Tuesday, July 17, 2012

Today's links

1--HSBC--Senate investigates bank in money-laundering, terrorist financing operations, zero hedge

The Mexico operation, Senate investigators allege in the report, should have been the global bank's most worrisome because it continued doing business with money-changing businesses known as "casas de cambio." These businesses were cited by U.S. authorities to be fronts for drug-cartel money laundering, and HSBC conducted business with them years after other big banks cut them off.

HSBC Mexico's top anti-money laundering official, as he prepared to leave the bank, told an official from HSBC's London compliance office in 2008 that he believed there was "a culture [of] pursuing profits and targets at all costs" and that it "was only a matter of time before the bank faced criminal sanctions," Senate investigators found....

Global banking giant HSBC and its U.S. affiliate exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls, a Senate Permanent Subcommittee on Investigations probe has found.

“In an age of international terrorism, drug violence in our streets and on our borders, and organized crime, stopping illicit money flows that support those atrocities is a national security imperative,” said Sen. Carl Levin, D-Mich., subcommittee Chairman. “HSBC used its U.S. bank as a gateway into the U.S. financial system for some HSBC affiliates around the world to provide U.S. dollar services to clients while playing fast and loose with U.S. banking rules. Due to poor AML controls, HBUS exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions. The bank’s federal bank regulator, the OCC, tolerated HSBC’s weak AML system for years. 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.”...

Disregarding Terrorist Financing Links. HBUS provided U.S. dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.

--Clearing Suspicious Bulk Travelers Checks. In less than four years, HSBC cleared $290 million in obviously suspicious U.S. travelers cheques for a Japanese bank, benefiting Russians who claimed to be in the used car business.

2--Fewer U.S. companies planning to hire; Europe looms: poll, Reuters
American companies are scaling back plans to hire workers and a rising share of firms feel the European debt crisis is taking a bite out of their sales, a survey showed on Monday.

Only 23 percent of the firms polled in June plan to add to staff in the next six months, the National Association for Business Economics said on Monday.

3--The "R" word, naked capitalism

Nouriel Roubini is predicting 1.2% growth at best for the second quarter. Ed Harrison pointed out on his Credit Writedowns Pro service that manufacturing ex autos is already in recession and that inventory building on the basis of the expectation of continued demand is the only thing that is keeping the US out of an actual recession. We’ve had falling disposable income with households initially treated as a blip (they went into savings and/or increased credit card debt). But as Ed also points out, without a change in incomes, you eventually see the decline translate into a fall in retail sales. And that’s where we seem to be now.

The way out of it would be to have government spending make up the slack. but that remains anathema; indeed, DC is fighting over how much to blunt the impact of the so called fiscal cliff, the cut in stimulus that will result if Bush tax cuts and recessionary spending measures expire at the end of 2012. Even if the full 3-5% GDP hit is forestalled (my tax mavens point out that large sections of the tax code are renewed each year, so the drama may be a tad overplayed), the continued talk of a Grand Bargain suggests that bloodletting from an already weakened patient is still on. And this cheery scenario of course does not consider the big uglies lurking in the wings, like a Eurozone crisis of some sort (Creditanstalt 2.0) or an attack on Iran (even with a new pipeline reducing the importance of the Strait of Hormuz, it’s still an important choke point, and Saudi refineries are also within striking distance of Iranian missiles).

4--U.S. Consumer Price Index Was Unchanged in June, Core Up 0.2%, Bloomberg

The cost of living in the U.S. was little changed in June, a sign inflation may stay subdued as Federal Reserve officials have predicted.

No change in the consumer-price index followed a 0.3 percent drop in May, a Labor Department report showed today in Washington. The measure matched the median forecast of economists in a Bloomberg News survey. The so-called core measure that excludes volatile food and fuel costs rose 0.2 percent for a fourth month.

5--Report: Housing Inventory declines 19.4% year-over-year in June, calculated risk

6--Is China’s electricity data worth any of your precious attention?, FT Alphaville

7--5 Year Treasury Hits a Record Low, sober look

U.S. Treasury yields fell to the brink of new all-time lows [the 5-year is in fact at an all-time low today, but the WSJ reporter seems to only track the 10yr] as concerns about a U.S. economic slowdown spurred demand for financial safety, extending the market’s rally this month.

The benchmark 10-year note yielded as little as 1.440% midday, a hair away from its 1.437% record low set on June 1 after a weak employment report. The yield on five-year notes sank as low as 0.577%, a new record for that maturity. Bond yields fall when prices rise.

A retail industry report early Monday showed sales falling for the third consecutive month in June, stoking fears about a snag in the U.S. recovery. Consumer spending, a crux of the U.S. economy, remains constrained by high unemployment and households’ efforts to work off debt.

