Cyprus Banks Gamble Away Russian Billions
Posted by Pratap Chatterjee on April 2nd, 2013
|Bank sign in Limassol, Cyprus. Photo: Leonid Mamchenkov. Used under Creative Commons license.|
A few years ago Yiannis Kypri and Andreas Vgenopoulos, senior executives at the two biggest banks in Cyprus, were on top of the financial world. Kypri courted wealthy Russian investors in Moscow while Vgenopoulos handed out millions in loans to companies in Greece, the country of his birth.
Both Kypri, the former CEO of the Bank of Cyprus, and Vgenopoulos, the former CEO of Laiki Bank, were fired when their financial institutions collapsed, bringing down with them the economy of the tiny Mediterranean island country. Last week anyone who had deposited more than €100,000 ($129,000) in the two Cypriot banks was forced to write off between 40 to 80 percent cut of their holdings in order to finance a €10 billion international bailout of the country.
Cypriots are understandably angry although the people who will lose the most appear to be expatriates, notably from the former Soviet Union who have been flocking to the country over the last decade. “There is a generation of Russian businessmen like me who have lost faith in the Russian government, in Russian banks and in Russian laws. That is why we are in Cyprus,” Sergey Ivanov, a Russian wine merchant in Cyprus told the New York Times.
Many of these Russians were attracted to Cyprus when it decided to become a “respectable” tax haven inside the European Union and shake off its prior reputation as a center for money laundering for arms traffickers and druglords. Starting in 2008 the country swapped its local currency - the pound - for euros and built up a major offshore banking industry.
Thousands of companies that existed just on paper were set up in Cyprus over the last few years by accountants and lawyers for wealthy expatriates in order to help them avoid taxes. (There are 320,000 registered companies for just 860,000 residents) Andreas Marangos, a Cypriot lawyer, says he alone set up 6,000 shell companies for Russian and Ukranian investors. Michalis Papapetrou, another Cypriot lawyer, told National Public Radio that one of his Russian clients deposited €100 million in the island.
Indeed one in three rubles that left Russia in 2011 went to
Cyprus, and almost as much came back, according to the International Monetary
Fund. Why? “They were overwhelmingly Russian cash “round-tripping” through
Nicosia shell companies and re-entering as foreign investment,” writes Ben
Judah, author of the forthcoming book “Fragile Empire: How Russia Fell In and
Out of Love With Vladimir Putin.” This even included money state entities like Rosneft,
the oil giant, Sberbank and VTB, both major banks, and of course the Russian
billionaires who control the steel companies.
Bank of Cyprus acquired 80 percent of Uniatsrum, a Russian bank, in 2008 in order to cash in on this bonanza. “We are utterly convinced as to the huge potential of the Russian economy,”
Kypri, who was then group chief general manager of Uniatsrum, told a
Moscow press conference in 2010. “Once Uniastrum securities are accepted
for trading on the Russian stock market, the bank’s appeal will
increase, providing it with access to equity in rubles and further
solidifying its position as one of Russia’s foremost banking
At the same time, tens of thousands of ordinary Russians also flocked to the southern Cypriot town of Limassol to take advantage of the sunny weather, the banking system and a welcoming mayor who coincidentally speaks fluent Russian. A Russian radio station and two Russian-language newspapers, as well as dozens of shops selling Russian products have sprung up. Indeed, some have taken to calling the city “Limassolgrad” because of the overwhelming Russian presence.
Unfortunately Kypri, Vgenopoulos and their staff squandered the deposits that they were entrusted with on a variety of questionable schemes ranging from a property boom in Cyprus to large bets on Greek bonds, which they bought at 70 percent of their original value. Those bonds sank to a quarter of the original value under a deal engineered by the European Union in late 2011. Laiki alone lost €2.3 billion, an amount equal to an eighth of the national gross domestic product, while the Bank of Cyprus lost €1.6 billion.
Vgenopoulos, for example, used Marfin Popular Bank (a precedecessor to Laiki) to lend money to the monks of Vatopedi Monastery on Mount Athos to buy prime state-owned land in sweetheart deals which they then re-invested in his financial schemes.
Foolish ventures aside, some say the European Union deliberately forced Cyprus to the brink in order to break up the money laundering and tax dodging schemes on the island. “If we knew at the time what might eventually happen, we might not have been so willing to join,” Afxentis Afxentiou, former governor of Cyprus’s central bank from 1982 to 2002, told the Financial Times. “It seems they wanted to punish Cyprus.”
A committee of former Cypriot Supreme Court judges is scheduled to start work this week to attempt to discover who was responsible for the financial mess – presumably investigating the work of senior executives like Kypri and Vgenopoulos. They are expected to report back in three to six months.
Mind you such questions have been asked for a while with no answers forthcoming. "How could (the Cypriot authorities) be fooled by a man who took the capital of Cypriot depositors to Greece and turned it into thin air?" Zacharias Koulias, a Cypriot independent member of parliament asked his colleagues last May. "Is it even possible for a man to come to our country, grab the capital and leave, and all these managers didn't realize what was going on?
Another scandal is also brewing over a list published by a news website of 132 individuals and companies who were allegedly tipped off to the terms of the bailout and withdrew €700 million just before the bailout, incuding relatives of Cypriot President Nicos Anastasiades.
“Alchemy” Investigation Alleges Wall Street Fraud at Standard & Poor’s
Posted by Pratap Chatterjee on February 5th, 2013
|Standard & Poor's photo: TreyDanger. Dollar bills photo: Adam Kuban. Used under Creative Commons license|
The medieval alchemists claimed they could turn ordinary metals into gold. Analysts at Standard & Poors (S&P), Wall Street’s top ratings agency, claimed that bad loans to poor people were wildly profitably. A U.S. government investigation alleges that S&P financial analysts are no different from the hucksters of yore.
On Monday, the U.S. Department of Justice sued S&P for $5 billion for misleading the Western Federal Corporate Credit Union, the first federally chartered credit union, which collapsed in 2008. Sixteen states have joined the lawsuit while the U.S. Securities & Exchange Commission has also launched an investigation. S&P has offered to settle for $100 million instead without admitting any guilt.
The lawsuits are based on a special government investigation named “Alchemy” into top ratings provided by S&P for “collateralized debt obligations” (CDOs) composed of sub-prime mortgages. The federal officials allege that analysts knew that the loans were likely to go sour.
Sub-prime mortgages are a name for loans made to people who have bad credit and cannot borrow money to buy houses under normal circumstances. A flood of such loans from U.S. banks that lasted till 2006 created over $1 trillion in debt, typically for poor people, whose property values crashed when the housing bubble burst in 2007.
Two dozen government lawyers spent several years, conducting over 150 interviews, to find out how much the ratings agency knew about the quality of the CDOs. Some of the documents they uncovered were pretty damning.
“This market is a wildly spinning top which is going to end badly,” wrote David Tesher, an S&P managing director in an email on December 11, 2006, according to documents released by the government. “Let’s hope we are all wealthy and retired by the time this house of cards falters,” another S&P employee wrote four days later, according to documents released by the U.S. Senate.
"Watch out // Housing market went softer // Cooling down // Strong market is now much weaker // Subprime is boi-ling o-ver // Bringing down the house,” sang an analyst in a parody video of Talking Heads' 1983 song "Burning Down the House" that he recorded for his colleagues in March 2007.
“In effect, rating agencies like S&P greased the assembly line that allowed banks to package and sell risky mortgages that generated huge profits,” wrote the Huffington Post in a summary of the findings.
“We allege that S&P falsely claimed that its ratings were independent, objective, and not influenced by the company’s relationship with the issuers who hired S&P to rate the securities in question,” said Eric Holder, the U.S. attorney general, at a press conference on Tuesday. “When, in reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire to increase its profits and market share to favor the interests of issuers over investors.”
“Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. S.&P. has always been committed to serving the interests of investors and all market participants by providing independent opinions on creditworthiness based on available information,” the Wall Street firm said in a statement released to the press.
S&P has also tried to claim in court that its ratings are protected under the first amendment to the U.S. constitution, which guarantees the right to free speech. Federal judges have been skeptical like Shira A. Scheindlin, who recently ruled against the argument.
S&P is one of three major agencies on Wall Street. No federal action has been announced yet against the other two agencies – Fitch and Moody’s – despite evidence gathered two years ago that suggest they knew of the problem too.
Other lawsuits have also uncovered evidence that Wall Street firms were aware of the problems with sub-prime loans as far back as 2005, according to documents just released in a New York court under a lawsuit against Morgan Stanley, a major U.S. investment bank, that was brought by the China Development Industrial Bank (CDIB) from Taiwan. The bankers cracked jokes about the quality of the CDO that they sold to the Taiwanese suggesting that it should be called “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout” or “Shitbag.”
Morgan Stanley Knew About “Nuclear Holocaust” Mortgage Loans, Taiwanese Lawsuit Reveals
Posted by Pratap Chatterjee on January 23rd, 2013
|Protest outside San Francisco Federal Reserve. Photo: Steve Rhodes. Used under Creative Commons license.|
Morgan Stanley, a major U.S. investment bank, was well aware of the problems in the sub-prime mortgage market as far back as 2005, according to documents just released in a New York court under a lawsuit brought by the China Development Industrial Bank (CDIB) from Taiwan.
