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?
Who Will Determine the Future of Capitalism?
Posted by Philip Mattera on March 13th, 2009
Amid the worst financial and economic crisis in decades, the U.S.
business press tends to get caught up in the daily fluctuations of the
stock market and, to a lesser extent, the monthly changes in the
unemployment rate. By contrast, London’s Financial Times is looking at the big picture. It recently launched a series
of articles under the rubric of The Future of Capitalism. In addition
to soliciting varying views on this monumental question, the paper
published a feature this week presuming to name the 50 people around the world who will “frame the way forward.”
Kicking off the series, the FT’s Martin Wolf was blunt in asserting
that the ideology of unfettered markets promoted over the past three
decades must now be judged a failure. Sounding like a traditional
Marxist, Wolf writes that “the era of liberalisation [the European term
for market fundamentalism] contained seeds of its own downfall” in the
form of tendencies such as “frenetic financial innovation” and “bubbles
in asset prices.”
in the series by Gillian Tett casually notes that “naked greed, lax
regulation, excessively loose monetary policy, fraudulent borrowing and
managerial failure all played a role” in bringing about the crisis.
Richard Layard of the London School of Economics weighs in with a piece
arguing that “we should stop the worship of money and create a more
humane society where the quality of human experience is the criterion.”
Did editorial copy intended for New Left Review mistakenly end up in the FT computers?
Wolf finished his initial article
with the statement: “Where we end up, after this financial tornado, is
for us to seek to determine.” Yet who is the “we” Wolf is referring to?
Following the damning critique of markets and poor government
oversight, the last ones we should turn to for leadership are the
powers that be. Yet that is exactly the group that dominates the list
of those who, according to the editors of FT, will lead the way
forward. The 50 movers and shakers include 14 politicians, starting
with President Obama and Chinese Prime Minister Wen Jiabao; ten central
bankers; three financial regulators; and four heads of multinational
institutions such as the IMF and the WTO. Also included are six
economists, including Paul Krugman and Obama advisor Paul Volcker, and
three prominent investors, among them George Soros and Warren Buffett.
The list also finds room for three chief executives (the heads of
Nissan, PepsiCo and Google) and, amazingly, the chiefs of four major
banks: Goldman Sachs, JPMorgan Chase, HSBC and BNP Paribas. It even
includes two talking heads: Arianna Huffington and Rush Limbaugh.
Except for Olivier Besancenot of France’s New Anticapitalist Party,
who is included among the politicians in a way that seems a bit
condescending, there is not a single person on the list directly
involved in a movement to challenge corporate power or even to
significantly alter the relationship between business and the rest of
society. There is not a single labor leader, prominent environmental
advocate or other leading activist. The editors at FT seem never to
have heard of civil society.
Then again, the problem may not be thickheadedness among FT editors.
Perhaps the voices for radical change have simply not been loud enough
to earn a place on a list of those who will play a significant role in
the shaping capitalism’s future. In fact, one of the articles in the FT
that in Europe neither the Left nor the labor movement has taken a
leadership role in responding to the crisis, even as spontaneous
protests have erupted in numerous countries.
In the United States, where those forces are weaker, anger at the
crisis has to a great extent been channeled into support for the
Keynesian policies of the Obama Administration. That’s unavoidable in
the short term, but it doesn’t address the need for fundamental
alteration of economic institutions. If, as the Financial Times suggests, the future of capitalism is up for grabs, let’s make sure we all join the fray.
Originally posted at: http://dirtdiggersdigest.org/archives/341
The City Within
Posted by Mark Floegel on February 26th, 2009
Before his execution, Socrates was visited in prison by his friend
Crito, who told him the bribes for the guards were ready and Socrates
could escape whenever he wished. Socrates refused to go.
Crito, angered, argued Socrates would a) leave his children orphans
and b) bring shame on his friends, because people would assume they
were too cheap to finance his escape. (Apparently, this sort of thing
was common in Athens in those days.)
Socrates replied that in his imagination, he hears the Laws of
Athens saying, “What do you mean by trying to escape but to destroy us,
the Laws, and the whole city so far as in you lies? Do you think a
state can exist and not be overthrown in which the decisions of law are
of no force and are disregarded and set at naught by private
In short, either Socrates or the rule of law had to die. Socrates
chose to die rather than diminish his city. Now, as then, he’d be a
lonely guy. His notion that the city lay within him – that he was the city of Athens – is striking.
All failure to enforce law – or to work
around it – is bad. This applies equally to speed limits, armed robbery
and banking regulations. Failure to enforce our agreed-upon standards
weakens our social bonds and undermines faith in both our justice
system and our government. If the police will not apprehend or the
courts will not prosecute or the legislatures draw protective circles
around certain elements in society, then society as a whole suffers.
There is within all of us an affinity for justice. The majority of
citizens have no training in law or political science, but we possess
intuitive notions of right and wrong. We’re willing to tolerate some
discrepancy on either margin of the page, but when things are pushed
too far out of balance on either side, then the door to vigilantism,
riot and revolution is opened.
This great imbalance – and we’re getting strong whiffs of it now –
is a failure by our institutions to enforce the terms of the American
“America is a classless society.” “All citizens stand equal before
the law.” Blah, blah, blah. It’s illegal to rob a convenience store.
It’s illegal to defraud investors. The accused robber, who flashed a
knife and made off with eighty or a hundred bucks, sits behind steel
bars and waits for his overburdened public defender to get around to
speaking with him.
The accused fraudulent investment fund manager, who flashed a phony
set of books and made off with eight or fifty billion dollars, sits in
his cosmopolitan penthouse and consults a million-dollar legal team,
which he pays with ill-gotten dosh.
If we vigorously enforce laws on the working class and make only
half-hearted attempts to do so with the managing class, then the class
warfare Republican politician are always whining about comes closer to
Worse, by allowing Ken Lays, Bernie Madoffs and Allen Stanfords to
get off easy, it destroys real opportunity for people in the working
classes to realize the American dream for themselves and their
children. The crimes of the managing class – unlike the convenience
store robber – have the real effect of depriving millions – both here
and abroad - of their livelihoods and homes when the financial system
In the news and before Congressional committee, we hear that
regulators were specifically warned for years that Bernie Madoff and
Allen Stanford were violating regulations.
While the beltway talkers argue over whether Wall Street bankers
should be allowed to keep their bonuses and exorbitant salaries, the
discussion that had yet to start is: why were these highly leveraged
instruments and securitized debt transactions legal in the first place?
We’re told incessantly that the Wall Street banking transactions were
so complicated that “no one really understands them.” There is,
however, the easily understood principle that one’s debts should be
balanced by one’s assets. Or one’s at least one’s assets should be
within shouting distance of one’s debts.
We have speed limits not because driving 110 is inherently evil, but
because it is unsafe and anyone who does shows reckless disregard for
themselves and others. And yet, a legion of reckless drivers loosed on
the interstate for a decade could not have wrought as much misery as
this handful of bankers, brokers and hedge fund managers.
