Thursday, December 13, 2012

Today's links

1---They're all guilty--"There is evidence that at the height of the banking crisis, a number of major banks depended on cash from drug-related laundering operations to stay afloat",

Sweetheart settlement for HSBC bank on drug money laundering charges, WSWS

The financial mafia that bestrides the American economy and controls the political system is, in practice, above the law. The government and the various financial regulatory agencies are its protectors, making sure that no leading banker or institution is held accountable for violations of the law and social crimes against the people.

Under the agreement announced Tuesday in Brooklyn by New York Assistant Attorney General Lanny Breuer and other federal, state and local officials, HSBC, Europe’s biggest bank and the third largest in the world, will forfeit $1.256 billion and pay an additional $650 million in civil penalties. The bank acknowledges having violated the Bank Secrecy Act in laundering Mexican drug cartel money and having breached other federal laws by ignoring US sanctions in financial dealings with Cuba, Iran, Libya, Sudan and Burma.

Instead of being indicted, the bank enters into a five-year deferred prosecution agreement, during which it is to be monitored for compliance by an independent agency. This quasi-probationary period is, however, little more than a formality. It is highly unlikely that criminal charges will ever be laid. Wall Street responded to the announcement of the agreement by bidding up HSBC shares a half percentage point.

The total fine of $1.9 billion is only 8.6 percent of the $22 billion profit the bank recorded in 2011, and is likely less than the profits HSBC made over many years serving as the main financial conduit for Mexican drug lords, including the Sialoa Cartel....

Last July, the Senate Permanent Subcommittee on Investigations released a report charging HSBC with laundering Mexican drug money on a massive scale. The report said that HSBC’s Mexico bank had a branch in the Cayman Islands that had no offices or staff, but held 50,000 client accounts and $2.1 billion in 2008.

It also denounced the bank’s US regulator, the Office of the Comptroller of the Currency, for turning a blind eye to the bank’s suspicious and incriminating activities. The Senate subcommittee noted that in 2010, the regulatory agency flagged $60 trillion in transactions and 17,000 accounts as potentially suspicious, but failed to even fine HSBC......

There is evidence that at the height of the banking crisis, a number of major banks depended on cash from drug-related laundering operations to stay afloat. According to Antonio MarĂ­a Costa, who then headed the United Nations office on drugs and crime, the flow of crime syndicate money represented the only “liquid investment capital” available to banks at the height of the crisis. “Inter-bank loans were funded by money that originated from the drugs trade,” he said. “There were signs that some banks were rescued that way.”

In March of 2010, the US Justice Department reached a similar settlement with Wachovia Bank, now part of Wells Fargo, as that announced Tuesday with HSBC. Wachovia admitted to having violated the Bank Secrecy Act by laundering $378.4 billion for the Sinaloa Cartel between 2004 and 2007. Rather than being prosecuted, it was given a deferred prosecution agreement under which it paid a fine of $160 million, less than 2 percent of its profit for the previous year.

By serving as financial conduits for the Mexican drug cartels, these banks have played a critical role in the drug war that has taken tens of thousands of lives in that country, not to mention the social devastation wrought in the US and around the world by the narcotics trade.

Martin Woods, a Wachovia whistleblower who had been forced to resign, said at the time of the US settlement with the bank: “These are the proceeds of murder and misery in Mexico, and of drugs sold around the world… It’s simple: if you don’t see the correlation between the money laundering by banks and the 30,000 people killed in Mexico, you’re missing the point.”

2--Another Asterisk for Asset Purchases, NYT

Federal Reserve officials have complained for years that the rest of the government is impeding the effectiveness of monetary policy. The Fed keeps making it cheaper to borrow, but the nation’s favorite kind of borrowing is the mortgage loan, and the mortgage market — well, let’s just say it’s a little broken.
In the latest variation on this important theme, researchers at the Federal Reserve Bank of New York presented evidence in a recent paper that a government policy aimed at helping underwater borrowers also is helping lenders pad profits, reducing the benefits for borrowers — and the economy....