Sub-prime mortgages are a name for loans made to people who have bad credit and cannot borrow money to buy houses under normal circumstances. A flood of such loans from U.S. banks that lasted till 2006 created over $1 trillion in debt, typically for poor people, whose property values crashed when the housing bubble burst in 2007.
On July 15, 2010, CIDB brought a lawsuit in New York State Supreme Court in Manhattan over a $275 million portion of a collateralized debt obligation (CDO) sold to them by Morgan Stanley which contained large quantities of mortgage-backed securities that were built on pools of such loans. “The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment,” wrote Morgan Stanley in a summary of the legal charges it was facing in its annual filings. The plaintiffs alleged that the bank “knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CIDB.”
The court allowed CIDB to examine Morgan Stanley’s emails which have just been made public. Jesse Eisinger of ProPublica, an investigative website, has written an excellent article explaining the scam. The documents reveal that the Wall Street bankers even cracked jokes about the quality of the loans that they packaged and resold to the Taiwanese suggesting that the CDO be called “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout” or “Shitbag.” Instead they played it safe and named the financial instrument STACK 2006-1.
“Ha ha. Those hilarious investment bankers,” writes Eisinger sarcastically. “We are never going to have a full understanding of what bad behavior bankers engaged in the years leading up to the financial crisis. We are left with what scraps we can get from those private lawsuits.”
“We are pleased that the court in this case is ordering Morgan Stanley to turn over damning evidence, so that the jury will get to see what Morgan Stanley really knew about the troubled nature of its supposedly ‘higher-than-AAA’ quality product,” Jason Davis, a lawyer representing CIDB, told ProPublica. “While investors and taxpayers all over the world continue to choke on Wall Street’s toxic subprime products, to this day not a single major Wall Street executive has been held accountable for misconduct relating to those products.”
The bank has not denied the emails. “While the e-mail in question contains inappropriate language and reflects a poor attempt at humor, the Morgan Stanley employee who wrote it was responsible for documenting transactions,” the bank wrote in a statement to ProPublica. “It was not his job or within his skill set to assess the state of the market or the credit quality of the transaction being discussed.”
But even more damning is the fact that Morgan Stanley had already laid bets in the markets that such CDOs would fail. Howard Hubler, who set up an internal hedge fund named the Global Proprietary Credit Group at the bank in April 2006, where he “shorted” the sub-prime mortgage market. Hubler, however, made a costly mistake though by insuring other mortgages to pay for his bet, a tale told in Michael Lewis’s book – The Big Short, which costs Morgan Stanley $9 billion.
Thanks But No Thanks: Insurance Company Considers Suing Uncle Sam After Rescue
Posted by Puck Lo on January 9th, 2013
|Code Pink protest against AIG. Photo: codepinkhq. Used under Creative Commons license.|
The video advertisement launched just before Christmas was stirring - a montage of devastated communities from Joplin, Missouri to New York city after Hurricane Sandy. Insurance officers of every race from the American Insurance Group (AIG), the world’s largest insurance company, conveyed a simple message that they were back in business helping communities recover.
It’s a remarkable turnaround for the company which received a massive $182 billion bailout from the U.S. government in September 2008 after facing certain collapse when it became obvious that the risky mortgages that it had insured were likely to fail. At the time the federal government took a 80 percent ownership stake in the company in return for the loan.
“We’ve repaid every dollar America lent us. Everything plus a profit of more than $22 billion,” intone the AIG officials in the video. It ends with the words: “Now let’s bring on tomorrow.”
Well, tomorrow is here, and now the board of directors of AIG have been asked to consider suing the federal government over the terms of the bailout.
The lawsuit against the government is not new. It was originally filed in 2011 on behalf of AIG’s shareholders by AIG’s former CEO and chairman, 87-year-old Maurice “Hank” Greenberg. The plaintiffs allege that the U.S. government deprived AIG shareholders of tens of billions of dollars by charging the company an interest rate of 14 percent on the bailout loan. The basis of the claim is that other bank were bailed out on more favorable terms than the insurance giant received. It asks for $25 billion to compensate AIG and its shareholders.
Until now AIG’s board has been silent about whether they would join the lawsuit but earlier this week, the board of directors of AIG held an unusual private mock-trial-like session about the matter, in which they heard from attorneys, representatives from the U.S. Treasury and the Federal Reserve.
What the AIG board was asked to decide was whether or not they would like to join the lawsuit, take it over and pursue the claims independently, or if they would try to stop Greenberg’s lawyers from pursuing the case on the company’s behalf. If they tried to prevent Greenberg from continuing with the suit, AIG would potentially lose out on any lucrative potential settlement.
After the board meeting was reported Monday night, the backlash from legislators, regulators and the financial press was swift and scathing.
"Don't even think about it," wrote Peter Welch, a Congressman from Vermont, in a letter to Robert S. Miller, AIG’s chairman: "AIG became the poster company for Wall Street greed, fiscal mismanagement, and executive bonuses—the taxpayer and economy be damned. Now, AIG apparently seeks to become the poster company for corporate ingratitude and chutzpah."
But former CEO Greenberg, who helped built AIG up from its beginnings in the 1960s, believes he has a case. “The (g)overnment loaned billions of dollars to numerous other financial institutions without taking any ownership in those institutions; it loaned billions of dollars to domestic and foreign institutions at interest rates that were a fraction of those charged to AIG; and it guaranteed hundreds of billions of dollars to institutions like Citigroup, Inc,” the lawsuit states. “AIG and its (c)ommon (s)tock shareholders, by contrast, were singled out for differential - and far more punitive – treatment.”
The lawsuit also accuses the government of violating the fifth amendment to the U.S. constitution which prohibits “taking private property for public use without just compensation” when it took the majority of the company’s shares in return for the loan.
The plaintiffs contend that the government used AIG as “a vehicle to covertly funnel billions of dollars to other preferred financial institutions, including billions of dollars to foreign entities, in a now well-documented ‘backdoor bailout.’”
(Greenberg, it should be noted, was forced to resign in 2005 after being accused of misrepresenting the company’s finances.)
“There is no merit to these allegations,” said Jack Gutt, spokesman for the Federal Reserve Bank of New York in response to the news of the AIG’s board discussion. “A.I.G.’s board of directors had an alternative choice to borrowing from the Federal Reserve, and that choice was bankruptcy,” he told the New York Times.
The terms of the other bailouts were different, says commentators, because AIG was not a bank. “Those institutions were either banks that were already closely regulated by the Fed or became bank holding companies and submitted themselves to Federal Reserve regulation in return for access to the Fed’s lending facilities,” Time magazine reported.
Others note that AIG got a really good deal for the price, give the size and the nature of the loan. "Warren Buffett
loaned Goldman Sachs $5 billion at 10 percent annual
interest, plus upside in the form of warrants," writes Daniel Indiviglio of Reuters. "He ended up
booking an annual return of 14 percent without exercising the
warrants - far better than the government has managed from AIG
on the same basis." (The government ended up with about four percent in interest a year.)
Federal regulators also stress that the massive bail out of AIG was necessary because AIG was selling credit-default swaps that were intended to protect against subprime mortgage default - a major cause of the 2008-2009 financial crisis. If the insurance company had collapsed, the other banks and financial systems that it has insured would have gone down with it also.
“(W)e have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy,” Ben Bernanke, the chairman of the U.S. Federal Reserve, told CBS television in 2009.
On Wednesday the AIG board decided not to join the lawsuit. “The majority of directors decided that the reputational damage was greater than the possibility on a long-shot lawsuit,” John Coffee, a professor at Columbia Law School, told the Washington Post.
Now Greenberg, whose lawsuit was initially thrown out of the courts in November 2012, will have to proceed without the insurance giant’s backing to an appeal court, which has agreed to review the case.
U.S. Banks Win Mortgage Fraud Settlement, Borrowers Lose
Posted by Pratap Chatterjee on January 8th, 2013
|Protest outside San Francisco Federal Reserve. Photo: Steve Rhodes. Used under Creative Commons license.|
Ten major U.S. banks settled charges of illegally kicking people out of their homes for pennies on the dollar, under two agreements with the government announced this week. The biggest beneficiary is Bank of America which will win a get-out-of-jail free card for selling fraudulent loans to two government-sponsored mortgage finance companies.
Bank of America sold bad mortgages that led to numerous foreclosures via subprime mortgage lenders Countrywide Financial Corporation and Countrywide Home Loans, Inc. that it acquired in 2008. “Through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill,” said Preet Bharara, the U.S. Attorney for the Southern District of New York when he sued the company for $1 billion on behalf of the government last October.