We will now suffer for years. These will be hard times, but within
this hardship will be opportunities to rediscover the extent to which
our society lives within in us, as Socrates would have said.
Originally published at:
The 10 Worst Corporations of 2008
Posted by on January 9th, 2009
What a year for corporate criminality and malfeasance!
As we compiled the Multinational Monitor list of the 10 Worst Corporations of 2008, it would have been easy to restrict the awardees to Wall Street firms.
But the rest of the corporate sector was not on good behavior during
2008 either, and we didn't want them to escape justified scrutiny.
So, in keeping with our tradition of highlighting diverse forms of
corporate wrongdoing, we included only one financial company on the 10
Here, presented in alphabetical order, are the 10 Worst Corporations of 2008.
AIG: Money for Nothing
There's surely no one party responsible for the ongoing global
financial crisis. But if you had to pick a single responsible
corporation, there's a very strong case to make for American
International Group (AIG), which has already sucked up more than $150
billion in taxpayer supports. Through "credit default swaps," AIG
basically collected insurance premiums while making the ridiculous
assumption that it would never pay out on a failure -- let alone a
collapse of the entire market it was insuring. When reality set in, the
roof caved in.
Cargill: Food Profiteers
When food prices spiked in late 2007 and through the beginning of 2008,
countries and poor consumers found themselves at the mercy of the
global market and the giant trading companies that dominate it. As
hunger rose and food riots broke out around the world, Cargill saw
profits soar, tallying more than $1 billion in the second quarter of
In a competitive market, would a grain-trading middleman make
super-profits? Or would rising prices crimp the middleman's profit
margin? Well, the global grain trade is not competitive, and the legal
rules of the global economy-- devised at the behest of Cargill and
friends -- ensure that poor countries will be dependent on, and at the
mercy of, the global grain traders.
Chevron: "We can't let little countries screw around with big companies"
In 2001, Chevron swallowed up Texaco. It was happy to absorb the
revenue streams. It has been less willing to take responsibility for
Texaco's ecological and human rights abuses.
In 1993, 30,000 indigenous Ecuadorians filed a class action suit in
U.S. courts, alleging that Texaco over a 20-year period had poisoned
the land where they live and the waterways on which they rely, allowing
billions of gallons of oil to spill and leaving hundreds of waste pits
unlined and uncovered. Chevron had the case thrown out of U.S. courts,
on the grounds that it should be litigated in Ecuador, closer to where
the alleged harms occurred. But now the case is going badly for Chevron
in Ecuador -- Chevron may be liable for more than $7 billion. So, the
company is lobbying the Office of the U.S. Trade Representative to
impose trade sanctions on Ecuador if the Ecuadorian government does not
make the case go away.
"We can't let little countries screw around with big companies like
this -- companies that have made big investments around the world," a
Chevron lobbyist said to Newsweek in August. (Chevron subsequently
stated that the comments were not approved.)
Constellation Energy: Nuclear Operators
Although it is too dangerous, too expensive and too centralized to make
sense as an energy source, nuclear power won't go away, thanks to
equipment makers and utilities that find ways to make the public pay
Constellation Energy Group, the operator of the Calvert Cliffs nuclear
plant in Maryland -- a company recently involved in a startling,
partially derailed scheme to price gouge Maryland consumers -- plans to
build a new reactor at Calvert Cliffs, potentially the first new
reactor built in the United States since the near-meltdown at Three
Mile Island in 1979.
It has lined up to take advantage of U.S. government-guaranteed loans
for new nuclear construction, available under the terms of the 2005
Energy Act. The company acknowledges it could not proceed with
construction without the government guarantee.
CNPC: Fueling Violence in Darfur
Sudan has been able to laugh off existing and threatened sanctions for
the slaughter it has perpetrated in Darfur because of the huge support
it receives from China, channeled above all through the Sudanese
relationship with the Chinese National Petroleum Corporation (CNPC).
"The relationship between CNPC and Sudan is symbiotic," notes the
Washington, D.C.-based Human Rights First, in a March 2008 report,
"Investing in Tragedy." "Not only is CNPC the largest investor in the
Sudanese oil sector, but Sudan is CNPC's largest market for overseas
Oil money has fueled violence in Darfur. "The profitability of Sudan's
oil sector has developed in close chronological step with the violence
in Darfur," notes Human Rights First.
Dole: The Sour Taste of Pineapple
A 1988 Filipino land reform effort has proven a fraud. Plantation
owners helped draft the law and invented ways to circumvent its
purported purpose. Dole pineapple workers are among those paying the
Under the land reform, Dole's land was divided among its workers and
others who had claims on the land prior to the pineapple giant.
However, wealthy landlords maneuvered to gain control of the labor
cooperatives the workers were required to form, Washington, D.C.-based
International Labor Rights Forum (ILRF) explains in an October report.
Dole has slashed it regular workforce and replaced them with contract
Contract workers are paid under a quota system, and earn about $1.85 a day, according to ILRF.
GE: Creative Accounting
In June, former New York Times reporter David Cay Johnston reported on
internal General Electric documents that appeared to show the company
had engaged in a long-running effort to evade taxes in Brazil. In a
lengthy report in Tax Notes International, Johnston reported on a GE
subsidiary's scheme to invoice suspiciously high sales volume for
lighting equipment in lightly populated Amazon regions of the country.
These sales would avoid higher value added taxes (VAT) in urban states,
where sales would be expected to be greater.
Johnston wrote that the state-level VAT at issue, based on the internal
documents he reviewed, appeared to be less than $100 million. But, he
speculated, the overall scheme could have involved much more.
Johnston did not identify the source that gave him the internal GE
documents, but GE has alleged it was a former company attorney, Adriana
Koeck. GE fired Koeck in January 2007 for what it says were
Imperial Sugar: 14 Dead
On February 7, an explosion rocked the Imperial Sugar refinery in Port
Wentworth, Georgia, near Savannah. Days later, when the fire was
finally extinguished and search-and-rescue operations completed, the
horrible human toll was finally known: 14 dead, dozens badly burned and
As with almost every industrial disaster, it turns out the tragedy was
preventable. The cause was accumulated sugar dust, which like other
forms of dust, is highly combustible.
A month after the Port Wentworth explosion, Occupational Safety and
Health Administration (OSHA) inspectors investigated another Imperial
Sugar plant, in Gramercy, Louisiana. They found 1/4- to 2-inch
accumulations of dust on electrical wiring and machinery. They found as
much as 48-inch accumulations on workroom floors.
Imperial Sugar obviously knew of the conditions in its plants. It had
in fact taken some measures to clean up operations prior to the
explosion. The company brought in a new vice president to clean up
operations in November 2007, and he took some important measures to
improve conditions. But it wasn't enough. The vice president told a
Congressional committee that top-level management had told him to tone
down his demands for immediate action.
