-offs about upcoming changes that could be used to gamble on the financial markets.

The threat to national security was deemed so severe that the investigation was swiftly taken over by spies at MI5, and the affair has remained a closely guarded secret for years.

A Bank of England source confirmed that in 1998 it was alerted to sensitive police intelligence that “two people were talking about inside access to the Bank’s information”.

Leaking monetary policy stuff would have been, and still is, a hanging offence,” and an immediate internal inquiry was launched. But it failed to identify where the leak was coming from, so no action was taken and the case was closed.

Listening to Secrets?

Lagarde Surveys the World

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Lagarrde says the world economy is recovering but fragile and “faces some downside risks.”

There is growing acceptance among Greece’s creditors that a restructuring of the country’s debt is inevitable, but only if Greece takes ownership of the bailout program by passing tough budget cuts and deep economic overhauls.

Greece has long bristled under Lagarde’s demands for politically unpalatable structural reforms — and this time is no different. During negotiations earlier this month over Athens’s latest bailout, Greek officials tried to boot the IMF from the so-called troika of creditors that also includes the European Commission and the European Central Bank.

Lagarde said that emerging markets are better prepared for the first Fed rate hike, having learned lessons from the taper-tantrum in May 2013.

She said she was pleased that Yellen has stressed that the timing of the first rate hike depends on the economic data.

Lagarde

US Fed Rates: Strong Dollar, Slow Growth Around the World?

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The Rocky Road to Globalization:

The Federal Reserve meeting in Maui hints interest rate rise later this year.

The Fed said economic growth continued to meet its expectations, and it indicated officials did not need to see much more progress before raising rates. The statement said officials wanted to see “some further improvement in the labor market,” suggesting the finish line is closer than at the Fed’s last meeting in June, when the central bank said it sought “further improvement.”

The decision to keep rates near zero for at least a few more weeks was unanimous, supported by all 10 voting members of the Federal Open Market Committee. But a number of those officials have said that they do not intend to wait much longer.  While growth remains disappointing by historical standards, the Fed said the economy continued to expand at a “moderate” pace, which was driving “solid job gains and declining unemployment.”

The statement also was notable for the absence of bad news. Although there was no mention of global problems, the Fed has to consider the impact of the strong dollar world wide.

The Fed has kept its benchmark interest rate near zero since December 2008, the centerpiece of its stimulus campaign to revive economic growth and increase employment since the recession. Officials have repeatedly extended that campaign as the economy disappointed their expectations, but in recent months, they have given clear signs they are becoming more worried about waiting too long to start raising interest rates than acting too soon.

Economic growth has increased after a rough winter, and employment expanded by an average of 208,000 jobs per month during the first half of the year. The unemployment rate fell to 5.3 percent.

Fed officials have said repeatedly that they plan to start raising rates this year as long as the economy keeps chugging along.

“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds target,” Janet L. Yellen, the Fed’s chairwoman.

Surveys of economic forecasters show that most expect the Fed to start raising interest rates at its next meeting, in mid-September. Measures of market expectations point to a December liftoff, however.

Inflation remains sluggish. Prices rose just 0.2 percent over the 12 months ending in May, according to the Fed’s preferred measure, a Commerce Department index of personal consumption expenditures. It was the 37th consecutive month that inflation has remained below the Fed’s declared target of 2 percent annual growth.

Ms. Yellen and other Fed officials, however, say they are increasingly confident that continued growth will push up prices to a more desirable level.

Global economic slowdown complicates the rate rise.

Interest rate rise

How Big Should the Banks Cushion Be?

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The Financial Stability Board (FSB) coordinates financial regulation for the Group of 20 economies and will finalize the rules by the end of September for endorsement by G20 leaders in November.

The FSB wants the top 30 banks to hold enough equity and long-term bonds so that if they fall into trouble they have enough resources without calling on taxpayers.

Major U.S. bank groups said in February the plan goes beyond what’s needed even at the lower end of the FSB’s range, but the calls appear to have been largely ignored.

“What we understand is that it will be going ahead largely as expected,” a senior banking industry source said.

“There will be tweaks here and there, but nothing substantial,” a G20 source added.

The buffer of “total loss absorption capacity” or TLAC would come on top of core capital requirements.

Standard & Poor’s has estimated that US$500 billion in bonds may have to be issued.

Mark Carney, the Bank of England Governor who chairs the FSB, has said the reform is crucial to ending “too big to fail” banks and drawing a line under the 2007-09 financial crisis.

Some banks like UBS and Bank of America have told analysts this month they are in a position to comply well ahead of the 2019 deadline, if not straight away.

