What Would Happen if Women Were the Financial Regulators?

William Greider asks:  If women were in charge of banking regulation, could they save us from the Wall Street cowboys who crashed the global financial system?

That provocative question was the implicit subtext for an all-day conference of banking and financial officials in Washington this week, held at, of all places, the soberly serious International Monetary Fund. The IMF’s managing director, as it happens, is a woman—Christine Lagarde of France—and she appeared alongside an even more powerful woman—Janet Yellen, chair of the US Federal Reserve System. Neither of them was in charge when the system crashed in 2008.

The IMF event was not a rump rally of feminists who somehow crashed the halls of power. But all of the 18 speakers on various panels were women, prominent as bank regulators or financial authorities. The one-sided gender line-up was not exactly an accident. The men in suits could hardly miss the message.

But just in case they did, IMF Director Lagarde prompted them with a droll question: “What would have happened if Lehman Brothers had been Lehman Sisters?”

What she meant was that different values might have prevailed if women had held the controlling positions at the brokerage or were the government regulators enforcing prudent standards. Women, as Lagarde has observed, worry more about financial exclusion. Worldwide, 42 percent of women have no access to financial services. Only a measly 3 percent of bank CEOs are women.

More to the point, Largarde said research shows women are more risk-averse—a quality utterly missing in the reckless banks and brokerages rushing like lemmings to the cliff. Women in charge might have asked tougher questions.

Fed Chairwoman Yellen stayed away from the gender question. But Lagarde has invoked “Lehman Sisters” numerous times since the financial collapse and disappointing recovery.

“It takes a great deal of will power to direct the French economy,” Largarde wrote in 2010 when she was France’s finance minister. “I am not doing this for women but as a woman I am, perhaps, more keenly aware of the damage that the crisis has done through greed, pride and a lack of transparency…. I am determined to do everything within my power to change the rules of the game and do my best to ensure that a crisis such as this can never happen again.”

What women want, she wrote, is to be judged, like men, on the basis of their deeds. She added what Eleanor Roosevelt had to say on the subject. “A woman is like a tea bag—you never know how strong it is until it’s in hot water.”

One of the conference speakers, Brooksley Born, is a courageous example. Born was nearly drowned by “hot water” dumped on her by Robert Rubin, Alan Greenspan, and Larry Summers during the Clinton administration. As a regulator she was trying to impose some limits on dangerous derivatives. The men hammered her, blocked her, and effectively drove her out of government.

Institute for New Economic Thinking was co-founded and funded by investor George Soros and others, and it set out to sweep worldwide in search of new ideas and new economists who are breaking free of the old orthodoxy that failed.

Johnson was once asked,“If you could wave a magic wand and do one thing to make the financial system better, what would it be?” Johnson had a quick answer: “Only women get to regulate finance.”

Adamti, Provocateur, Instigator

Adamti, Provocateur, Instigator

States’ Attorneys’ General Targeted by Lobbyists and Lawyers

Pro Publica reports on the campaign contributions and lobbying efforts of businesses and organizations targets by States’ Attorneys General.

Attorneys general are now the object of aggressive pursuit by lobbyists and lawyers who use campaign contributions, personal appeals at lavish corporate-sponsored conferences and other means to push them to drop investigations, change policies, negotiate favorable settlements or pressure federal regulators, an investigation by The New York Times has found.

A robust industry of lobbyists and lawyers has blossomed as attorneys general have joined to conduct multistate investigations and pushed into areas as diverse as securities fraud and Internet crimes.

But unlike the lobbying rules covering other elected officials, there are few revolving-door restrictions or disclosure requirements governing state attorneys general, who serve as “the people’s lawyers” by protecting consumers and individual citizens.

A result is that the routine lobbying and deal-making occur largely out of view. But the extent of the cause and effect is laid bare in The Times’s review of more than 6,000 emails obtained through open records laws in more than two dozen states, interviews with dozens of participants in cases and attendance at several conferences where corporate representatives had easy access to attorneys general.

Often, the corporate representative is a former colleague. Four months after leaving office as chief deputy attorney general in Washington State, Brian T. Moran wrote to his replacement on behalf of a client, T-Mobile, which was pressing federal officials to prevent competitors from grabbing too much of the available wireless spectrum.

“As promised when we met the A.G. last week, I am attaching a draft letter for Bob to consider circulating to the other states,” he wrote late last year, referring to the attorney general, Bob Ferguson.

A short while later, Mr. Moran wrote again to his replacement, David Horn. “Dave: Anything you can tell me about that letter?” he said.