Philip Morris International: Unshackled
The old Philip Morris no longer exists. In March, the company formally
divided itself into two separate entities: Philip Morris USA, which
remains a part of the parent company Altria, and Philip Morris
International. Philip Morris USA sells Marlboro and other cigarettes in
the United States. Philip Morris International tramples the rest of the
Philip Morris International has already signaled its initial plans to
subvert the most important policies to reduce smoking and the toll from
tobacco-related disease (now at 5 million lives a year). The company
has announced plans to inflict on the world an array of new products,
packages and marketing efforts. These are designed to undermine
smoke-free workplace rules, defeat tobacco taxes, segment markets with
specially flavored products, offer flavored cigarettes sure to appeal
to youth and overcome marketing restrictions.
Roche: "Saving lives is not our business"
The Swiss company Roche makes a range of HIV-related drugs. One of them
is enfuvirtid, sold under the brand-name Fuzeon. Fuzeon brought in $266
million to Roche in 2007, though sales are declining.
Roche charges $25,000 a year for Fuzeon. It does not offer a discount price for developing countries.
Like most industrialized countries, Korea maintains a form of price
controls -- the national health insurance program sets prices for
medicines. The Ministry of Health, Welfare and Family Affairs listed
Fuzeon at $18,000 a year. Korea's per capita income is roughly half
that of the United States. Instead of providing Fuzeon, for a profit,
at Korea's listed level, Roche refuses to make the drug available in
Korean activists report that the head of Roche Korea told them, "We are
not in business to save lives, but to make money. Saving lives is not
Originally posted on December 29, 2008, at:
Robert Weissman is managing director of the Multinational Monitor.
Satyam’s Fraudulent “Maquiladora of the Mind”
Posted by Philip Mattera on January 8th, 2009
It was only a few years ago that a group of offshore outsourcing
companies based in India seemed poised to take over a large portion of
the U.S. economy. Business propagandists insisted that work ranging
from low-level data input to skilled professional work such as
financial analysis could be done faster and much cheaper by workers
hunched over computer terminals in cities such as Bangalore. The New York Times once described one of these offshoring companies as “a maquiladora of the mind.”
Among the most aggressive of the Indian firms was Satyam Computer
Services Ltd., which signed up blue-chip clients such as Ford Motor,
Merrill Lynch, Texas Instruments and Yahoo. In a 2004 report
I wrote for the U.S. high-tech workers organization WashTech, I found
that Satyam was also among the offshoring companies that were doing
work for state government agencies. It was hired, for example, as a
subcontractor by the U.S. company Healthaxis to develop a system for
handling applications for medical insurance services provided by the
Washington State Health Care Authority. As it turned out, Healthaxis’s
contract was terminated, allegedly because of late delivery and poor
quality in the work done by Satyam.
The Washington State fiasco may have been an early omen of things to come. Satyam has just admitted that for years it cooked its books and engaged in widespread financial wrongdoing. The revelation came in a letter
sent to the company’s board of directors by Satyam founder and chairman
B. Ramalinga Raju (photo), who simultaneously tendered his resignation.
Raju wrote that what started as “a marginal gap between actual
operating profit and the one reflected in the books” eventually
“attained unmanageable proportions” as the company grew. The fictitious
cash balance grew to more than US$1 billion. “It was like riding a
tiger,” Raju colorfully wrote, “not knowing how to get off without
While admitting that he engaged in very creative accounting, Raju
insisted he did not personally benefit from the fraud, denying for
instance that he had sold any of his shares in the company. I guess it
is meant to be some consolation that among his sins Raju is not guilty
of insider trading.
Apart from Raju, the party most on the hot seat is the company’s
auditor, PriceWaterhouseCoopers, whose Indian unit gave Satyam’s
financial reports a clean bill of health.
The Satyam scandal is being called India’s Enron. It should probably
also be called India’s Arthur Andersen as this seems to be another case
in which an auditor was either oblivious to widespread accounting
misconduct by one of its clients or complicit in it.
Some soul-searching is probably also in order for the many large
U.S. corporations that have not hesitated to take jobs away from
American workers and ship the work off to Indian companies such as
Satyam. The revelation that much of the work has been going to a
crooked company is all the more galling.
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
Public Ownership -- But No Public Control
Posted by Rob Weissman on October 21st, 2008
Originally posted Tuesday, October 14. 2008 -- It is an extraordinary time. On Friday, the Washington Post ran a front-page story titled, "The End of American Capitalism?" Today, the banner headline is, "U.S. Forces Nine Major Banks to Accept Partial Nationalization."
There's no question that this morning's announcement from the Treasury
Department, Federal Reserve and Federal Deposit Insurance Corporation
(FDIC) is remarkable.
It was also necessary.
Over the next several months, we're going to see a lot more moves like
this. Government interventions in the economy that seemed unfathomable
a few months ago are going to become the norm, as it quickly becomes
apparent that, as Margaret Thatcher once said in a very different
context, there is no alternative.
because the U.S. and global economic problems are deep and pervasive.
The American worker may be strong, as John McCain would have it, but
the "fundamentals" of the U.S. and world economy are not. The
underlying problem is a deflating U.S. housing market that still has
much more to go. And underlying that problem are the intertwined
problems of U.S. consumer over-reliance on debt, national and global
wealth inequality of historic proportions, and massive global trade
Although it was enabled by deregulation, the financial meltdown merely
reflects these more profound underlying problems. It is, one might say,
Nonetheless, the financial crisis was -- and conceivably still might be -- by itself enough to crash the global economy.
Today, following the lead of the Great Britain, the United States has announced
what has emerged as the consensus favored financial proposal among
economists of diverse political ideologies. The United States will buy
$250 billion in new shares in banks (the so-called "equity injection").
This is aimed at boosting confidence in the banks, and giving them new
capital to loan. The new equity will enable them to loan roughly 10
times more than would the Treasury's earlier (and still developing)
plan to buy up troubled assets. The FDIC will offer new insurance
programs for bank small business and other bank deposits, to stem bank
runs. The FDIC will provide new, temporary insurance for interbank
loans, intended to overcome the crisis of confidence between banks.
And, the Federal Reserve will if necessary purchase commercial paper
from business -- the 3-month loans they use to finance day-to-day
operations. This move is intended to overcome the unwillingness of
money market funds and others to extend credit.
But while aggressive by the standards of two months ago, the most
high-profile of these moves -- government acquisition of shares in the
private banking system -- is a strange kind of "partial
nationalization," if it should be called that at all.
Treasury Secretary Henry Paulson effectively compelled the leading U.S.
banks to accept participation in the program. And, at first blush, he
may have done an OK job of protecting taxpayer monetary interests. The
U.S. government will buy preferred shares in the banks, paying a 5
percent dividend for the first three years, and 9 percent thereafter.
The government also obtains warrants, giving it the right to purchase
shares in the future, if the banks' share price increase.
But the Treasury proposal specifies
that the government shares in the banks will be non-voting. And there
appear to be only the most minimal requirements imposed on
So, the government may be obtaining a modest ownership stake in the banks, but no control over their operations.