Under the new settlement Bank of America will buy back $6.75 billion in residential mortgage loans sold to the Federal National Mortgage Association (Fannie Mae) and give the government an additional $3.6 billion in cash. The other banks - which include Citigroup Inc, JPMorgan Chase and Wells Fargo - will pay out $3.3 billion in direct payments to people who lost their homes plus another $5.2 billion to others who are threatened with possible eviction for not being able to pay their loans. This is in addition to the $26 billion that many of the same banks agreed to pay out last February under a separate deal with 49 state attorneys general, the Justice Department and the Department of Housing and Urban Development.
Despite the large sums involved, most consumer advocates say that the settlements are far too little for those who lost the most. “Communities of color were particularly hard hit by abusive mortgage practices,” said Debby Goldberg, special project director at the National Fair Housing Alliance. "The $8.5 billion and other settlements are not comparable to the trillions of dollars in wealth sucked from communities," added Sasha Werblin, senior program manager at the Greenlining Institute.
The two new settlements were drawn up after the effective failure of the Independent Foreclosure Review – a 2011 program set up by the banks to review bad mortgages and compensate those who were eligible. Only about one in ten of the potential 3.8 million beneficiaries signed up for the program because they were skeptical of the effort that was widely perceived as biased towards the lenders. They were probably not wrong – the consultants running the program was billing as much as $250 an hour for 20 hours for each case, according to the New York Times.
"It has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers," said Thomas Curry, the federal Comptroller of the Currency. "Our new course of action will get more money to more people more quickly."
But the activists say that the government had bungled the whole process. “If the reviews had been done right the first time, banks would have been on the hook to pay far more to homeowners,” said Alys Cohen, staff attorney for the National Consumer Law Center.
David Lazarus of the Los Angeles Times put the numbers in context – he estimates that the average amount that most borrowers will get is just $2,000. On the other hand, Lazarus notes that the banks have done quite a bit better in 2011 - the year covered by the settlement: “Citigroup pocketed $11.3 billion in profit. JPMorgan Chase saw record profit of $19 billion. Wells Fargo posted almost $16 billion in profit. (Bank of America) was the poor relation of the family. It earned only $1.4 billion in profit.”
Nomura CEO Resigns Over Insider Trading Scandal
Posted by Pratap Chatterjee on July 26th, 2012
|Photo: MJ/TR (´･ω･) Used under Creative Commons license.|
Kenichi Watanabe and Takumi Shibata, the CEO and chief operating officer of Nomura, have resigned to take responsibility for several recent insider trading scandals at the Japanese multinational conglomerate. The company, which once was once the world’s largest securities firms with holdings of $76 billion in 1987, is now valued at $12.3 billion.
"It is difficult at this stage to numerically estimate the possible damage,” Junko Nakagawa, chief financial officer of Nomura. “All we want to do is make efforts to regain trust."
In 2010 Nomura underwrote new share offerings for Inpex (an oil and natural gas exploration company), Mizuho Financial Group (one of Japan’s largest banks) and Tokyo Electric Power Company. Such offerings typically have an impact on share prices, so any advance knowledge of such plans allows traders to cash in.
Nomura employees allegedly secretly told a First New York Securities fund manager about the plans for the Tokyo Electric Power Company allowing the manager to take out a “short position” days before the utility company made a share offering in September 2010. First New York Securities made 7.2 million yen ($85,000 at the time) profit as a result.
Likewise Nomura employees gave out nonpublic information on Mizuho and Inpex to fund managers at Chuo Mitsui Asset Trust (now called Sumitomo Mitsui Trust Bank, Japan's biggest trust bank). Chuo sold Inpex holdings a higher price on behalf of foreign investors and bought them back a lower price to make a profit of ¥10 million ($119,000).
In March 2012, Japanese regulators handed out a fine of 8,000 yen (about $600). “The amount was so tiny—it would cover the cost of a fancy dinner for four in a Tokyo restaurant—that some critics questioned whether it would have any deterrent effect,” scoffed the Wall Street Journal at the time.
Japan's Securities and Exchange Surveillance Commission (SESC) has historically been fairly timid in imposing fines on insider trading. All told it has levied just ¥268 million ($3.2 million) in fines for 121 cases of insider trading since 2005. By comparison the Financial Services Authority in the UK imposed a £59.5 million fine (($93.5 million) on Barclays bank in June for fixing rates and the Securities and Exchange Commission levied a $550 million fine on Goldman Sachs in 2010 for the misleading investors on subprime mortgages.
Despite the small fines, the scandal has had a huge impact on Nomura. The Journal reports that Nomura has been dropped from underwriting deals for at least eight Japanese companies including one to act as joint global coordinator for a $6 billion share issue by Japan Airlines, expected to the biggest deal of the year. The company also says its profits for the second quarter have plunged 90 percent.
The scandal on insider trading in Japan may widen, as the SESC is investigating several other firms. Tadahiro Matsushita, the Japanese financial services minister, has asked 12 top brokers in Japan to submit reports by early August on how they handled nonpublic information.
The scandal at Nomura is also just one of a wave of global scandals in recent months that have shone an welcome light on seamier side of the financial industry. Robert Diamond resigned as CEO of Barclays bank earlier this month following a scandal on rigging global interest rates. The Securities and Exchange Commission (SEC) has fined Goldman Sachs researchers for passing on stock tips to investment bankers and traders while a recent a New York Times investigation has uncovered a questionable new phenomenon that suggests that some of the biggest brokerage firms in the U.S. “appear to be giving a handful of top hedge funds an early peek at … research analysts’ views — allowing them to trade on the information before other investors get the word.”
HSBC Bank Apologizes for Laundering Mexican Drug Cartel Money
Posted by Pratap Chatterjee on July 20th, 2012
|HSBC protest in Hong Kong. Photo by twak. Used under Creative Commons license. Photo of David Bagley testifying at the Permanent Subcommittee on Investigations taken from official video feed.|
HSBC, one of the world’s largest banks, has been accused of laundering money for Mexican drug cartels. At a hearing conducted by the U.S. Senate earlier this week, David Bagley, HSBC's head of compliance, apologized and resigned.
"I recognize that there have been some significant areas of failure. Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators," Bagley told the U.S. Senate Permanent Subcommittee on Investigations.
HSBC traces its origins back to the Hong Kong Shanghai Banking Corporation that was set up in 1865. Today it is one of the largest financial institutions in the world, with over $2.5 trillion in assets, 89 million customers, 300,000 employees, and 2011 profits of nearly $22 billion. The CEO is still based in Hong Kong but the bank is run out of London.
In 2002, HSBC bought up a Mexican bank named Banco Internacional, S.A. from Grupo Financiero Bital, S.A. de C.V. “A pre-purchase review disclosed that the bank had no functioning compliance program, despite operating in a country confronting both drug trafficking and money laundering,” noted a report prepared for the U.S. Senate. “It opened accounts for high risk clients, including Mexican casas de cambios and U.S. money service businesses, such as Casa de Cambio Puebla and Sigue Corporation which later legal proceedings showed had laundered funds from illegal drug sales in the United States.”
HSBC officials, however, treated the new Mexican unit as low risk. Paul Thurston, chief executive of retail banking and wealth management, who was dispatched to Mexico in 2007 to look into the matter, told Congress that he was "horrified" by what he found. "I should add that the external environment in Mexico was as challenging as any I had ever experienced. Bank employees faced very real risks of being targeted for bribery, extortion, and kidnapping – in fact, multiple kidnappings occurred throughout my tenure," he said.
Other HSBC staff also raised the alarm. “The AML (anti-money laundering) Committee just can’t keep rubber-stamping unacceptable risks merely because someone on the business side writes a nice letter. It needs to take a firmer stand. It needs some cojones. We have seen this movie before, and it ends badly,” wrote John Root, a senior HSBC Group Compliance expert, wrote in an email to Ramon Garcia, the compliance director in Mexico, on July 17, 2007.
All told, the Senate report estimates that HSBC’s Mexican affiliate transported $7 billion in physical dollars to the U.S. between 2007 and 2008 alone, outstripping other Mexican banks, even one twice its size. One Cayman islands subsidiary set up by the Mexican division of HSBC handled 50,000 client accounts and $2.1 billion in deposits, but neither staff nor offices. (Pro-Publica has a nice annotated summary of the 335 page report here.)
“Due to poor AML controls, HBUS exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions,” said Senator Carl Levin of Michigan, the chairman of the subcommittee. “If an international bank won’t police its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the U.S. bank being used to aid and abet that illicit money.”
While Bagley was taking the bullet, his former boss, Lord Stephen Green, who was chief executive of HSBC between 2003 and 2006 and chairman until 2010, has been avoiding calls to testify. An ordained priest and the author of a book titled "Serving God? Serving Mammon?" he is now the UK Trade minister.
“No one should raise questions about Mr Green's integrity. Au contraire. The cerebral businessman and part-time preacher turned minister isn't the type to play silly games with regulators,” wrote James Moore, the deputy business editor of the Independent newspaper. “But he does have questions to answer. Such as whether time spent on books would have been better spent on business. Or whether he was just asleep at the wheel.”