“Working on it sir,” came the answer. “Stay tuned.” By January, the letter was issued by the attorney general largely as drafted by the industry lawyers.

The exchange was not unusual. Emails obtained from more than 20 states reveal a level of lobbying by representatives of private interests that had been more typical with lawmakers than with attorneys general.

“The current and increasing level of the lobbying of attorneys general creates, at the minimum, the appearance of undue influence, and is therefore unseemly,” said James E. Tierney, a former attorney general of Maine, who now runs a program at Columbia University that studies state attorneys general. “It is undermining the credibility of the office of attorney general.”

Lobbyists

Teachout on Corrupt Campaign Finance Practices

Zephyr Teachout writes: More than 200 years ago, we included in our Constitution a provision that forbids federal officers from accepting a gift of any kind whatever from foreign interests without first getting permission from Congress (Article I, Section 9, the so-called Emoluments Clause). We borrowed the provision from the Netherlands, where it was ridiculed for being overly fussy about corruption. But we put it in both our Constitution and in that document’s forerunner, the Articles of Confederation, as a defense against emulating the corrupt culture of Europe.

The unlikely source of the provision was a snuff box. A few years before the constitutional convention, the King of France gave Benjamin Franklin a diamond encrusted snuff box after his diplomatic tour. Franklin did not appear to offer anything in return, but the gift nonetheless led to concerns that Franklin might be quietly corrupted by French interests—perhaps even without his knowing it.

The Americans, rigidly rejecting European custom, believed that acceptance of a luxurious gift by someone in power was itself a threat. Perhaps Franklin would be more generous toward French commercial interests simply by the operation of normal human sympathies, which to tend to be more charitable toward those who give us gifts. The framers tried to put a check on those sympathies, or at least put a block in the relationship, by requiring that Congress approve any gifts to federal officials.

Ironically, at the constitutional convention, Franklin was among the most outspoken in favor of anti-corruption provisions. His own lifelong experience with governments around the world had made him wary of the many ways in which officials could be tempted. James Madison, Thomas Jefferson, George Mason, and Franklin weren’t wrong to be concerned about foreign powers attempting to use money to buy influence and favorable treatment.

According to The New York Times, Bill Clinton received a $500,000 personal payment from a Russian bank as payment for a speech in 2010. (In some cases, Bill Clinton directs his speaking fees to the Clinton Foundation, though there’s no evidence that happened in this case.) This payment happened around the same time that Hillary Clinton’s State Department was participating in the decision-making process on the legitimacy of Russian takeover of American uranium interests (the decision was made by an inter-agency body on which State was represented, but was chaired by Treasury). Many people have raised concerns that this fee, like Benjamin Franklin’s snuff box, might have swayed Bill Clinton’s—and Hillary’s—general thinking toward Russian interests at the time.

In effect, the troubling morality of Citizens United has become the official morality of Clinton’s defenders.  Over the past several years, Bill Clinton has been given millions of dollars for foreign and domestic speeches, with the greatest number of sponsors coming from the financial industry. At the same time, he solicited and received millions of dollars from foreign and domestic interests, including. Many of the donors and sponsors had interests that were affected by State Department policies, and all of the donors, past and current, have interests that would be affected by a Hillary Clinton presidency.

Hillary Clinton has not addressed the issue publicly, but some of her defenders have argued that without a smoking gun, or evidence of quid pro quo, there’s nothing to be concerned about.

As the framers knew, we don’t need that in order to be concerned.

Here is Teachout’s artcile on Anti-corruption in the US constitution.  Anti Corruption

Teachout recently ran for Governor of New York State.

Franklin

 

Accessing Information: War by Any Name?

Robert Hackett writes:  A report out of Arlington, Va.-based cyber security firm Lookingglass reveals a cyber campaign, allegedly Russian, waged against Ukrainian targets, such as the government, law enforcement, and military. The purpose of the state-sponsored espionage has apparently been to gather intelligence on its adversary, bolstering Russian war efforts.

The researchers dubbed the campaign “Operation Armageddon”. “For the most part the technologies were not advanced,” says Jason Lewis, chief collection and intelligence office at Lookingglass. “It’s not super sophisticated, but it’s certainly persistent.”

Lookingglass researchers worked with neither Ukraine nor Russia in its investigation, sourcing its materials rather from proprietary methods and through sites like VirusTotal, a public database where people can upload and scan files for known viruses.