In keeping with the terms of the $700 billion bailout legislation,
under which the bank share purchase plan is being carried out, the
Treasury Department has announced guidelines
for executive compensation for participating banks. These are
laughable. The most important rule prohibits incentive compensation
arrangements that "encourage unnecessary and excessive risks that
threaten the value of the financial institution." Gosh, do we need to
throw $250 billion at the banks to persuade executives not to adopt
incentive schemes that threaten their own institutions?
The banks reportedly will not be able to increase dividends, but will
be able to maintain them at current levels. Really? The banks are
bleeding hundreds of billions of dollars -- with more to come -- and
they are taking money out to pay shareholders? The banks are not obligated to lend with the money they are getting. The banks are not obligated to re-negotiate mortgage terms with borrowers -- even though a staggering one in six homeowners owe more than the value of their homes.
"The government's role will be limited and temporary," President Bush said in announcing today's package. "These measures are not intended to take over the free market, but to preserve it."
But it makes no sense to talk about the free market in such
circumstances. And these measures are almost certain to be followed by
more in the financial sector -- not to mention the rest of economy --
because the banks still have huge and growing losses for which they
have not accounted.
If the U.S. and other governments are to take expanded roles in the
world economy -- as they must, and will -- then the public must demand
something more than efforts to preserve the current system. The current
system brought on the financial meltdown and the worsening global
recession. As the government intervenes in the economy on behalf of the
public, it must reshape economic institutions to advance broad public
objectives, not the parochial concerns of the Wall Street and corporate
Robert Weissman is managing director of the Multinational Monitor.
Getting Wall Street Pay Reform Right
Posted by Robert Weissman on September 30th, 2008
There's mounting talk on Capitol
Hill that a Wall Street bailout will include some limits on executive
compensation, as well as contradictory reports about whether a deal on
controlling executive pay has already been reached.
Four days ago, such a move seemed very unlikely. But the pushback from
Congress -- from both Democrats and Republicans -- has been
surprisingly robust, thanks in considerable part to a surge of outrage
from the public.
Will restrictions on CEO pay just be a symbolic retribution, as some have charged?
The answer is, it depends.
Meaningful limits not just on CEO pay, but also on the Wall Street
bonus culture, could significantly affect the way the financial sector
does business. Some CEO pay proposals, by contrast, would extract a
pound of flesh from some executives but have little impact on incentive
There are at least five reasons why it is important to address executive compensation as part of the bailout legislation.
First, there should be some penalty for executives who led their
companies -- and the global financial system -- to the brink of ruin.
You shouldn't be rewarded for failure. And while reducing pay packages
to seven digits may feel really nasty given Wall Street's culture of
preposterous excess, in the real world, a couple million bucks is still
a lot of money to make in a year.
Second, if the public is going to subsidize Wall Street to the tune of
hundreds of billions of dollars, the point is to keep the financial
system going -- not to keep Wall Street going the way it was. Funneling
public funds for exorbitant executive compensation would be a criminal
appropriation of public funds.
Third, the Wall Street salary structure has helped set the standard for
CEO pay across the economy, and helped establish a culture where
executives consider outlandish pay packages the norm. This culture, in
turn, has contributed to staggering wealth and income inequality, at
great cost to the nation. We need, it might be said, an end to the
culture of hyper-wealth.
Fourth, as Dean Baker of the Center for Economic and Policy Research
says, the bailout package must be, to some extent, "punitive." If the
financial firms and their executives do not have to give something up
for the bailout, then there's no disincentive to engage in unreasonably
risky behavior in the future. This is what is meant by "moral hazard."
If Wall Street says the financial system is on the brink of collapse,
and the government must step in with what may be the biggest taxpayer
bailout in history, says Baker, then Wall Street leaders have to show
they mean it. If they are not willing to cut their pay for a few years
to a couple of million dollars an annum, how serious do they really
think the problem is?
Finally, and most importantly, financial sector compensation systems
need to be changed so they don't incentivize risky, short-term behavior.
There are two ways to think about how the financial sector let itself
develop such a huge exposure to a transparently bubble housing market.
One is that the financial wizards actually believed all the hype they
were spreading. They believed new financial instruments eliminated
risk, or spread it so effectively that downside risks were minimal; and
they believed the idea that something had fundamentally changed in the
housing market, and skyrocketing home prices would never return to
Another way to think about it is: Wall Street players knew they were
speculating in a bubble economy. But the riches to be made while the
bubble was growing were extraordinary. No one could know for sure when
the bubble would pop. And Wall Street bonuses are paid on a yearly
basis. If your firm does well, and you did well for the firm, you get
an extravagant bonus. This is not an extra few thousand dollars to buy
fancy Christmas gifts. Wall Street bonuses
can be 10 or 20 times base salary, and commonly represent as much as
four fifths of employees' pay. In this context, it makes sense to take huge risks. The payoffs from benefiting from a bubble are dramatic, and there's no reward for staying out.
Both of these explanations may be true to some degree, but the
compensation incentives explanation is almost certainly a significant
part of the story.
Different ideas about how to limit executive pay would address the
multiple rationales for compensation reforms to varying degrees.
A two-year cap on executive salaries would help achieve the first four
objectives, but by itself wouldn't get to the crucial issue of
One idea in particular to be wary of is "say on pay" proposals,
which would afford shareholders the right to a non-binding vote on CEO
pay compensation packages. These proposals would go some way to address
the disconnect between executive and shareholder interests, reducing
the ability of top executives to rely on crony boards of directors and
conflicted compensation consultants to implement outrageous pay
packages. But while they might increase executive accountability to
shareholders, they wouldn't direct executives away from market-driven
short-term decision making. Shareholders tend to be forgiving of
outlandish salaries so long as they are making money, too, and -- worse
-- they actually tend to have more of a short-term mentality than the
executives. So "say on pay" is not a good way to address the multiple
executive compensation-related goals that should be met in the bailout
The ideal provisions on executive compensation would set tough limits
on top pay, but would also insist on long-term changes in the bonus
culture for executives and traders. Not only should bonuses be more
modest, they should be linked to long-term, not year-long, performance.
That would completely change the incentive to knowingly participate in
a financial bubble (or, more generously, take on excessive risk),
because you would know that the eventual popping of the bubble would
wipe out your bonus.
Four days ago, forcing Wall Street to change its incentive structure
seemed pie in the sky. Today, thanks to the public uproar, it seems
eminently achievable -- if Members of Congress seize the opportunity.
Robert Weissman is managing director of the Multinational Monitor.
The Dangers in Outsourcing the Bailout
Posted by Philip Mattera on September 30th, 2008
Originally posted at Dirt Digger's Digest on September 23, 2008 -- A number of leading Democrats and Republicans expressed strong
misgivings last Monday about the autocratic plan for bailing out Wall
Street that Treasury Secretary Henry Paulson wants to ram through
Congress. It remains to be seen whether this is mere posturing or
Critics are focusing on vital issues such as cost and oversight, but
a lot less attention is being paid to the mechanics of Paulson’s
proposal – specifically, the question of who would carry out the
federal government’s purchase of $700 billion in “troubled” securities
from banks. As I noted in my post a week ago Sunday, the draft legislation
circulated over the weekend includes a provision that seems to allow
Treasury to contract out the process. Treasury then put out a fact sheet
making it quite clear it intends to use private asset managers to
manage and dispose of the assets it acquires, though the document does
not specifically allude to the purchasing. Paulson himself referred to the use of “professional asset managers” during an appearance on one of the Sunday morning talk shows.