“Clearly things are slowing down, more so than most had expected,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. ”For a while, everyone was focused just on Europe. Now we’re seeing the slowdown here and in China—major drivers of global growth.”

8--Defective Government by Design, The Big Picture

The Federal Reserve Zero Interest Rate policy is a balm to banks whose balance sheets still have so much real estate exposure that higher rates will cause corporate bankruptcy;

-The SEC brings minor insider trading cases while enormous financial crimes go unpunished;

-The Supreme Court has granted natural rights to corporations — rights previously reserved for living and breathing Human Beings;

-The CFTC no longer does the sort of daily audits that can prevent fraud like MF Global and PeregrineFG;-The US Attorney’s office has been captured by the Treasury department, which in turn was captured by large Banks long ago;

-Laws that used to be written by Congressional staffers and academics are now drafted by the industry itself;

-The Attorneys General offices of the states are too timid to sue these same banks for obvious perjury;-Tax loopholes allow wealthy companies to pay very little taxes relative to profits;

-Copyrights that should be in the public domain are retained by companies who have changed intellectualproperty laws.

-The Minerals Management Service (MMS) gives away oil leases and mineral rights for pennies on the dollar.-Money has somehow been equated to speech, turning the idea of “One Person, One vote” on its head.

9--China's central bank will have to cut rates further to avoid hard landing, sober look

As China's inflation rate moderates, the real lending rate is rising. In fact the ISI Group is predicting inflation of 1.8% (annualized) within the next couple of months. That would translate into a 4.5% real lending rate - the highest since 2009.

But in 2009 China's economic growth was considerably stronger than it is now, justifying higher real rates. In the current environment however, real rates need to come down in order to avoid a "hard landing" scenario. That means PBoC should aggressively lower policy rate from the current 6% level

10--Consumers’ outlook darkens in July, WSJ
Americans are getting gloomier about the economy.

Consumer sentiment fell to its lowest level of the year in early July, according to a preliminary reading from Thomson Reuters and the University of Michigan. The groups’ sentiment index fell to 72.0 at the start of July from 73.2 in June, according to an economist who has seen the report. This reading marks the lowest of the year.

Consumer sentiment rose steadily earlier this year, leading to hopes among some economists that household spending would drive economic activity and support the recovery process.

But slower job growth and other recent weak economic data have cut into both confidence and actual spending. The ever-evolving euro-zone debt crisis and the financial-market volatility it causes also continues to dent sentiment, which also fell in June.

“The latest confidence data suggest that although consumers remain cautious, at least they aren’t panicking,” the research firm Capital Economics wrote in a note to clients.

Economists surveyed by Dow Jones Newswires had expected the preliminary read in July to tick up to 73.5.

Consumers don’t expect a quick turnaround: The expectations index, an indicator of households’ hopes for the months ahead, dropped to 64.8 from 67.8. One silver lining came in the current conditions index, however, as the early-July reading rose to 83.2 from 81.5 at June-end.

11--Faith in Hard Work, Capitalism Falter; But Emerging Markets Upbeat --Pervasive Gloom About the World Economy, PEW Research

The economic mood is exceedingly glum all around the world. A median of just 27 percent think their national economy is doing well, according to a survey in 21 countries by the Pew Research Center’s Global Attitudes Project. Only in China (83%), Germany (73%), Brazil (65%) and Turkey (57%) do most people report that current national economic conditions are good.

The public mood about the economy has worsened since 2008 in eight of 15 countries for which there is comparable data, while it is essentially unchanged in four others. The Chinese are the lone exception. They have been positive about their economy for the past decade.

Less than a third of Americans (31%) say the U.S. economy is doing well. That figure is up 13 percentage points from 2011. (But it is down 19 points from 2007, the year before the financial crunch began.) A median of just 16% of Europeans surveyed think their economy is performing up to par. That includes just 2% of the Greeks and 6% of the Spanish and Italians. Among Europeans, only the Germans (73%) give their economy a thumbs up. And just 7% of Japanese believe their economy is doing well...

The global economic crisis has eroded support for capitalism. In 11 of the 21 nations surveyed, half or fewer now agree with the statement that people are better off in a free market economy even though some people are rich and some are poor. And such backing is down in 9 of 16 nations with comparable data since 2007, before the Great Recession began. Such disenchantment is particularly acute in Italy (where support for a free market economy is down 23 percentage points), Spain (20 points) and Poland (15 points).

12--Media Consolidation: The Illusion of Choice, Big Picture

13--US companies sitting on $5 trillion in cash, IFR

The Fed says American companies are sitting on $1.7 trillion of cash, but Reuters columnist David Cay Johnston found that the number is actually three trillion higher. Johnston explains why are they sitting on so much cash.