Often, the researchers found, the hackers stole documents relevant to the outside conflict from victims’ machines, and then used those files to compromise future targets.

Once Ukraine’s interim President announced the start of an “anti-terrorist operation” against pro-Russian separatists in mid-April 2014, the conflict’s cyber activities significantly increased. From this point onwards, waves of cyber attacks from the Russians directly correlated with the timing of military events and were geared towards gathering intelligence to empower themselves on the physical battlefield – a digital method of espionage in its truest of forms.

The Lookingglass researchers, convinced that Russia is the culprit, agree with the Security Service of Ukraine (SBU) that the Russian Federal Security Service (FSB, descendant of the KGB) is to blame. (SBU, too, has called out FSB as being responsible for recent phishing attacks.) “We’re highly confident that the claims the SBU made are accurate,” Lewis says. “We didn’t find any evidence to the contrary to dispute those claims.”

That nation states are using cyber attacks to achieve geopolitical ends should come as no surprise.

Last year, CrowdStrike associated Chinese cyber espionage campaigns with China’s movement into disputed territory in the South Pacific as well as with an ISIS-led takeover of an Iraqi oil refinery. The security firm FireEye FEYE -1.07% found state actors using attack methods similar to those outlined above to target rebel forces during conflict in Syria. The security firm Cylance recently implicated Iran as having probed critical U.S. energy infrastructure, just prior to nuclear negotiations. And then, of course, there are the claims about Sony Pictures Entertainment and North Korea.

Espionage and cyber attacks can give countries that engage in the practice an upper hand in international affairs. “Nation states need to be able to asses how seriously people will take their threats and what they’ll do as result of a threat,” says Adam Meyers, vice president of intelligence at the security firm CrowdStrike, presenting a rationale for digital incursions. “It puts them in a better position to make a credible threat if they know what the response is going to be.”

Indeed, recent reports suggest that Russian spies have penetrated deep inside Ukraine’s intelligence apparatus.

Hacking as War?

Upping Equity Requirements for Banks?

SImon Johnson writes: The main financial risk facing the United States today looks very similar to what caused so much trouble in 2007-2008: big banks with too much debt and too little equity capital on their balance sheets. Uneven global regulations, not to mention regulators who fall asleep at the wheel, compound this structural vulnerability.

All booms are different, but every major financial crisis has at its heart the same issue: major banks get into trouble and teeter on the brink of collapse.

The most important question to ask of any financial system is how much loss-absorbing equity major banks have on their balance sheets. When a company suffers losses, its shareholder equity falls in value, and less equity means that the company is more likely to default on its debts.

The capital ratios most frequently highlighted by banks and officials are misleading, because they include items – such as goodwill and deferred tax assets – that are incapable of absorbing losses. We need to look instead at tangible equity relative to tangible assets. And we should also be very careful about the accounting used for derivatives.

Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, publishes his own calculation of capital levels at the world’s largest banks, and these data are now available through the end of 2014. The most leveraged big US bank, Morgan Stanley, has less than 4% equity, meaning that 96% of its balance sheet is some form of debt. The average for big US banks is just under 5% equity.

This is more – but not much more – capital than some troubled banks had in the run-up to the financial crisis in 2008. Citigroup, for example, had no more than 4.3% equity, according to Hoenig’s calculation, in November 2008. At the end of 2012, when Hoenig started to publish his US GAAP-IFRS adjustment, the average for the largest US banks was roughly 4% equity. It is possible to argue that this key measure is moving in the right direction, but the pace of improvement is glacial at best.

More important, 5% equity is unlikely to be enough to absorb the kinds of losses that a highly volatile world will throw up.

The most dangerous shocks may be those that originate with the big banks themselves. The latest significant development to surface is what Better Markets, a pro-reform group that has put out a helpful fact sheet, calls “de facto guaranteed foreign subsidiaries” that trade derivatives – a murky phenomenon that likely involves all the big players. The trick here is that a de jure guaranteed foreign subsidiary of a US bank would have to comply with many US rules, including those governing conduct, transparency, and clearing (how the derivatives are actually traded). A foreign subsidiary that is supposedly independent is exempt from those rules.

The main reason why such loopholes are left open is that regulators choose not to close them. Sometimes this may be due to lack of information or awareness. But, in many cases, the regulators actually believe that there is nothing wrong with the behavior in question – either because they have been persuaded by lobbyists or because they themselves used to work in the industry (or could go work there soon.)

Sound familiar?

Saving Banks?

EU to Join UN in Libyan Immigration Solution?