It amazes me that there is not more outrage over this aspect of the
plan. Paulson seems to be leaving open the possibility that the same
firms that are being bailed out could be hired to run the bailout. This
would mean that institutions receiving a monumental giveaway of
taxpayer money could turn around and earn yet more by acting as the
government’s brokers. Aside from the unseemliness of this arrangement,
this would be an egregious conflict of interest.
The alternative proposal
floated by Senator Chris Dodd, which accepts Paulson’s language on
contracting out, includes a section on conflict of interest. But rather
than stating what the rules should be, the draft leaves it up to the
Treasury Secretary to do so. There were reports last Monday night that Treasury would go along with the inclusion of a conflict-of-interest provision.
Paulson’s approach to the Big Bailout, particularly the insistence
that there be no punitive measures for the banks, shows he is not the
right party to oversee ethical issues. Paulson apparently can’t help
himself. He still has the mindset of a man who spent more than 30 years
working on Wall Street, at Goldman Sachs. He is a living example of the
perils of the reverse revolving door: the appointment of a
private-sector figure to a key policymaking position affecting his or
her former industry.
The weak conflict-of-interest provisions Paulson is likely to impose
would probably not address the inherent contradiction in having
for-profit money managers running the bailout program. Even if Treasury
chooses managers whose firms are not getting bailed out, there is still
the danger that they will use their inside knowledge to benefit their
non-governmental clients (and themselves) or will collude with buyers
to the detriment of the public.
A Reuters story of last Monday reported that a leading contender for a federal
money management role is Laurence Fink and his firm BlackRock, which
was involved in managing the portfolio of Bear Stearns when that firm
was sold to JPMorgan Chase as part of an earlier bailout. Last March,
BlackRock, which is 49-percent owned by Merrill Lynch (now part of Bank
of America), announced
it was forming a venture to “acquire and restructure distressed
residential mortgage loans.” Will Paulson see that as a conflict of
interest – or more likely as a credential?
Letting financial firms that have profited from the mortgage crisis
manage the bailout gives the impression that we are permanently in the
grip of Big Money. To Paulson’s way of thinking, that’s not a problem,
but it could make a bad plan much worse.
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
The Financial Re-Regulatory Agenda
Posted by Robert Weissman on September 23rd, 2008
As the Federal Reserve and
Treasury Department careen from one financial meltdown to another,
desperately trying to hold together the financial system -- and with
it, the U.S. and global economy -- there are few voices denying that
Wall Street has suffered from "excesses" over the past several years.
The current crisis is the culmination of a quarter century's
deregulation. Even as the Fed and Treasury scramble to contain the
damage, there must be a simultaneous effort to reconstruct a regulatory
system to prevent future disasters.
hyper-complexity of the existing financial system makes it hard to get
a handle on how to reform the financial sector. (And, by the way,
beware of generic calls for "reform" -- for Wall Street itself taken up
this banner over the past couple years. For the financial mavens,
"reform" still means removing the few regulatory and legal requirements they currently face.)
There is more urgency to such an effort than immediately apparent. If
the Fed and Treasury succeed in controlling the situation and avoiding
a collapse of the global financial system, then it is a near certainty
that Big Finance -- albeit a financial sector that will look very
different than it appeared a year ago -- will rally itself to oppose
new regulatory standards. And the longer the lag between the end (or
tailing off) of the financial crisis and the imposition of new
legislative and regulatory rules, the harder it will be to impose
meaningful rules on the financial titans.
But the complexity of the system also itself suggests the most
important reform efforts: require better disclosure about what's going
on, make it harder to engage in complicated transactions, prohibit some
financial innovations altogether, and require that financial
institutions properly fulfill their core responsibilities of providing
credit to individuals and communities.
(For more detailed discussion of these issues -- all in plain, easy-to-understand language, see these comments from Damon Silvers of the AFL-CIO, The American Prospect editor Robert Kuttner, author of the The Squandering of America and Obama's Challenge, and Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.)
Here are a dozen steps to restrain and redirect Wall Street and Big Finance:
1. Expand the scope of financial regulation. Investment banks and hedge
funds have been able to escape the minimal regulatory standards imposed
on other financial institutions. Especially with the government safety
net -- including access to Federal Reserve funds -- extended beyond the
traditional banking sector, this regulatory black hole must be
2. Impose much more robust standards for disclosure and transparency.
Hedge funds, investment banks and the off-the-books affiliates of
traditional banks have engaged in complicated and intertwined
transactions, such that no one can track who owes what, to whom.
Without this transparency, it is impossible to understand what is going
on, and where intervention is necessary before things spin out of
3. Prohibit off-the-books transactions. What's the purpose of
accounting standards, or banking controls, if you can evade them by
simply by creating off-the-books entities?
4. Impose regulatory standards to limit the use of leverage (borrowed
money) in investments. High flyers like leveraged investments because
they offer the possibility of very high returns. But they also enable
extremely risky investments -- since they can vastly exceed an
investor's actual assets -- that can threaten not just the investor
but, if replicated sufficiently, the entire financial system.
5. Prohibit entire categories of exotic new financial instruments.
So-called financial "innovation" has vastly outstripped the ability of
regulators or even market participants to track what is going on, let
alone control it. Internal company controls routinely fail to take into
account the possibility of overall system failure -- i.e., that other
firms will suffer the same worst case scenario -- and thus do not
recognize the extent of the risks inherent in new instruments.
6. Subject commodities trading to much more extensive regulation.
Commodities trading has become progressively deregulated. As
speculators have flooded into the commodities markets, the trading
markets have become increasingly divorced from the movement of actual
commodities, and from their proper role in helping farmers and other
commodities producers hedge against future price fluctuations.
7. Tax rules should be changed so as to remove the benefits to
corporate reliance on debt. "Payments on corporate debt are tax
deductible, whereas payments to equity are not," explains Damon Silvers
of the AFL-CIO. "This means that, once you take the tax effect into
account, any given company can support much more debt than it can
equity." This tax arrangement has fueled the growth of private equity
firms that rely on borrowed money to buy corporations. Many are now
8. Impose a financial transactions tax.
A small financial transactions tax would curb the turbulence in the
markets, and, generally, slow things down. It would give real-economy
businesses more space to operate without worrying about how today's
decisions will affect their stock price tomorrow, or the next hour. And
it would be a steeply progressive tax that could raise substantial sums
for useful public purposes.
9. Impose restraints on executive and top-level compensation. The top
pay for financial impresarios is more than obscene. Executive pay and
bonus schedules tied to short-term performance played an important role in driving the worst abuses on Wall Street.