14--JP Morgan beaches its Whale, as loss grows, IFR

15--US report says HSBC handled Iran, drug money, IFR

A “pervasively polluted” culture at HSBC Holdings Plc allowed the bank to act as financier to clients seeking to route shadowy funds from the world’s most dangerous and secretive corners, including Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria, according to a scathing US Senate report.

While the big British bank’s problems have been known for nearly a decade, the Senate probe detailed just how sweeping the problems have been, both at the bank and at the Office of the Comptroller of the Currency, a top US bank regulator which the report said failed to properly monitor HSBC.

“The culture at HSBC was pervasively polluted for a long time,” said Senator Carl Levin, chairman of the US Senate Permanent Subcommittee on Investigations, a Congressional watchdog panel.

The report comes at a troubling time for a banking industry reeling from a multi-country probe into the manipulation of global benchmark rates. Last month, rival British bank Barclays Plc agreed to pay a $453 million fine to settle a US-British probe into the rigging of the benchmark interest rate known as the London interbank offered rate, or Libor.

The Senate probe provides a rare look at how HSBC responded when confronted with numerous cases of suspect money flows.

The report, released late on Monday, caps a year-long inquiry that included a review of 1.4 million documents and interviews with 75 HSBC officials and bank regulators. It will be the focus of a hearing on Tuesday at which HSBC and OCC officials are scheduled to testify....

Between 2007 and 2008, HSBC’s Mexican operations moved $7 billion into the bank’s US operations. According to the report, both Mexican and US authorities warned HSBC that the amount of money could only have reached such a level if it was tied to illegal narcotics proceeds.

The Senate probe also examined banking HSBC did in Saudi Arabia with Al Rajhi Bank, which the report said has links to financing terrorism. Evidence of those links emerged after the Sept 11, 2001 attacks on the United States, the Senate report said, citing US government reports, criminal and civil legal proceedings and media reports.

In 2004, Al Rajhi sued the Wall Street Journal, which had published an article about US and Saudi authorities monitoring accounts. The article referenced Al Rajhi.

Al Rajhi said in response to a WSJ story that it “unequivocally condemns terrorism”. Al Rajhi and the paper settled in 2004. The paper did not pay damages and stated that it “did not intend to imply an allegation that (Al Rajhi) supported terrorist activity, or had engaged in the financing of terrorism”, the Senate report said....

Dealings with Iran

Some of the money that moved through HSBC was tied to Iran, the report said, which would violate US prohibitions on transactions linked to it and other sanctioned countries.

To conceal the transactions, HSBC affiliates used a method called “stripping”, where references to Iran are deleted from records. HSBC affiliates also characterized the transactions as transfers between banks without disclosing the tie to Iran in what the Senate report called a “cover payment”.

HSBC “failed to take decisive action to confront these affiliates and put an end to the conduct,” the report said.

Between 2001 and 2007, more than 28,000 transactions were identified by an outside auditor for HSBC that potentially could have run afoul of laws that prohibit transactions with sanctioned countries. Of those, 25,000 involved Iran. A smaller number required additional analysis to determine if violations of US regulations had occurred, the report said.

At the heart of HSBC’s failings was the fact that it served as a hub for smaller financial firms needing access to the global banking system, the report said.

16--JPMorgan scandal: The tip of the iceberg, WSWS
17--A revealing exposé of the US assets leading the Syrian opposition, WSWS
The Syrian opposition: who’s doing the talking?” is a devastating exposé of the intimate connections between the Syrian opposition and the US, British and French intelligence services, along with top US neo-cons. It traces the formation of the Syrian National Council and the appointment of its leading personnel to long-standing and well-funded plans for regime change in Syria and more generally in the Middle East. These plans date back to at least 2005, and have been funded by Washington in an effort to secure political control of the oil-rich region.

Skelton does not attempt to be comprehensive. He focuses on a few of the most prominent members of the SNC and identifies some of the most vociferous proponents of military intervention as being paid representatives of the Western powers.

Among those routinely cited as “official spokesmen” or “pro-democracy campaigner” is the Paris-based Syrian academic Bassma Kodmani, a member of the executive bureau and head of the SNC’s foreign affairs.

Kodmani is a repeated visitor to the Bilderberg group conference, an organisation of top political figures dedicated to strengthening the links between US and European imperialism and securing their collective global interests under the banner of promoting “Atlanticism.”...

Radwan Ziadeh, the SNC’s director of foreign relations, is a senior fellow at the US Institute of Peace and a signatory to a letter calling for US military intervention alongside former head of the CIA James Woolsey, Karl Rove and other prominent neo-cons. He has acted as an intermediary between the White House and the Syrian opposition since 2005...

The clear importance of Bassma Kodmani in the SNC hierarchy is simply dismissed, while Skelton is even derided for describing the Council on Foreign Relations (CFR) as “a powerful US lobby group,” for being “needlessly sinister”. It is “America’s most prestigious foreign policy talking shop and research centre”, Borger insists.