Most refugees trying to flee to safety in Europe hail from wartorn Syria, or are Africans shuttling through the chaos in Libya for a way off the continent. Although many Syrians try to cross into Europe through Turkey, increasing numbers travel to the Libyan coast via Egypt in order to find smugglers who will put them in dodgy dinghies – or worse. And they pay a lot of money to do it.

After hundreds of refugees drowned this week when their boats sank, and video footage captured the tragedies, European politicians reacted. The European Commission proposed a 10-point plan that boils down to improving search-and-rescue operations and basically doing more of the same.

One theory has been thoroughly disproven: Cutting down on sea rescue operations, which is what happened when the EU nations pulled the plug on Italy’s Mare Nostrum operation, does not motivate refugees to stay on African shores.

Undoubtedly the European Union should beef up its operations to rescue people in distress and find ways to evenly distribute them across the EU member states. But Europe should also actively pursue the stabilization of Libya.

The current situation in Libya is reminiscent of Lebanon during its civil war. Several groups are at once trying to take control of the country. What remains of the national government is powerless. Government services such as the border police and customs have collapsed. It is in this chaotic vacuum that people smugglers find the freedom they need to strip desperate refugees of their money – and all too often, their lives.

Aside from this, the vacuum is also giving rise to Islamofascist groups like ISIS. The self-labeled Libyan chapter of ISIS likes to engage in the slaughter of innocents. What they carry out is the kind of butchery.

Just a few years ago, Europeans and Americans removed the murderous dictator Moammar Ghaddafi. The Europeans made the same error they had accused Americans of after toppling Iraq’s Saddam Hussein in 2003: neglecting to engage in proper nationbuilding, or even having a strategy for it. Now as Libya descends into civil war, it presents a gateway to Europe not only to refugees, but also to ISIS terrorists.

It is time to own up to Europe’s mistakes and stem the tide in Libya. The European Union should engage with the United Nations to set up a large peacekeeping force with a tough mandate, and go to Libya to restore stability, separate the warring factions and disarm them – by force if necessary. Then organize a conference with the factions and establish a democratic federal republic that restores border patrols and law and order.

Immigration to EU

Reform in China?

A scholar based in China writes:  Since the start of its post-Mao reforms in the late 1970s, the communist regime in China has repeatedly defied predictions of its impending demise. The key to its success lies in what one might call “authoritarian adaptation”—the use of policy reforms to substitute for fundamental institutional change. Under Deng Xiaoping, this meant reforming agriculture and unleashing entrepreneurship. Under Jiang Zemin, it meant officially enshrining a market economy, reforming state-owned enterprises, and joining the World Trade Organization. Under Hu Jintao and Wen Jiabao, it meant reforming social security. Many expect yet another round of sweeping reforms under Xi Jinping—but they may be disappointed.

The need for further reforms still exists, due to widespread corruption, rising inequality, slowing growth, and environmental problems. But the era of authoritarian adaptation is reaching its end, because there is not much potential for further evolution within China’s current authoritarian framework. A self-strengthening equilibrium of stagnation is being formed, which will be hard to break without some major economic, social, or international shock.

One reason for the loss of steam is that most easy reforms have already been launched. Revamping agriculture, encouraging entrepreneurship, promoting trade, tweaking social security—all these have created new benefits and beneficiaries while imposing few costs on established interests. What is left are the harder changes, such as removing state monop­olies in critical sectors of the economy, privatizing land, giving the National People’s Congress power over fiscal issues, and establishing an independent court system. Moving forward with these could begin to threaten the hold of the Chinese Communist Party on power, something that the regime is unwilling to tolerate.

Reform in China

 

Another reason for the loss of steam is the formation of an increasingly strong antireform bloc. Few want to reverse the reforms that have already taken place, since these have grown the pie dramatically. But many in the bureaucracy and the elite more generally would be happy with the perpetuation of the status quo, because partial reform is the best friend of crony capitalism.

HSBC to Hong Kong?

HSBC proclaims that the world is its oyster.

HSBC Holdings Plc, less than two weeks before Britain’s general election, said it’s reviewing whether to move its headquarters out of the country because of rising tax and regulatory costs.

A move to Hong Kong, viewed by analysts as the bank’s most likely destination should it relocate, would unpick a structure that’s existed since the Hongkong and Shanghai Banking Corp. acquired Britain’s Midland Bank Plc in 1992. A transfer should cost no more than $1.5 billion because HSBC still has a base in the former British colony, said Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London.