Barclays Bank Fine Reveals Global Rate Setting Scandal
Posted by Pratap Chatterjee on July 6th, 2012
A record £290 million ($450 million) fine for fixing rates at which banks lend to each other has been levied on Barclays bank in the UK by U.S. and U.K. authorities. The scandal has forced Bob Diamond, the Barclays CEO who had ignored activist protests over his sky-high $28 million salary, to resign on Tuesday.
Perhaps even more importantly, the scandal has shone a light into how banks set – and manipulate - rates at which $360 trillion in international deposits are loaned out every day. While most of these loans are overnight transfers between banks, they affect the price of consumer loans like mortgages, car loans and credit card loans.
Minos Zombanakis, a Greek banker who worked at Manufacturers Hanover Trust, invented a system in 1969 to estimate “market” rates for lending money when he was asked to work on a $80 million loan to Iran. “We had to fix a rate, so I called up all the banks and asked them to send to me by 11 a.m. their cost of money,” he told the New York Times. “We got the rates, I made an average of them all and I named it the London interbank offer rate.”
In subsequent years, the British Bankers Association took on the daily task of setting “LIBOR” rates for as many as 150 different kinds of loans. These BBA-determined rates are now considered the global benchmark says Donald MacKenzie, a sociologist at the University of Edinburgh, who wrote a fascinating article in 2008 about how they are set.
“This can now be done on-screen, but – especially if large sums are involved or market conditions are tricky and changing rapidly – it’s often better to use the ‘voicebox’. This is a combination of microphone, speaker and switches that instantly connects each broker by a dedicated phone line to each of his clients in banks’ dealing rooms.”
“A broker needs to pass information to his clients as well as to receive it: that’s a major part of what they want from him, and a good reason to use the voicebox rather than the screen. The brokers’ code of conduct prohibits passing on private knowledge of what a named bank is trying to do (unless a client is about to borrow from it or lend to it), but that restriction leaves plenty of room for brokers to tell traders what has just happened and to convey the ‘feel’ of the market.”
What Barclays brokers did was to claim that they could borrow money more cheaply than anyone else to mask their financial problems. “This is a big deal,” writes Dylan Matthews in the Washington Post. “Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.”
Matthews goes on to add: “The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks.”
For example, one trader is reported to have told a Barclays employee: "Coffees will be coming your way either way, just to say thank you for your help in the past few weeks". The reply came back: "Done, for you big boy."
Public speculation that the rates were being fixed date back to at least 2007. Libor rates could “be manipulated if contributor banks collude or if a sufficient number change their behaviour” concluded a 2008 study by the Bank for International Settlements. So did a paper published on the Social Science Research Network which found evidence of “questionable patterns.”
Heads are continuing to roll. Marcus Agius, the chairman of the British Bankers’ Association, resigned Monday over the scandal. By coincidence, or perhaps not, Agius was also chairman of Barclays.
But that may not be enough, say some. “(T)oday’s leaders must be for finance but against banking behemoths. The instruments of finance, from risk models to derivatives, are useful when used responsibly,” concludes Sebastian Mallaby in the Financial Times. “But the structure of modern finance – vast institutions that borrow cheaply because taxpayers are on the hook to save them – is an abomination that must stop.”
How to Make A (Foreign) Wall Street Bank Vanish
Posted by Pratap Chatterjee on June 7th, 2012
|Photo: SheepGuardingLlama. Used under Creative Commons license.|
Can you name the eight largest banks in the U.S.? Seven of them are easy – Bank of America, Citigroup, Goldman Sachs, JP Morgan, MetLife, Morgan Stanley, Wells Fargo. Then there’s Taunus at 60 Wall Street, New York. You mean to say you haven’t heard of Taunus? Well, you’d be even more surprised to learn it doesn’t even appear on the list of the top 50 banks maintained by the Federal Reserve.
Visit the 23 year old 55 story skyscraper and you might still be confused because for all practical purposes the building is occupied by employees of Deutsche Bank. Scratch a little deeper and you will soon discover that Taunus is the name of the holding company that controls Deutsche Bank and by rights should be counted as the eighth largest bank in the U.S. because its $354 billion of assets and 8,652 employees put it slightly ahead of the next contender.
In February, Deutsche Bank changed the listing for Taunus Corp. from a "financial holding company" to "domestic entity—other” Poof! Without even a puff of smoke, Taunus/Deutsche Bank disappeared from the list of the top 50 banks maintained by the Federal Reserve.
This was after the German bank spent $3.4 million lobbying on Capitol Hill in 2010 followed by $2.2 million in 2011, according to numbers compiled by Deutsche Welle, the German public broadcast network. (By comparison Bank of America spent $3.7 million in 2011 and Goldman Sachs, generally considered to be the most politically connected Wall Street firm, spent $6.1 million) Deutsche Bank, like many others on Wall Street, apparently was concerned about the Dodd-Frank act, the 2010 law to improve transparency and accountability in financial institutions.
"Deutsche Bank has extensive business activities in the US and is subject to the rules and regulations there," Deutsche Bank spokesman Ronald Weichert told the German broadcaster by e-mail in response to a query about why it spent so much money on lobbying.
Deutsche Welle has a theory for why Deutsche Bank spent the money. At stake was an extra $20 billion that Taunus needed to keep on hand to comply with the new law which increased the minimum amount of money required in reserve to prove they were fiscally solvent. The Federal Reserve had previously given Taunus a waiver from the higher capital requirements, according to a recent Wall Street Journal article but Dodd-Frank made the waiver moot.
By delinking Taunus from a Deutsche Bank trust company, Tanuas was converted to doing just investment banking, which then allowed it change its listing with the Federal Reserve to "domestic entity—other” where it was no longer subject to the stricter new rules. (Deutche Bank is the second foreign institution to do this – after Barclays of the UK)
“Deutsche Bank in particular had been given some extraordinary and hard to believe advantages," Simon Johnson, a former International Monetary Fund chief economist, told Deutsche Welle. "They wanted to have very little capital in the (Taunus) operation to keep it as a highly leveraged and highly risky business and they were allowed to do that.”
Footnote: The name Taunus comes from the parent Deutsche Bank which is headquartered on Taunusanlage in Frankfurt. Taunus is also the name of a low mountain range visible from the Germany’s financial capital.
Whale Wars: Hedge Funds Rob Banks, and the Poor Suffer Most
Posted by Pratap Chatterjee on May 30th, 2012
|Jamie Dimon cartoon: DonkeyHotey. $100 bills. Photo: Adam Kuban. Used under Creative Commons license.|
Boaz Weinstein took as much as $2 billion from Jamie Dimon and Bruno Iksil. That is to say a hedge fund named Saba Capital Management in New York bet against the London office of an investment bank named JP Morgan and won. These men - known as “whales” because of the size of their bets in the financial markets – have triggered a major outcry over the lack of regulation of Wall Street, mostly because of the $2 billion loss by JP Morgan, a public company and bank.
“(I)t’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out,” wrote an outraged Paul Krugman, a Nobel Prize winning economist.
Wonderful sentiments, but what about when these banks make huge profits? Are they supporting the economy then? Or are they also taking money from some one else on those occasions?
Certainly hedge funds – a secretive group of financiers – often make a killing, though sometimes they lose their shirts. Much of the money is made in ways that are very hard to understand, but in simple words: by stealing legally from the rich like the investment banks, but also from the working class and the poor. (They don’t discriminate)
Here’s an extreme example: George Soros, the hedge fund billionaire, bet against Asian currencies in 1997 and plunged the region into crisis. Millions lost their jobs, major riots ensued, and entire countries went into severe recession. Soros argues - with some accuracy – that the governments were to be blamed for their economic policies that led to artificial currency rates but the fact of the matter is he took advantage of it to make a lot of money for himself.
Here’s a more common example: Splunk, a data company, recently went public at $17 a share. A month later the stock had doubled to $35. The banks and hedge funds who bought the shares initially are happy because they can sell now and make a tidy profit, but it means that the company raised only half the money it wanted. Still that’s the way the world works and the financial community loves it. (Thanks, Joe Nocera, for that example)
Wall Street was not as happy when Facebook also recently went public at $38 and then the price dropped. Facebook walked off with extra money but many of the institutional buyers were the ones who lost out. (Perhaps Wall Street should have been less critical of a 28 year old with a hoodie who outsmarted them. He didn’t need a sharp suit to take their money away from them)
Now back to the hedge funds robbing the banks. Weinstein noticed that Iksil (known as the London Whale) was making large bets on credit derivatives that didn’t make sense and he bet against him. Weinstein, according to a recent New York Times profile who had himself lost $2 billion at Deutsche Bank when doing whale-sized bets, recognized the problem and moved quickly to profit out of it.
So who cares? One rich bank lost money to a rich hedge fund. Surely that is a zero sum game: They swap mansions and yachts, their partners swap diamonds and butlers, and it makes no difference to the rest of us. Or does it?