10. Revive competition policy. The repeal of the Glass-Steagall Act,
separating traditional banks from investment banks, was the culmination
of a progressive deregulation of the banking sector. In the current
environment, banks are gobbling up the investment banks. But this
arrangement is paving the way for future problems. When the investment
banks return to high-risk activity at scale (and over time they will,
unless prohibited by regulators), they will directly endanger the banks
of which they are a part. Meanwhile, further financial conglomeration
worsens the "too big to fail" problem -- with the possible failure of
the largest institutions viewed as too dangerous to the financial
system to be tolerated -- that Treasury Secretary Hank Paulson cannot
now avoid despite his best efforts. In this time of crisis, it may not
be obvious how to respect and extend competition principles. But it is
a safe bet that concentration and conglomeration will pose new problems
in the future.
11. Adopt a financial consumer protection agenda that cracks down on abusive lending practices.
Macroeconomic conditions made banks interested in predatory subprime
loans, but it was regulatory failures that permitted them to occur. And
it's not just mortgage and home equity loans. Credit card and student
loan companies have engaged in very similar practices -- pushing
unsustainable debt on unreasonable terms, with crushing effect on
individuals, and ticking timebomb effects on lenders.
12. Support governmental, nonprofit, and community institutions to
provide basic financial services. The effective governmental takeover
of Fannie Mae, Freddie Mac and AIG means the U.S. government is going
to have a massive, direct stake in the global financial system for some
time to come. What needs to be emphasized as a policy measure, though,
is a back-to-basics approach. There is a role for the government in
helping families get mortgages on reasonable terms, and it should make
sure Fannie and Freddie, and other agencies, serve this function.
Government student loan services offer a much better deal than private
lender alternatives. Credit unions can deliver the basic banking
services that people need, but they need back-up institutional support
to spread and flourish.
What is needed, in short, is to reverse the financial deregulatory wave
of the last quarter century. As Big Finance mutated and escaped from
the modest public controls to which it had been subjected, it demanded
that the economy serve the financial sector. Now it's time to make sure
the equation is reversed.
Robert Weissman is managing director of the Multinational Monitor.
Paulson Blueprint Promotes Insurance Industry Shell Game
Posted by Philip Mattera on April 5th, 2008
There’s something peculiar in the report on
financial market regulation issued March 31 by Treasury Secretary Henry
Paulson. The plan, touted by some as a bold expansion of federal
control over capital markets and dismissed by others as a mere
rearranging of the deck chairs on the financial Titanic, includes an
incongruous section on the insurance industry.
While insurance is a financial service, it hasn’t been at the center
of the implosion of the housing market or (aside from the bond
insurance crisis) linked to the instability on Wall Street. The Paulson
plan, nonetheless, provides a resounding endorsement of a “reform” that
key players in the insurance industry have been seeking for at least 15
years—allowing large national carriers to do an end run around the
current state-based insurance regulatory system. Such carriers would be
permitted to adopt an “optional federal charter” and thereby put
themselves under the supervision of a federal regulatory agency that
does not yet exist.
Big Insurance has not sought federal oversight because it wants more regulation.
After all, this is the industry that pioneered offshoring when some
carriers moved their official headquarters to tax havens such as
Bermuda. While it is true that many state regulators have been
toothless watchdogs, other states have been aggressive in protecting
the interests of policy holders and the public.
In fact, the Paulson proposal comes just a couple of weeks after
insurers were celebrating the downfall of New York Gov. Eliot Spitzer
in a prostitution scandal. During his time as New York’s attorney
general, Spitzer pursued major insurance companies such as Marsh &
McLennan and American International Group for offenses such as bid
rigging. Marsh ended up settling for $850 million in 2005, and AIG paid
a whopping $1.6 billion the following year. While it is true that
Spitzer went after the industry as a prosecutor rather than a
regulator, he did so in the overall context of state oversight.
The insurance industry swears that it supports the optional federal
charter in the name of modernization (as does the Paulson report), but
it is significant that the reform has been supported by groups such as
the Competitive Enterprise Institute and the American Enterprise Institute that
are no friends of regulation (some Democrats in Congress are also in
favor). When word of Paulson’s insurance proposal leaked out over the
weekend, the American Insurance Association rushed out a press release
hailing it, saying that the optional federal charter “will be more
efficient, effective and rational given the ‘increasing tension’ a
state-based regulatory system creates.”Throughout its history, the insurance industry has avoided “tension”
by trying to minimize government interference in its affairs. In 1945
the industry supported the McCarran-Ferguson Act, which responded to a
Supreme Court ruling by affirming the regulatory role of the states. In
recent times, the industry has wanted the option of federal oversight
on the assumption that it would be less onerous. I’ll let the legal
scholars decide whether state or federal regulation is inherently more
appropriate. The issue is whether an industry not known for generous
treatment of its customers (think of Katrina victims denied coverage)
is going to be subjected to some strict oversight somewhere.
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
Global Accounting Standards
Posted by Pratap Chatterjee on October 18th, 2007
The world of global accounting is girding up for a trans-Atlantic battle. Last month L'Oreal, Royal Dutch Shell, and Unilever, all gigantic companies, asked the U.S. Securities and Exchange Commission (SEC) to allow them to choose which accounting standards they want to use. (The companies belong to the European Association of Listed Companies, who delivered the letter.)
The reason is that U.S. Generally Accepted Accounting Principles (GAAP) is 25,000 pages long (which are based on very specific rules) and they don't like it. By comparison, the International Financial Reporting Standards (IFRS), is just one tenth the length (which are based on principles which can be more open to interpretation).
There are other good arguments for using the global rules - there are now more than 100 countries either using or adopting international financial reporting standards, or IFRS, including the members of the European Union, China, India and Canada.
But L'Oreal, Royal Dutch Shell, and Unilever, don't just want the easier rules, they want to choose which version of IFRS they can use - a European Commission version that allows them to choose how they value certain assets.
Financial Week, an industry magazine, in New York is up in arms.
" Imagine signing a contract and not having to hold up your end of the bargain. Or being able to say "I do" at the altar when you might sometimes mean "I don't." Having it both ways in such matters sure provides flexibility, to put it charitably. Yet that's exactly what a group of European companies want when it comes to accounting standards for global companies tapping the U.S. capital markets," editors of Financial Week, wrote earlier this month. (see "Converging on Chaos")
Another industry magazine, Accountancy Age in London, has also been critical of companies that use the more flexible European Commission rules. A couple of years ago, Taking Stock, the magazine's blog, asked Rudy Markham, the finance director of Unilver, why he was using flexible IFRS rules in reporting for the company, but he refused to comment, leading them to poke fun at him:
" TS understands that the biggest accounting change for a generation can be a complete turn off. We assume the numbers involved didn't mean that much to Markham anyway - a billion off the top line there, a billion on the bottom line there. He did, after all, personally take home just over £1.1 million last year. Money, money, money, as Abba used to sing... "
The good news is that the U.S. which has long insisted on using its own complex rules, may be open to using the global standard. SEC chairman Christopher Cox has agreed to allow U.S. companies to use the IFRS but has cautioned against local versions of the rules, like the European Union version. Financial Accounting Standards Board chairman Robert Herz has also said that this is a bad idea.