“We’re going to start issuing TLAC in the current quarter, in 3Q, so we’re obviously not waiting to see the final regulations,” UBS Chief Financial Officer Tom Naratil told reporters on Monday.

“As we’ve indicated previously, it doesn’t really matter where it ends up, we feel that we’re well prepared to be able to address even the higher end of that band,” Naratil added.

Regulators in Continental Europe where some banks are still building up core capital cushions, want a final TLAC figure nearer 16 percent, while the Federal Reserve wants it around 20 percent, bankers said.

Settling for about 18 percent, as some bankers expect, will likely prompt the Fed to top this up with local requirements.

“Once the TLAC details have been finalised, the sector will be looking at how this is implemented in key jurisdictions, including whether any will gold plate,” said Oliver Moullin, a director at European banking lobby AFME.

The FSB, which had no comment, proposed that large banks from emerging markets like China be exempt from holding TLAC but bankers say the final rule will likely say this is temporary.

Banks with major units abroad must hold TLAC to reassure local regulators their taxpayers won’t be on the hook in a crisis. Under FSB proposals, these pools of TLAC could add up to well in excess of even 20 percent on a group basis.

“We have heard the FSB has found ways to mitigate that consolidation effect,” one senior European banker said.

Once a final TLAC figure is agreed, the banks will come under pressure to comply sooner rather than later, analysts said.

“I think banks will have to communicate as early as possible what their plans are to meet the requirements if they don’t meet them,” said Alexandre Birry, director, financial services ratings, at Standard & Poor’s.

SNL, a financial data company, said the next rung of lenders below the top 30 would also face investor pressure to meet the standards of the biggest players.

20110514_SRD003

Only Goldman Understands Accounting?

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Robert Reich writes: The Greek debt crisis offers another illustration of Wall Street’s powers of persuasion and predation, although the Street is missing from most accounts.

The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein.

Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction.

Then Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

As a result, about 2 percent of Greece’s debt magically disappeared from its national accounts. For its services, Goldman received a whopping 600 million euros ($793 million).  That came to about 12 percent of Goldman’s revenue from its giant trading and principal-investments unit in 2001—which posted record sales that year. The unit was run by Blankfein (who set up Hillary Clinton’s son-in-law in business).

In 2005, the deal was restructured and that 5.1 billion euros in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the European Central Bank and a major player in the current Greek drama, was then managing director of Goldman’s international division.

Greece wasn’t the only sinner. Until 2008, European Union accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities.

But Greece was in the worst shape, and Goldman was the biggest enabler.

Meanwhile, the people of Greece struggle to buy medicine and food.

There are analogies here in America, beginning with the predatory loans made by Goldman, other big banks, and the financial companies they were allied with in the years leading up to the bust. Today, even as the bankers vacation in the Hamptons, millions of Americans continue to struggle with the aftershock of the financial crisis in terms of lost jobs, savings, and homes.

Goldman knows very well what it is doing. It knew more about the real risks and costs of the deals it proposed than those who accepted them. “It is an issue of morality,” said the shareholder at the Goldman meeting.

Blankfein

 

Greece Re-Joins EU for 90b Euros

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Given the choice of being moneyless or giving up sovereignty to confirm its membership in the Eurozone and the EU, Greece has signed off on a deal which will give them operating money in exchange for firm and immediate dates for putting in place VAT taxes and new pension rules, among other economic reforms.

The banks care still closed, credit cards can be used in Greece in only.  Re-capitalization of Greece to begin soon and in Greece.

Has fiscal sovereignty been given up?  Is the deal undemocratic?  To be seen.  But if you are a member of a group, you obey its rules.  This is the rocky road to globalization.

Greece and the Eurozone

Renovate the IMF?

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The international system of economic governance is at a turning point. After 70 years, the Bretton Woods institutions – the International Monetary Fund and the World Bank –appear creaky, with their very legitimacy being questioned in many quarters. If they are to remain relevant, real changes must be made.

The IMF, in particular, is facing challenges on all sides. In the United States, Congress is stalling not only on international issues like trade, but also on the implementation of reforms that would expand the role of emerging economies in the IMF. For its part, Europe has drawn the organization into its debt crisis, with Greece having already missed a payment on its IMF loans (though the Fund is not calling it a default). And, in Asia, the IMF still carries a stigma, because of its flawed response to the region’s financial crisis in the late 1990s.

How can the IMF reprise its role as a guardian of international financial stability?  Modernizing the IMFIMF?

US Tired of SameOldSameOld?

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