One of the biggest problems is that the world of finance is that it is actually awash in cash. And the owners of that cash want to make even more cash. “(C)orporate money has been flooding into JPMorgan, as companies pull their money out of eurozone banks,” notes Gillian Tett at the Financial Times who says that roughly $2 trillion is available for investment at any given time. “Somehow you have to stash that money in an incredibly safe place, but also produce some returns. So where do you put it? In Treasuries, which carry negative real returns and are becoming riskier by the day? In eurozone bonds or corporate credit? Or can you find something else, without creating new risk?”
Remember also that even in these lean times, the titans of the hedge fund world are still mostly minting money: Raymond Dalio of Bridgewater Associates was paid an estimated $3 billion in 2011, Carl Icahn of Icahn Capital Management earned $2 billion. The top European hedge fund manager in 2011 was Alan Howard of Brevan Howard Asset Management, who earned $400 million last year. All told, the 40 highest paid hedge fund managers were paid a combined $13.2 billion in 2011, according to a Forbes magazine survey.
Same with the banks and CEOs.
Where did this money come from if the world economy is in a recession?
Well, the simple answer is that every day, both the banks and the hedge funds are taking little chunks of our money, although not in the extreme way that Soros did in Indonesia back in 1997. Higher interest rates; lower wages by moving factories; buying up farmland etc. etc.
The good news about the Jamie Dimon/JP Morgan debacle is that the U.S. Congress is taking notice about money being used rashly and may force the banks to make some changes. “We had too many regulators, too many gaps and too much overlap…we added more,” Jamie Dimon told a U.S. Chamber of Commerce conference in Washington in 2011. “It’s even more complicated now.” (See here for a video compilation)
Dimon’s remarks are being used to roast him now and it’s high time. We need better regulation of both banks and hedge funds. One important reform is to make sure that investment banks and regular banks are separated. If the rich want to trade mansions, they can do so. But the investment banks and hedge funds should not be bailed out. And if they want to take money from the rest of us, they need to be kept in check.
Unfortunately that may be the opposite of what happens. As the Washington Post’s Dana Milbank notes: “The trading scandal at JPMorgan highlighted the urgent need for tougher regulation of Wall Street, but (Alabama Congressman’s) Shelby’s harangue was part of a larger effort to use the scandal as justification to repeal regulations.”
Shareholder Spring Spreads: CEOs Ousted in the UK, Bank of America Protested
Posted by Pratap Chatterjee on May 9th, 2012
|Bank v America Boxing Match. Photo: Jed Brandt. Used under Creative Commons license.|
Thousands of community activists gathered in Charlotte, North Carolina, on Wednesday to protest at Bank of America’s annual shareholder meeting. A boxing match billed as “Bank v America” was staged outside while inside, protestors from the mountains of Appalachia to homeowners in Ohio stood up to speak out against the company.
This is the latest in what has been perhaps the most diverse, widespread and sizeable protests of corporate annual meetings around the world to date. Traditionally these company gatherings are held in the spring after the publication of annual reports in April of each year. They tend to be dull affairs hosted by company management and attended by analysts from Wall Street and the City of London and a handful of shareholders.
Occasionally, church groups and environmental groups attend to speak out in favor of progressive resolutions that gather no more than five percent of votes from the big institutional investors who own the bulk of company shares. And sometimes there are a rallies outside led by the same groups.
But the scale of the protests 2012 has been different, first because of the return of the Occupy protestors who were evicted by police or winter conditions. These activists have bolstered the numbers outside the annual general meetings: in Detroit, hundreds of Occupy protestors marched to protest General Electric on April 25, 2012 to protest the way the company avoids paying taxes. Occupy also turned out in force to protest Peabody Coal in St. Louis, Missouri and Wells Fargo Bank in San Francisco last month.
We wrote about some of the initial protests last month:
“Wearing blue eagle masks and garlands of money, protestors gathered outside the Barclays bank shareholder meeting in London, while a giant, cigar-smoking inflatable rat accompanied activists at the Wells Fargo annual meeting in San Francisco. Meanwhile shareholders in Dallas voted overwhelmingly against a multi-million dollars pay package for Citibank’s CEO while almost a third did the same at the Credit Suisse meeting in Zurich.”
In the last week or so, this anger has spread, led surprisingly by institutional shareholders. The Financial Times and the Telegraph newspaper in the UK have labeled the phenomenon “shareholder spring” in which a number of CEOs have seen their multi-million dollar pay packages voted down under so-called “say on pay” rules that allow shareholders to reject excessive payments. In a May 4 editorial titled “Irresistible Rise of the Angry Investor” the Financial Times says: “Shareholders want executives to perform for their pay. Is that so much to ask?”
In a similar vein, the Observer newspaper in the UK noted: “Just weeks after the Occupy protesters were chucked out of the City, the sharp-suited fund managers who picked their way through the tents to get to their desks each morning have staged their own protest against fat-cat capitalism. On Thursday alone, five companies felt the wrath of investors and suffered revolts over their pay policies.”
The list of companies affected to date is impressive: more than half of the shareholders of Aviva, the top UK insurance company, voted against the pay package of Andrew Moss, the CEO, forcing him to resign. Sly Bailey, CEO of Trinity Mirror, the country’s biggest newspaper group (publishers of Daily Mirror, Sunday Mirror and People as well as the Sunday Mail in Scotland) has decided to step down after shareholders are expected to vote against her £1.7 million ($2.7 million) pay tomorrow. David Brennan, CEO of AstraZeneca, the Anglo-Swedish pharmaceutical company, has decided to retire early for the same reasons and Ralph Topping, the CEO of William Hill, a major UK betting company, is hanging on for dear life after 49.9 percent of shareholders voted against his £1.2 million ($1.92 million) pay package.
Last week saw significant protest votes against Kaspar Villiger, chairman of UBS bank in Zurich, and Ivan Glasenberg, the CEO of Swiss mining company Xstrata, on May Day. Two days later Andrew Sukawaty, the executive chairman of Inmarsat, the satellite phone company, saw a shareholder revolt against his £2.66 million salary ($4.25 million) and 3M, makers of Scotch Tape, saw protests against the companies corporate lobbying in St. Paul, Minnesota yesterday.
Next month Sir Martin Sorrell, the CEO of advertising giant WPP, who is paid £13 million a year ($21 million) expects to see protests when the company holds its annual meeting on June 13.
It’s not just CEOs, board members have also come under fire. Alison Carnwath, a banker who sits on many UK boards, was protested at both Barclays bank as well as at hedge fund Man Group. “Alison Carnwath is the embodiment of "crony capitalism" that allows a small group of City figures to set each other's pay and bonuses without having to worry about the real world” wrote Jill Treanor and Rupert Neate in the Guardian.
One of the reasons that executives have managed to get away with excessive pay packages so far is the nature of corporate boards. Lord Myners, the former head of a hedge fund, told the Observer that the problem lay with the fact that company boards are handpicked by the chairman: "(W)e have the North Korean model, in which each candidate is re-elected
every year, and 99.99% of them get voted in with 99.99% of the vote.
Stay tuned: tomorrow we will have more reports on the protestors on the outside – at the Bank of America annual meeting in Charlotte and the Enbridge meeting in Toronto, Canada.
Hedge Funds Handed New Loophole to Make Money
Posted by Pratap Chatterjee on May 7th, 2012
|$100 bills. Photo: Adam Kuban. Used under Creative Commons license
Hedge funds, a publicity-shy sector of the financial industry where the super wealthy invest their money in the hope of making above-average profits, were just handed an opportunity to make even more money under a new law signed by President Barack Obama. Consumer advocates say that unsophisticated investors may be at risk as a result.
Most U.S. investment funds are regulated under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 which restrict how much the fund managers are paid and what they do in order to protect naïve investors. Many hedge funds are designed to get around these restrictions by raising money from a select few sophisticated investors.
For example, big hedge funds seek “qualified purchasers” – who have at least $5 million in money – who are exempt from these restrictions under section 3(c)(7) of the 1940 Securities Exchange Act. Smaller hedge funds seek as many as 100 “accredited investors” - those with a net worth of over $1 million (not including their houses) or a minimum annual income of $200,000 (or $300,000 for married couples) – under the 3(c)(1) of the Investment Company Act of 1940.
Like any other exclusive club for the wealthy, hedge funds tend to be very secretive. Some of this is the law: “private placements” of securities are banned from advertising publicly but also because companies with less than 500 shareholders are exempt from publishing annual reports under the Securities Exchange Act of 1934.
In “More Money Than God: Hedge Funds and the Making of a New Elite” Sebastian Mallaby estimates that the hedge funds make some 11 percent profit, more than double other investment vehicles. This allows fund managers to ask for higher fees than regular bankers – typically they take between one and four percent of the investment every year as well as between 10 and 50 percent of profits in return for attempting to beat the stock market.
Some hedge fund managers mint money: Raymond Dalio of Bridgewater Associates was paid an estimated $3 billion in 2011, Carl Icahn of Icahn Capital Management earned $2 billion. The top European hedge fund manager in 2011 was Alan Howard of Brevan Howard Asset Management, who earned $400 million last year. All told, the 40 highest paid hedge fund managers were paid a combined $13.2 billion in 2011, according to a Forbes magazine survey.