“The work is underway,” Chairman Douglas Flint told shareholders at the bank’s annual meeting in London on Friday. “The question is a complex one and it is too soon to say how long this will take or what the conclusion will be.”

 Flint has been under pressure from investors to consider moving from the U.K., where a levy imposed on banks’ global balance sheets following the financial crisis cost HSBC 750 million pounds ($1.1 billion) last year, more than any other lender. Europe accounts for less than a quarter of profit at the bank, which operates in more than 70 nations.

“They may not like the U.K., but I’m not sure there’s exactly going to be a raft of people queuing up to have them” because of the size of HSBC’s $2.6 trillion balance sheet, said Edward Firth, head of European bank research at Macquarie Group Ltd. in London. “Hong Kong is the only serious possibility.”

In a statement, the Hong Kong Monetary Authority noted what it called HSBC’s “deep historical links” and said it would take a “positive attitude” should the lender decide to move.

Finance Director Iain Mackay said in an interview: HSBC won’t just look at Hong Kong, but other countries with a strong regulatory framework including Canada, the U.S., China, Australia, Singapore, France and Germany.

HSBC also said it’s concerned about Britain’s potential exit from the European Union.

Standard Chartered, another British bank that like HSBC makes most of its profit in Asia, is also being urged by investors to relocate because of the cost of being in London. The U.K. levy cost Standard Chartered $366 million last year, accounting for about 9 percent of its $4.2 billion of pretax profit.

Hong Preferred Home for Bankers?

 

Can Policy Change on High Speed Trading?

Everett Rosenfeld writes:  A UK trader is charged for manipulation contributing to 2010 flash crash.

A high-frequency futures trader has been charged with illegally manipulating the stock market, contributing to the May 2010 “flash crash,” according to documents unsealed Tuesday.

The US Justice Department charged the United Kingdom’s Navinder Singh Sarao with wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation and one count of spoofing (which is when a trader places a bid or offer with the intent to cancel before execution).

Sarao was arrested Tuesday in the U.K., and the U.S. is requesting his extradition, the DOJ said. The charges were filed in a federal complaint in February, but were unsealed Tuesday following the arrest.

The Commodity Futures Trading Commission also filed parallel civil charges against Sarao on Tuesday, calling him a “very significant player in the market.”

The CFTC alleged that Sarao was believed to have profited by about $40 million for his scheme. U.S. authorities have frozen nearly $7 million worth of his assets and accounts, Aitan Goelman, CFTC director of enforcement.

 

Spoofing

Renzi: End Slave Driving and Set up Immigration Centers in Africa

Dan Bilefsky writes: Prime Minister Matteo Renzi of Italy has issued a plea for collective action, and he alluded to a call for the creation of centers in Africa that would process asylum applications in a bid to spare many the perilous sea crossing to Europe.

Italy has become the main target of a wave of migrants trying to cross the Mediterranean Sea on often unseaworthy vessels such as the ship that capsized off the coast of Libya over the weekend, killing as many as 900 people.

Mr. Renzi called for the European Union to have a more coordinated strategy, including expanding search-and-rescue patrols and taking action against smugglers in Libya and elsewhere, whom he referred to as “21st-century slave drivers.”

He also evoked an idea that has previously circulated in Brussels: the establishment of migration centers in African countries, in cooperation with the United Nations, so that would-be migrants could apply for asylum in the European Union from their home countries rather than set off on potentially deadly journeys in search of refuge in Europe.On Thursday, European leaders are expected to discuss proposals to double the size of search-and-rescue operations in the Mediterranean; increase the budget for Frontex, the European Union’s border agency; improve cooperation between the police across the bloc; and intensify the battle against smugglers and human traffickers.

European Union officials said on Wednesday that the current budget for the bloc’s border protection operation, known as Triton, was about 3 million euros, or $3.2 million, a month, and that the operation’s resources included two aircraft, two helicopters, six coastal patrol vessels and about 65 officers. Even doubling that would probably not be enough to deal with the scale of the migration crisis, analysts said.

The number of people who have died in the Mediterranean Sea this year is thought to have already reached 1,727 migrants, according to the International Organization for Migration — more than 30 times last year’s death toll.

However, efforts to forge a common and robust European approach to immigration have faced several challenges in recent years, including weak political will at a time when budgets are stretched and far-right parties that have gained in popularity across the Continent by tapping into resentment against immigrants.

The efforts to forge a new European strategy on immigration have also been stymied by the fact that migration policy in the 28-member union is mostly the preserve of national governments rather than Brussels.