Today the International Accounting Standard Board, which drew up the IFRS, appointed a new chairman, Gerrit Zalm, a former Dutch finance minister, who has already announced that he would try to prevent local variations of the global rules: "One of my first priorities will be no new carve-outs in Europe and trying to get rid of the existing carve-out, because if Europe is doing this, other countries could get the same inspiration and then all the advantages of the one programme fade away," Zalm told the Financial Times. "The fragmentation of standards is costly for the enterprise sector and it doesn't help in creating clarity for investors."
We look forward to his efforts to create a single global standard. Stronger global rules are always welcome, especially if they are easier to follow, but weaker ones that cater to nationalistic interests are not.
2008 Public Eye Awards
Posted by Pratap Chatterjee on September 27th, 2007
Which are the world's worst multinationals? Which are the best? These are questions CorpWatch gets asked practically everyday. Just to clarify, we do not rank good corporations or endorse any of them, for several reasons: today's idols sometimes turn out to have feet of clay. And we see our job as investigators of malfeasance. For those who want to do the opposite, there are plenty of groups out there who promote "socially responsible" businesses, and we encourage you to look them up. (We don't have a list of these groups for the aforementioned reasons, but we do have a guide to the principles that we believe good businesses should follow -- and we leave it to you, our gentle readers, to apply this criteria to evaluate corporations.)
(We strongly believe that it is very important not to take corporate claims at face value, because sometimes these companies are not telling the whole truth. This is known as "greenwash" and to see a history of this phenomenon, we urge you to check out our short history of the subject, in this handy guide written by Josh Karliner, the founder of CorpWatch.)
Today, there is an opportunity for you to get your favorite (or maybe, least favorite) multinational nominated for an award for corporate malfeasance -- the Berne Declaration and Friends of the Earth Switzerland are holding its fourth annual award ceremony in January 2008, to coincide with the annual gathering of Fortune 500 chieftains in Davos. You can take part in this contest by clicking here.
(Previous winners from 2005, 2006 and 2007 are available online.)
If you have questions, contact Oliver Classen who is coordinating the awards ceremony.
In case you are wondering, how do you find out whether companies are telling the truth? Well, here's a tip -- there's a group in the Netherlands that collects these reports: the Global Reporting Intitiative. You can even search their database to look up your favorite/least favorite company. GRI is about to launch a tool on October 1st, 2007 that will allow you to rank these reports -- if you are so inclined.
Read the reports, search our website and that of Multinational Monitor, and then contact groups on the ground to see if these companies are telling the truth or not.
Remember the deadline to nominate a company for the Public Eye on Davos award is September 30th, 2007!
Accounting for Errant Auditors
Posted by Pratap Chatterjee on September 14th, 2007
The U.S. Securities and Exchange Commission (SEC) brought charges against 69 accountants for failing to register with the Public Company Accounting Board (PCAB) earlier this week. This somewhat obscure action is the latest ripple in the wave of crackdowns that followed the Enron accounting scandals in 2001 -- to break up the all too cozy relationship between auditors and the multinationals that they are supposed to be policing.
Governments allow companies to close their financial books at the end of the fiscal year, if a qualified accountant has signed off on it. The problem is that both the companies and the auditors are private entities whose ultimate motive is to make a profit, so there is potential for one or both of the two not to report any cooking of the books, unless they know that a regulator might catch them and discipline them. And in the last two decades, as favored accountants have been rewarded with multi-million dollar non auditing consulting gigs (such as tax planning or management consulting), the worry was that they were looking the other way in order to win more business.
Following the Enron scandal, which showed that Arthur Andersen, the company's auditor, had failed in its public duty, the U.S. Congress passed the Sarbanes-Oxley law in 2002 that replaced the accounting industry's own regulators with the Public Company Accounting Board with subpoena and disciplinary powers. Auditors are supposed to register with the board, but clearly not everyone took this seriously.
The SEC's enforcement director, Linda Chatman Thomsen, said that Thursday's action showed that the agency "is committed to ensuring compliance with the regulatory framework Congress established for auditors of public companies." A total of 50 of the errant accountants settled the charges with the federal agency the very same day.
This action is an important warning shot across the bows to let the auditors know that the SEC is checking up on them. But the jury is still out as to whether the SEC will go one step further and prosecute auditors who fail to report companies that are cooking their books.
In related news, a new study from the University of Nebraska suggests the whistle-blowers who report violations of the Sarbanes-Oxley Act to agencies like the PCAB are not properly protected. The study looked at 700 cases where employees experienced retaliation from companies for whistle-blowing and found that a mere 3.6 per cent of cases were won by employees.
Richard Moberly, the study's author, argues the findings "challenge the hope of scholars and whistle-blower advocates that Sarbanes-Oxley's legal boundaries and burden of proof would often result in favourable outcomes for whistle-blowers."
The Financial Times reports that Louis Clark, president of the Government Accountability Project, a non-profit organization that lobbies for whistle-blowers, calls the law "a disaster." Jason Zuckerman, a lawyer at the Employment Law Group, a law firm that represents Sarbanes-Oxley whistle-blowers, says: "Part of the problem is that investigators misunderstand the relevant legal standards and believe that a complainant must have a smoking gun -- that is, unequivocal evidence proving retaliation."
The debate is still on
over whether Sarbanes-Oxley is effective five years after the law was
passed, although all appear to agree it was a step in the right
direction. The proof of the pudding, they say, will be in the eating,
so we eagerly await the day that SEC puts errant accountants behind
Will the Pope tell Gucci and Prada to please pay their taxes? (Mick Jagger and Microsoft too!)
Posted by Tonya Hennessey on August 14th, 2007
In the next few days Pope Benedict plans to issue his second encyclical – the most authoritative statement a pope can issue – which apparently will focus on social and economic inequity in a globalized economy. In the statement, he is expected to denounce the use of tax havens as socially-unjust and immoral in cheating the greater well-being of society.
According to the Times (UK) newspaper, the statement may have been inspired by a recent request to the Vatican by Romano Prodi, the Italian prime minister, who urged church leaders to speak out on tax evasion.
Prodi’s government plans to seek taxes on undeclared earnings of €60 million ($84 million) by Valentino Rossi, the world motorcycling champion. How about also asking Gucci and Prada, some of Italy’s best known fashion designers, to move their tax headquarters back to home turf (from the tax-saving Netherlands, see below) and contribute to Italy’s budget deficit?
As global capital has progressively unbound itself from traditional national constraints, excessive off-shore wealth seemingly knows no shame, with wealthy individuals and corporations setting up front companies abroad to avoid paying taxes, supported by a new class of financial services specialists.
While Caribbean island resorts are often assumed to be the places where the wealthy stash their money away for retirement, some European countries (and I don't mean Lichtenstein) have also newly seen the light.