Under the Jumpstart Our Business Startups (JOBS) Act, signed into law by Obama on April 5, 2012, the threshold for publishing annual reports has been raised to 2,000. It also allows hedge funds to conduct “general advertising” although specifics will have to be spelt out by the Securities and Exchange Commission (SEC) within 90 days.
Barbara Roper, director of investor protection at Consumer Federation of America told Reuters that she was worried that hedge funds might exploit unwary people. “Accredited investors are not necessarily sophisticated investors,” she said. “It will do more harm than good.”
Writing in the Financial Times Robert Pozen, a senior lecturer at Harvard Business School and Theresa Hamacher, president of the National Investment Company Service Association, recommend that the SEC should take two specific steps to protect these smaller investors. “First, it should update the definition of accredited investor, which was established 30 years ago, in 1982. To be a realistic proxy for sophistication in the present age, accredited investors should have an annual income of $600,000 and net worth of at least $3m, again excluding their home.
“Second, the SEC should establish uniform standards for reporting performance by hedge funds. Because reporting hedge fund returns is voluntary, managers can hide the performance of a poorly performing fund—either by not reporting it or by closing down the fund. As a result, the average reported return of hedge funds is overstated by more than three percentage points per year, according to several studies.”
The SEC, for its part, says it is intent on cleaning up the industry with the help of data that hedge funds have to provide under new disclosure rules enacted into law by the Dodd-Frank Act of 2010. "Pick your fraud of the day and the question is, 'Can we extract information from this data system together with the other databases we have access to and home in on problems before they do damage?'" Robert Plaze, deputy director in the division of investment management for the Securities and Exchange Commission, told the Wall Street Journal.
Bankers Bonanzas Protested By Blue Eagles and A Cigar-Smoking Rat
Posted by Pratap Chatterjee on April 27th, 2012
Wearing blue eagle masks and garlands of money, protestors gathered outside the Barclays bank shareholder meeting in London, while a giant, cigar-smoking inflatable rat accompanied activists at the Wells Fargo annual meeting in San Francisco. Meanwhile shareholders in Dallas voted overwhelmingly against a multi-million dollars pay package for Citibank’s CEO while almost a third did the same at the Credit Suisse meeting in Zurich.
Annual general meeting season is in full swing and hundreds of people are showing up to protest excessive pay at banks around the world. The numbers have swollen from years past with the vigor injected from the long summer of Occupy protests around the world in 2011 that protested the failure of government to tackle the economic crisis and reign in private capital.
In London, activists with the World Development Movement and Robin Hood Tax, dressed up with blue eagle masks (mimicking the company’s logo) gathered outside the Royal Festival Hall. Some 800 shareholders attended the meeting where they heckled Bob Diamond, the CEO who was paid just shy of $28 million last year. One woman described the bank as “"ruthless, heartless, cruel" while another investor yelled: "You are all part of the same club.” Almost 27 percent voted against the company’s proposed pay package.
In Zurrich some 1,750 shareholders attended the Credit Suisse annual meeting on Thursday where almost a third of the votes recorded rejected individual pay packages as high as $9.35 million (for Robert Shafir who heads up the asset management team) "You should be ashamed of yourselves for taking so much money away from us," said Rudolf Weber, a shareholder, who spoke up during the meeting. “We are the owners of this bank, and you are our employees. We should be the ones who decide what you earn.”
On Tuesday Vikram Pandit, the CEO of Citibank, faced a revolt against his proposed salary of $15 million. Some 55 percent of shareholders voted against - the first time in history that a pay proposal at a major U.S. bank has been voted down since the law was amended to allow such voted under the Dodd-Frank act of 2010. Two days later, Stanley Moskal, a Citi shareholder, sued Pandit and the Citibank board for breaching their fiduciary duties stating that the vote had “cast doubt on the board's decision-making process, as well as the accuracy and truthfulness of its public statements."
The same Tuesday, thousands of activists gathered in San Francisco outside the Wells Fargo annual meeting at the Merchants Exchange Building to protest the bank which is the second-largest U.S. bank as measured by deposits. The crowd was joined by a fake stagecoach (the bank’s logo that reflects its Gold Rush history) labeled “Hell’s Cargo” and a giant cigar-smoking inflatable rat. A small group linked arms to prevent shareholders from attending the meeting while others went inside to protest. A total of 24 protestors – 14 inside the meeting and ten outside – were arrested.
"Wells Fargo is one of the largest and most corrupt Wall Street banks and has foreclosed on hundreds of thousands of homes," Charles Davidson of Move On East Bay told Reuters. "I think it's really important that we stand up to this or the economic crisis will continue."
However Wells Fargo shareholders failed to rally against CEO John Stumpf’s salary where over 90 percent voted for his $19.8 million pay package.
Vampire Squid Update: SEC Fines Goldman For Huddles
Posted by Pratap Chatterjee on April 13th, 2012
|Vampire Squid puppet. Photo: M.V. Jantzen. Used under Creative Commons license|
In U.S. sports jargon, a “huddle” is the term used to describe players gathering in a tight circle to plan game strategy. When the Securities and Exchange Commission (SEC) discovered that Goldman Sachs researchers had weekly “huddles” with investment bankers and traders to provide them with stock tips, however, they called foul.
“From 2006 to 2011, Goldman held weekly huddles sometimes attended by sales personnel in which analysts discussed their top short-term trading ideas and traders discussed their views on the markets,” said the SEC in a press release issued earlier this week. “In 2007, Goldman began a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with select clients.”
Insider trading – as we have noted before – is the practice of cashing in on information that is not known to the general public. Although it is not illegal in many other countries, the U.S. takes it very seriously and will jail violators and sometimes ban them from trading. Bigger companies – like Goldman Sachs – will typically pay out large sums in order to avoid such punishment.
This is not the first time that Goldman Sachs has been accused of insider trading. In 2003, the investment bank paid out $110 million as part of a $1.4 billion settlement with the New York state attorney general Eliot Spitzer to resolve claims of conflicts of interest. Business Week magazine’s Robert Kuttner described it thus: “(R)esearch analysts" were acting as stock touts for the firms' investment banking business instead of providing objective, independent analysis to investors.”
Three years later, it appears that the company was doing much the same thing. In 2009, the Wall Street Journal uncovered evidence: Susanne Craig published an article in which she gave specific example of a Goldman analyst named Marc Irizarry who rated mutual-fund manager Janus Capital Group Inc. as a "neutral" in early April 2008. Later that month, at an internal huddle, Irizarry said that he expected Janus to climb. The following day Goldman staff called some 50 preferred clients like Citadel Investment Group and SAC Capital Advisors, both hedge fund groups, to give them the tip. Less powerful clients had to wait six days for Irizarry’s bullish report, by which time the stock had already gained 5.8 percent.
In June 2011, Goldman Sachs paid state regulators in Massachusetts a $10 million fine to resolve the allegations of huddles. “We verified that there was a preference of some customers at the expense of others,” William F. Galvin, the state’s chief financial regulator, told the New York Times.
More details followed: An internal e-mail, written in November 2008, noted that over half of 115 accounts that were contacted by Goldman Sachs staff reported an increase in revenue. “The commercial value of these calls in the form of more revenue to GS … (is) substantial,” the complaint recorded one business manager saying. “In general we have seen about a 50 percent rise in revenue.”
This week’s settlement with the SEC requires Goldman Sachs to pay a fine of $22 million. “Despite being on notice from the SEC about the importance of (higher-order) controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients,” said Robert S. Khuzami, the SEC’s enforcement director in a press release.
Goldman issued a statement saying that it “neither admitted or denied the charges.”
Given this history, it is hardly a surprise that Goldman Sach’s business model was recently caricatured by Matt Taibbi in Rolling Stone thus: “The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Lockheed, General Dynamics Face UK Bank Boycott Over Cluster Bombs
Posted by Pratap Chatterjee on April 10th, 2012
|Ten year old Mohammad Abd el Aal of Lebanon was injured by a cluster bomb on 27 March 2009. Photo: Cluster Munitions Coalition|
Lockheed Martin and General Dynamics of the U.S. face divestment from major UK banks, for manufacturing cluster bombs. The Guardian newspaper has exclusively reported that Aviva, the UK’s largest insurance company; Scottish Widows (part of the Lloyds Banking Group) and the Co-op Bank will sell shares in these companies, following a similar move by the Royal Bank of Scotland last year after 10,000 people signed protest letters in a campaign led by Amnesty International.
Cluster bombs are made of dozens of “bomblets” that are delivered in a single larger weapon that scatters them on impact. The wide dispersal of these small bombs makes them hard to trace. Many linger for years – long after conflict has ended - before exploding when civilians dig or pick up unusual pieces of metal. For example, 200 civilians were killed in Lebanon after the conclusion of the August 2006 invasion by Lebanon. The Cluster Munition Coalition – an activist collaborative – estimates that a third of the casualties are children.
A treaty to ban the production, transfer and stockpiling of cluster munitions was signed by 94 countries in Oslo in December 2008. The Convention on Cluster Munitions became international law on 1 August 2010, after 30 countries ratified it in February 2010. (A similar treaty banning land mines was signed in Ottowa in 2007).