Borger in fact argues against his own faux-naïf pose. No other foreign policy think tank is more influential than the CFR, and Kodmani is there as a trusted representative of US imperialist interests in the Middle East

18--Europe’s austerity zone, wsws
Spanish Prime Minister Mariano Rajoy’s announcement of a further 65 billion euros in cuts and tax hikes confirms that no shift from austerity can be expected from either the European Union or any of its constituent governments.

Rajoy’s statement was a declaration of class war. He spoke in parliament as riot police, using rubber bullets and batons, attacked striking miners who are threatened with the loss of their jobs and other demonstrators.

The payback for the third such package in six months is to be an extra year to reach Spain’s deficit targets and a possible additional bailout of 100 billion euros. This too will have to be clawed back through cuts, alongside the 100 billion given directly to the banks.

All talk of a “growth strategy” in Europe means nothing other than a vast additional handout to the banks and speculators, for which workers will have to pay. Any agreement to allow more long-term debt repayment will only be made to avert default and will be accompanied by demands for more severe cuts, to be imposed at a faster pace

19--OC Shadow inventory: What it really is and how large it really is, OC Housing News

CoreLogic has the most widely accepted definition of shadow inventory, but it’s wrong, and their numbers under report the actual figures. CoreLogic, counts visible bank-owned inventory and borrowers who have been served notice. These properties are visible, and although they may not be on the MLS yet, they are not hiding in the shadows. The real shadow inventory is the total number of delinquent mortgage holders who haven’t been served notice. These people aren’t picked up on any foreclosure reports because they haven’t entered the system yet. CoreLogic’s estimate of this number is based on self-reported databases, and lenders are not making a full and accurate accounting to CoreLogic.

Keith Jurow noted that New York has significantly more shadow inventory than is widely reported:

Through sheer persistence, I obtained accurate statistics on serious delinquencies from the New York State Division of Banking. Let me explain.

In late 2009, the NYS legislature passed a law requiring all servicing banks in the state to send a “pre-foreclosure” notice to all delinquent owner occupants. It warned them of possible foreclosure and explained steps they could take to prevent this. These servicing banks were also required to report to the Banking Division all notices that were sent...

States with the highest % of clients not in foreclosure, average months delinquent

Minnesota (96%) 12 months

North Carolina (88%) 13 months

Maryland (88%) 19 months

Texas (85%) 16 months

Oklahoma (84%) 8 months

Washington (79%) 13 months

Nevada (79%) 13 months

Georgia (75%) 12 months

Michigan (73%) 18 months

Virginia (72%) 18 months

Those numbers are staggering. In Minnesota, there are 25 delinquent borrowers for each one that’s been reported? Wow! Nevada recently passed a law making it much more difficult to foreclose, so the huge backlog of those who have been served is not being processed, and the even larger backlog of those who haven’t been served notice gets to continue their free ride. There are 21,000 people in Nevada who have been served notice. That means there are another 80,000 who also aren’t paying and who haven’t been served notice. Last month they processed about 350 foreclosures. At that rate, it will take them 24 years to process those who are currently delinquent on their mortgages

20--The Real Libor Scandal, counterpunch

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

Why isn’t this happening?

Despite the negative interest rate, investors have been making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower.

What was pushing the interest rates lower?

The answer is even clearer now. Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise.

Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.

In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

How long can the government bond bubble be sustained? How negative can interest rates be driven?

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.

Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

21--China: Slowing Growth, Speeding Consumer, WSJ

A slowdown in the world's factory could be a good time to take a bet on the workers.

Growth in China's economy decelerated to 7.6% year-on-year in the second quarter of 2012, the lowest since the start of 2009. The old mainstays—exports and investment—both disappointed. The share of investment in growth fell relative to 2011, and slowing exports were a drag.

The last time things were this bad was the financial crisis, and Beijing responded with a mighty stimulus. An increase in lending of more than 5.5 trillion yuan ($861 billion) in 2009 was equivalent to around 16% of gross domestic product, dwarfing the U.S and European stimulus. Anyone betting on China's equity markets, which rose 88% from end-2008 to August 2009, made a killing. Hard commodities also benefited, with the price of copper more than doubling over the course of the year.

This time it's different. The 2009 stimulus did the job, but it also ballooned total credit levels from around 134% of gross domestic product in 2008 to 173% in 2011, unleashed a wave of inflation, and tilted the economy further toward reliance on investment to drive growth.

A repeat performance isn't in prospect. The 2012 stimulus is markedly smaller and pays more attention to solving, or at least not exacerbating, structural problems. Rate cuts have been executed so they protect returns to household savers even as they cut the cost of credit for business borrowers. Income tax for low earners has been reduced.

Worryingly, the more modest moves to stimulate growth aren't yet gaining traction.


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