A favored location is the Netherlands -- check out the November 2006 report by Dutch-based SOMO, "The Netherlands: A Tax Haven?" The report is the first comprehensive analysis of the complex system of double tax treaties, tax incentives, the relationship with the Netherlands Antilles and the now 20,000 and counting mailbox corporations operating within the borders of this small European nation. According to SOMO, "examples of companies with tax-induced headquarters in the Netherlands are Volkswagen, IKEA, Gucci, Pirelli, Prada, Fujitsu-Siemens, Mittal Steel, and Trafigura."
The issue has been in the news, mostly because big name musical artists (like Bono and Mick Jagger) and famous athletes (think David Beckham) have also been getting in on the act. When it comes to evading taxes on lucrative licensing and royalties, the Netherlands is fast emerging as the hip tax haven of choice because Holland levies no tax on earnings royalties.
In an article titled “Gimme Tax Shelter”, the New York Times reported on this in February 2007 as newly public documentation surrounding the assets and wealth-transfer plans of the Rolling Stones demonstrated that the wily rockers have paid a mere 1.5% (as opposed to the British tax rate of 40%), or $7.2. million, on $450 million in earnings routed through the land of tulips with the help of their company Promogroup.
"The Caribbeans are thinking about trading profits, not royalties, so the smaller European countries like Holland have had to be creative, tax-wise,'' David Pullman, an investment banker in New York who caters to entertainers and athletes told the New York Times. ''They are going for the high-end stuff and don't want to be seen as shady like some Caribbean haven.''
More scandalous was the 2006 revelation that super-rockers U2 had transferred their song-publishing catalog from Ireland to Holland's Promogroup, in order to avoid a change in Irish tax law introducing taxes on royalties earned in excess of 250,000 Euros per year. Much ado was made of Bono's unwillingness to pony up his share of the tax obligation in service of the global debt relief and poverty eradication for which he so famously advocates.
Another European country that has figured they can make money out of tax evasion is Ireland -- whose “Celtic Tiger” growth is largely the product of charming huge corporations like Dell, Google, Microsoft and Sun Systems to move much of their intellectual property patents over to subsidiaries in the land of Eire -- where the corporate tax rate is 12.5%, but no taxes are charged on royalties.
Microsoft has been a major beneficiary of this scheme for the last four or so years -- it slashed billions in tax receipts to the U.S. Treasury -- by setting up subsidiaries Round Island One and Flat Island Company in Dublin. Recently Microsoft took things a step further by re-registering the two patent-holding entities as unlimited liability companies which have no obligation to file their accounts publicly.
Indeed, the Sunday Independent (Ireland) reports that Ireland was the most profitable location for U.S. multinationals between 1998-2002, during which the “the profits of US companies with Irish facilities doubled.”
The Irish law exempting patent income from taxes also provides a sweet loophole for corporate executive pay. In November 2005 it was reported that Dell Ireland’s top executives were reaping the fruits of sumptuous pay, and saving the company taxes: between them the senior management shared nearly $3.8 million in tax-free dividends since 2003.
These corporate tax breaks have earned Ireland the distinction of being hailed “the world’s 7th freest economy” in 2007 by the conservative, DC-based Heritage Foundation, which says that “Ireland’s economy is 81.3 percent free.”
Most of this tax evasion, is sadly, quite legal. But ordinary citizens around the world who think that Microsoft and Mick Jagger should pay taxes, can take heart from the fact that some members of the global elite have been punished -- take the recent conviction of media mogul Conrad Black of Hollinger International. In July, Canadian and U.S. press reported on the lawsuits, corporate and civil, that are following his conviction for obstruction of justice and mail fraud, seeking remuneration from assets, including purported millions stashed in the Caribbean:
…"Not satisfied with receiving $20 to $40 million a year in excessive management fees, Black and the Ravelston insiders then directed significant portions of those fees to Moffat Management and Black-Amiel Management, which were empty shell companies registered in Barbados," a special report from Hollinger’s board stated.
"Even though these entities did nothing to earn fees, and did not have either employees or real operations, paying management fees to them on the pretense that they performed services allowed the recipients the prospect of transforming a portion of the enormous management fees that would otherwise most likely have been taxable in Canada (where the payments were received), or possibly the U.S. (where services were largely performed), into dividends received in Barbados (where nothing occurred)," the report stated.
NOTE: For more good examples of what tax journalist Lucy Komisar calls the “corporate bag of tricks called profit laundering,” check out the Tax Justice Network, and the Komisar Scoop -- who just revealed where did Rupert Murdoch get $5 billion to buy up the Wall St. Journal? (Answer: A collection of 800 offshore companies that helped him cut corporate taxes to 6%!)
Iraq Wounded Fight for Insurance Coverage
Posted by David Phinney on July 12th, 2006
CBS Evening News and ABC Nightline are both working stories about wounded civilian contractors fighting for insurance coverage from their employers.
It's a very rich story. The Pentagon's privatizing of military support services may or may not save money, but it certainly does privatize the human toll of war.
Civilians are coming home by the thousands with injuries sustained in Iraq. Whenever the Pentagon and the news media report US casualties -- the 500 dead (or more) working under US contractors are ignored.
The story is also a nightmare for many civilians serving in Iraq. A good number of them went to Iraq because they were making good money -- and, as the president told them, "major combat is over."
Thousands are suffering from battle fatigue -- once known as soldier's heart and now even more widely known as post-traumatic stress disorder (PTSD).
Veterans struggled with the Pentagon and Department of Veterans Affairs for years to get the acknowledgement and support for the debilitating condition. PTSD is one reason for the huge homeless problem among Vietnam vets.
Now civilian contractors are fighting the same battle -- not to mention the struggle to get coverage and disability benefits for physical injury.
(The first story to tackle the issue of civilians fighting for their insurance payments, Adding Insult to Injury, appeared under my byline. Just one of many stories framed by me that set the tone for major news organizations to follow. Anytime you guys want to send a check or share some credit, please do.)
My understanding is that both CBS and ABC are relying heavily on two fabulously strong sources for their insurance angles: Jan Crowder and Houston attorney Gary Pitts.
Jana runs several Web sites to help support contractors working in Iraq and their families, most notably Contractors in Iraq. Gary Pitts represents dozens of clients suing companies for their coverage. Jana, me and CorpWatch regularly refer potential clients to him.
While ABC and CBS will undoubtedly focus on KBR truck drivers (some riveting amateur video of insurgent attacks shot by truckers is available -- and in the hands of CBS), there are plenty of other companies in the same pickle, including Titan, which provides translators to the Army in Iraq. The San Diego Union ran an excellent series on the issue.
Mine Tragedy Spun as Profit Opportunity
Posted by CorpWatch on January 11th, 2006
Spectacular. Bad-boy investment celebrity Jim Cramer, host of CNBC's "Mad Money with Jim Cramer," actually recommended today investing in "mine-safety" stocks. Not because it is important for us as a country to pick up the slack left by a "paper tiger" federal mine safety agency, but because there could be lots of dough in it.
According to the blog Crooks and Liars, Cramer actually said ""we're not partisan here... we're just looking to make money, and the Bush Administration has been negligent." And why on earth not cash in?
There is simply something obscene about the very suggestion.