The UK has signed and enforced the treaty and has even expelled companies promoting such munitions from trade fairs in the country. However, a number of other countries - Brazil, China, India, Israel, Pakistan, Russia and the U.S. for example – all of which manufacture such weapons, have refused to sign the treaty.
The UK banks are using a list compiled by Ethix, a Swedish ethical investment consultancy, of the major manufacturers of cluster bombs. This includes Alliant Techsystems (US), Aryt Industries (Israel), Doosan Corporation (South Korea), GenCorp (US), General Dynamics Corporation (US), Hanwha Corporation (South Korea), L-3 Communications Corporation (US), Lockheed Martin Corporation (US), Poongsan Corporation (South Korea), Poongsan Holdings Corporation (South Korea), Singapore Technologies Engineering (Singapore) and Textron (US).
"The Aviva board has now determined that this exclusion should also be applied to Aviva policyholder funds. We are currently working to implement this decision and will provide an update when this is complete," a spokesperson told the Guardian. Aviva held $65 million worth of bonds in Lockheed Martin and $67 million in Textron in 2010.
"We are now well advanced in a process of identifying and divesting from overseas companies where there is strong evidence of involvement in activities prohibited by the convention,” a spokesperson for the Scottish Widows Investment Partnership told the newspaper.
"All of our active portfolios are no longer invested in such holdings and no further investments in such companies have or will be made through these funds," a spokesman from Co-op Asset Management told the Guardian. "By the end of this month we will also have divested all of our passive, tracker funds, which are non-retail funds owned by the Co-operative's life fund, from these companies."
Barclays and HSBC are the two other major UK banks that have yet to announce a policy on cluster bomb manufacturers.
Despite the official commitment to ban cluster bombs, the UK has been reported to be working behind the scenes with the US to “permit the use of cluster bombs as long as they were manufactured after 1980 and had a failure rate of less than one per cent” according to a report in the Independent newspaper last November. The attempt failed.
Mining Maverick Resigns from Rainmaking at JP Morgan
Posted by Pratap Chatterjee on April 5th, 2012
Ian Hannam, a senior JP Morgan banker and ex-soldier, who helped finance a number of flamboyant and controversial mineral extraction projects over the last couple of decades, has resigned, after being fined $720,000 for insider trading by the UK Financial Services Authority (FSA).
Among the projects Hannam helped bankroll were multinational comglomerates digging for gold in Afghanistan and Tanzania, drilling for oil in Kurdistan, digging for bauxite in India, copper in Kazakhstan, gold and silver in Mexico and iron in the Ukraine.
In India, Hannam financed Vedanta Resources, a UK company, that is threatening to despoil the Niyamgiri Hills in Orissa, home to the Dongria Kondh tribal people. In Tanzania, Hamman raised money for African Barrick Gold, where local police have killed local scavengers. In Kurdistan, Hannam helped Tony Buckingham, chairman of Heritage Oil and a former partner in Executive Outcomes, the now defunct South African mercenary operation.
Hannam raised tens of millions for each of these operations as JPMorgan’s global chairman of equity capital markets, attracting fawning attention from the world’s business elites. “In his wake, mountains are razed, villages electrified, schools built, and fortunes made,” wrote Fortune magazine last May in a glowing tribute to his plans to dig for gold in northern Baghlan province, Afghanistan. “If anyone can wrest a fortune from Afghanistan's rubble, it is this man, Ian Hannam.” Others were a little more critical. “There are those who feel he’s an unguided missile,” a South African banker told the Financial Times last September. “But the thing about missiles is they can be very effective.”
Hannam came unstuck when he fired off two emails to a business associate in Kurdistan in September 2008. The first suggest that Heritage Oil shares would soon be worth as much as £4 ($6.40) almost twice as much as the price at the time. The second email read: “PS - Tony has just found oil and it is looking good.” (Hamman was referring to a Heritage project in Uganda which later proved to be correct)
This is classic insider trading, giving out information that is not known to the general public, which allows the recipient to cash in quickly. Although it is not illegal in many countries, the U.S. frowns heavily on this and the U.K is starting to crack down on such violations.
The person Hamman emailed did not cash in on Heritage but was sufficiently impressed to hire the JP Morgan banker to set up a Kurdish investment fund.
Hannam told the FSA that the emails were an "honest error or errors of judgment” that he made "at a time of extreme turbulence in the financial markets, when he was under extreme pressure at work.”
The Financial Times has both praised and lamented the fines on Hamman. “City is right to crack whip on market abuse,” writes John Gapper. “The curse of the rainmaker strikes. Ian Hannam is the investment banker who helped turn London into the go-to financial centre for mining companies,” writes the Lex column. “(F)inancial centres such as London need to make sure that relationship banking continues to find a home.”
We agree with Gapper. But we are not so sure that the Lex column’s suggestion that “relationship banking” (read borderline insider trading) is such a good thing, especially when its purpose is to enrich a few at the expense of many, such as farmers and scavengers in Tanzania, as well as that of the sacred lands and environment of indigenous communities like the Dongria Kondh.
Barclays Bankers Bonanza
Posted by Pratap Chatterjee on March 15th, 2012
|£50 banknotes. Photo: Images_of_Money. Used under Creative Commons license|
Rich Ricci, Jerry del Missier and Bob Diamond took home paychecks of $15 million or more from Barclays bank last year, continuing a tradition of excessive pay in the UK. Bob Diamond, the CEO, made just shy of $28 million (£17.7 million), while Jerry del Missier and Rich Ricci, co-heads of Barclays Capital, made $17 million (£10.8 million) and $15 million (£9.7 million), respectively.
Of course this pales compared to what U.S. hedge fund managers make - Raymond Dalio of Bridgewater Associates was paid an estimated $3 billion in 2011, Carl Icahn of Icahn Capital Management earned $2 billion. The top European hedge fund manager in 2011 was Alan Howard of Brevan Howard Asset Management, who earned $400 million last year. All told, the 40 highest paid hedge fund managers were paid a combined $13.2 billion in 2011, according to a Forbes magazine survey.
Such pay-outs make Goldman Sach’s vice president Greg Smith’s estimated salary of $500,000 look like pocket change.
The UK salaries have become public knowledge because of a pact made by the banking sector with the UK government, as part of Project Merlin signed in February 2011. The plan – named after the fictional wizard – was intended to boost bank lending for small businesses. The project has been a failure so far with lending falling every quarter instead.
Yet Project Merlin has been successful in revealing how well bankers are paid, often despite doing very badly for investors, he most scandalous revelation so far comes from the Royal Bank of Scotland (RBS), which received $70 billion (£45 billion) of taxpayer funds. Despite the fact that the loss-making bank is now effectively 83 percent state owned, RBS handed out shares worth almost $44 million (£28 million) to nine of its top executives in 2010. All told it paid out nearly $1.5 billion (nearly £1 billion) to its senior employees – even as it reported losses of $1.7 million (£1.1 billion) for 2010 and slashed pension payments to its employees.
Shareholders protested at the RBS annual meeting last April. "You should not be paying yourselves anything until the debt is paid off to the government and to the people," said one attendee, characterising the pay scales as "really obscene to the degree of greed and corporate theft."
And it's not just the average citizen who thinks salary levels are excessive. Three out of four financial workers in the City of London who responded to a survey by St Paul's Institute thought the wealth divide was too big.
In 2010, five of Barclays top managers also shared a payout of £110 million. That year, the bank's top two earners were also Jerry del Missier and Rich Ricci , who made over $15 million each last year. It needs to be noted that Ricci, del Missier and Diamond are not the highest paid people at Barclays. That distinction goes to company traders, whose salaries do not have to be revealed under UK rules (as opposed to bankers).
Perhaps one of the most curious facts to emerge from the banker’s pay scandals in the UK are the fact that some of the bankers are employed and paid outside the banks themselves. For example Stuart Gulliver, HSBC's highest paid banker, is not employed by the bank's main holding company despite taking over as chief executive but by a Dutch-based company called HSBC Asia Holdings. Part of his salary is paid into a Jersey-based defined contribution scheme called Trailblazer . And Bob Diamond, chief executive of Barclays, is seconded to the bank from a Delaware subsidiary known as Gracechurch. The banks say that there is no tax benefit to the arrangement.
Vampire Squid Loses Tentacle
Posted by Pratap Chatterjee on March 14th, 2012
|Vampire Squid puppet. Photo: M.V. Jantzen. Used under Creative Commons license|
Greg Smith, a Goldman Sachs employee in London, has quit the company with a fiercely critical op-ed in the New York Times in which he accuses the Wall Street investment bank of losing its moral compass.
“It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail,” Smith wrote.
The financial world is in an uproar over the incident. Some have praised his candor like Iain Martin in the Daily Telegraph: “It is refreshing when we rediscover that a knee in the nuts, in the form of an op-ed in a newspaper, can still have a serious impact.”
The Wall Street Journal has reacted with disdain: “A person familiar with the matter said Mr. Smith’s role is actually vice president, a relatively junior position held by thousands of Goldman employees around the world. And Mr. Smith is the only employee in the derivatives business that he heads, this person said.”
Readers of the Guardian say that his description of Wall Street should be no surprise: “I think this is the kind of revelation that would come as a complete shock out of the blue to the kind of people who believe in the Tooth Fairy.”
Many have mocked Smith. Blogger Deadspin says Smith was “trolling for a new job!” under a headline “Bronze Medal Ping Pong God Bravely Resigns From Goldman Sachs" noting “I like how he got the Stanford mention in right off the bat. Smith goes on to list his accomplishments at the firm: "I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video." "I managed the summer intern program in sales and trading." " My clients have a total asset base of more than a trillion dollars."
The Daily Mash has done a very funny re-write, titled: “Why I am leaving the Empire, by Darth Vader,” in which they advise Goldman Sachs to “Make killing people in terrifying and unstoppable ways the focal point of your business again. Without it you will not exist. Weed out the morally bankrupt people, no matter how much non-existant Alderaan real estate they sell. And get the culture right again, so people want to make millions of voices cry out in terror before being suddenly silenced.”
Smith himself paid homage to previous criticisms of Goldman, citing Matt Taibbi’s Rolling Stone feature of the company in which Taibbi described the company thus: “The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
But honestly, is anyone really surprised that people at Goldman Sachs try to make as much money for themselves as they can? And can the vampire squid grow another tentacle to replace Greg Smith?
Real criticism of Goldman Sachs would delve into how they have ripped off the taxpayer and ordinary workers, and ruined the global economy. For that, once again, go read Matt Taibbi’s article in which he lays out the real story.
Here’s the short version from Taibbi:
“(Goldman)'s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts … The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.”
Washington Losing Poker Game in Kabul
Posted by Pratap Chatterjee on March 8th, 2012
|Poker Winnings. Photo: dcJohn. Used under Creative Commons license|
Sherkhan Farnood, the founder of Kabul Bank in Afghanistan, is the focus of a front page New York Times article today. The 51 year old international poker player is held up as a symbol of the “pervasive graft (that) has badly undercut the American war strategy” noting that he owes the bank $467 million. But in reality, the powerful men behind the bank - Mahmoud Karzai, brother to the Afghan president, Hamid Karzai, and Abdul Hasin Fahim, brother to the vice-president, General Qasim Fahim – are the real symbols of corruption in the country.
Kabul Bank has become the country’s best known institution because it runs the electronic system that pays out the salaries of 250,000 government employees in Afghanistan. But it has also played another role – financing businesses that sells goods and services to the U.S. military, such as Zahid Walid, which is owned by Hasin Fahim, as CorpWatch has chronicled in the past.
Zahid Walid was started by Hasin Fahim with the help of his warlord brother who had been a key ally of the U.S. during the 2001 invasion. The company won a series of lucrative contracts to pour concrete for a NATO base, as well as portions of the U.S. embassy being rebuilt in Kabul and the city's airport, which was in a state of disrepair.
Next the company started importing Russian gas, and not long after that, Abdul Hasin set up the Gas Group, which markets bottled gas to households and small businesses. More lucrative deals followed - beginning in the winter of 2006, Zahid Walid won over $90 million in contracts from the Afghan ministry of energy and water to supply fuel to the diesel power plants in Kabul.
In 2007, Fahim and his fellow shareholders at Kabul Bank, approached Mahmoud Karzai with an offer – they would lend him $5 million to take an ownership stake in the bank. “The only way to get contracts and protection is to have support in the political system … That was political survivalism. They knew they needed a Karzai,” an Afghan political leader told the New York Times.
The money flowed freely: Kabul Bank loaned $14 million to Fahim and Karzai to start Afghan Cement. The two men borrowed more money from Kabul Bank to buy villas in Dubai. Karzai even bought a villa from none other than Sher Khan Farnood.
In early 2009, Hasin Fahim and Mahmoud Karzai approached the president with a suggestion – why not take on General Fahim as vice-president? After Hamid Karzai agreed, Kabul Bank, together with another politically connected bank, Ghazanfar, donated millions to his re-election campaign.
Mahmoud Karzai soon tired of Farnood. "The thing is, he's not sophisticated enough for today's global economy,” he told the Daily Telegraph.
It is true that Farnood was not a sophisticated jet-setter like Karzai (who has run restaurants from Boston to San Francisco) nor related to warlords or senior politicians. Born into a poor family in Kunduz, he made his money running money lending operations in Moscow and gambling on the side. He made rash business judgements – his airline acquired planes with forged documents – leading to a fatal crash.
But it isn’t the only time that the U.S. government and its political allies have entrusted large sums of money to neophytes willing to do their bidding in the War on Terror. In Iraq, the U.S. hired Ziad Cattan, a Polish Iraqi used-car dealer, to work at the Ministry of Defense where he spent $1.3 billion on military equipment that was “shoddy, overpriced or never delivered” such as aging Russian helicopters and underpowered Polish transport vehicles. "Before, I sold water, flowers, shoes, cars — but not weapons," Cattan told the Los Angeles Times. "We didn't know anything about weapons."
"He was somebody we recruited, and we were taking a chance on him just like on everybody else," said Frederick Smith, a former Defense Department official told the newspaper. "Ziad is not a choirboy. But he was willing to serve."
The same goes for 21 year old Efraim Diveroli, who was awarded a $300 million contract in 2007 to supply weapons to the Afghan security forces. Diveroli and his partner David Packouz sent decades-old Kalashnikov ammunition in corroded packaging to the war, and repackaging and obscuring the origins of Chinese cartridges procured from Albania. "I didn't know anything about the situation in that part of the world. But I was a central player in the Afghan war — and if our delivery didn't make it to Kabul, the entire strategy of building up the Afghanistan army was going to fail,” Packouz later told Rolling Stone. “Here I was dealing with matters of international security, and I was half-baked (high on marijuana). It was totally killing my buzz.”
Handing over millions to flower sellers, stoners, poker players – who gamble the money away - is it that surprising that the money for the War on Terror isn’t going very well
Scotland Yard Needs To Pursue Gordon Gekko
Posted by Pratap Chatterjee on March 2nd, 2012
|Michael Douglas video for the FBI|
The Federal Bureau of Investigation (FBI) has just released a public service advertisement featuring Michael Douglas, the Hollywood star who plays the fictional character Gordon Gekko in the “Wall Street” films to target insider trading in the financial industries.
“In the movie ‘Wall Street’ I played Gordon Gekko, who cheated to profit while innocent investors lost their savings. The movie was fiction but the problem is real,” says Douglas in the ad. “Our economy is increasingly dependent on the success and integrity of the financial markets. If a deal looks too good to be true, it probably is.”
Increasingly, however, it seems that the UK needs a similar campaign for the City of London, which has become the center for the mantra “Greed is Good.”
An article from this weekend’s New York Times magazine titled “London Is Eating New York’s Lunch” explains that over 300,000 people work in the world of high finance in and around the square mile that makes up the City of London compared to fewer than 200,000 on Wall Street. London is the world’s biggest trader of currencies although New York remains the preferred location for hedge funds to set up shop.
Why is London so attractive to wealthy traders? One of the reasons is the relative lack of enforcement against criminal activity. New York authorities have prosecuted 66 people for insider trading, with 57 convictions or guilty pleas since 2009.
By contrast, the Financial Services Authority (FSA) in the UK has secured very few criminal convictions: the first major one being in 2009 when Christopher McQuoid, former general counsel at TTP Communications, went to jail for telling his father-in-law to buy shares when he heard that Motorola was planning to take over the company.
The UK has relied on fines to push the envelope a little against financial services abuse. Philippe Jabre, a former managing director of hedge fund manager GLG Partners, was told to pay £750,000 in August 2006 for illegally dealing in securities of Sumitomo Mitsui Financial Group. JP Morgan was fined £33.3million in June 2010 by the FSA for failing to segregate client money in overnight accounts. Last month, David Einhorn and his fund Greenlight Capital, were fined £7.2m for insider trading about a planned 2009 equity fundraising by Punch Taverns.
“It has been far slower going in London, where many hedge funds operate, let alone in Geneva,” writes John Gapper of the Financial Times. “The small minority that breaks the rules has a much lower chance of either being caught or, when caught, jailed.”
One of the reasons is that the FBI has been more effective is its ability to monitor mobile phone calls and conference calls. The UK, however, does not allow phone-tapping to convict traders.
Although the UK convictions may seem paltry – they are still a sea change from the past, as a result of a crackdown initiated by Margaret Cole, the interim FSA director. She was recently placed on leave and is to be replaced by Martin Wheatley, who will head a new body called the Consumer Protection and Markets Authority.
Wheatley comes to the job from Hong Kong where he secured 171 convictions in the past three years as head of the Hong Kong Securities and Futures Commission (SFC), representing over two thirds of the cases in the last 23 years. Will he finally be able to crack down on the Gordon Geckos in the City of London?