The average rates that lenders charge borrowers, however, have fallen by less than the average interest rates that investors demand from lenders. Over the last decade, the median difference was about 0.4 percentage point, according to Bloomberg News. It now stands at more than 1.2 percentage points.
In other words, as my colleague Peter Eavis wrote in August, the Fed’s campaign is helping lenders much more than it’s helping borrowers.
That 3.55 percent rate for a 30-year mortgage could be closer to 3.05 percent if banks were satisfied with the profit margins of just a few years ago. The lower rate would save a borrower about $30,000 in interest payments over the life of a $300,000 mortgage.
3---QE4 is Here, Forbes

QE4 is here. Only a few months after announcing what had been dubbed QE3, an open-ended $40 billion a month program to buy up mortgage backed securities (MBS), the FOMC decided to extend its asset purchases in 2013 as Operation Twist expires.

The Fed will therefore accelerate its rate of balance sheet expansion, easing monetary conditions further. While Operation Twist had been sterilized, which means the Fed sold assets at the same rate as it was gobbling them up, the new program will consist purely of Treasury purchases. Combined with QE3, the Fed will be taking $85 billion in bonds, both Treasuries and MBS, out of the market. The FOMC also decided to begin rolling over its maturing Treasuries as of January.

4---Bernanke’s Non-Stupidity Pact, NYT

So, how big a deal was yesterday’s Fed announcement? Philosophically, it was pretty major; in terms of substantive policy implications, not so much.

What the Fed did was pledge not to raise rates until unemployment is considerably lower than it is now, or inflation is running significantly above the 2 percent target. One fairly important wrinkle I haven’t seem emphasized: the inflation criterion was couched in terms of the inflation projection, rather than past inflation. This would let the Fed hold rates low even in the face of a blip caused by, say, a sharp rise in commodity prices.

It’s fairly clear — although not explicitly stated — that the goal of this pronouncement is to boost the economy right now through expectations of higher inflation and stronger employment than one might otherwise have expected.

5---Home Seizures Rise as Banks Adjust to Foreclosure Flow, Bloomberg

Home seizures in the U.S. rose 5.4 percent last month, the first annual gain in two years, as lenders seek to manage the flow of distressed properties without disrupting the housing recovery, according to RealtyTrac.
Banks repossessed 59,134 homes, up from 56,124 from November 2011, the Irvine, California-based data firm said today in a report. The increase was the first since October 2010, when foreclosures slowed after allegations that lenders were using faulty practices to take property from delinquent homeowners. Seizures climbed 11 percent from the previous month.

“Lenders have figured out how to play the foreclosure game in this new world where they’re getting a lot more scrutiny,”Daren Blomquist, RealtyTrac vice president, said in a telephone interview. “Everybody involved in the foreclosure industry has finally got a good handle on how to manage these properties to create a more managed and stable flow.” ...

In the peak year of 2010, banks took back an average of 87,542 homes a month on the way to a record 1.05 million completed foreclosures, according to RealtyTrac.

‘Less Charged’

Lenders have adapted to state measures that slowed repossessions beyond delays caused by the U.S. mortgage probe.

6---QE: The problem, not the solution, The Coppola Comment

The policy rate has fallen to an all-time low - it has now been fixed at 0.5% since Q2 2009. But that is only just beginning to feed through into the effective interest rate, and the chart indicates that most commercial lending rates remain far above the policy rate. Now, the policy rate is not an absolute indication of the cost of funding for banks - most banks pay slightly above that - but it is certainly an indication that bank funding is pretty cheap at present. Yet commercial borrowers are still paying high rates. This is undoubtedly because of banks' desperate need to repair their balance sheets and build up capital, but it doesn't help the economy.

And note also the effect of QE. This chart does suggest - very strongly - that QE is effective in bringing down real interest rates - but not for borrowers from commercial banks. They are paying as much or more than two years ago. The effective interest rate is depressed because of lower rates paid to savers, not lower rates charged to borrowers. Credit spreads are widening.

This suggests that QE, far from being a stimulus, is actually contractionary for the real economy. If rates to both savers AND borrowers were falling, and bank lending volumes were normal, then QE could be said to be a stimulus, because it would encourage more borrowing, and falling returns to savers might encourage them to spend rather than save. But that's not the case. Lending volumes are reduced and interest rates to borrowers remain high, while interest rates to savers are depressed: people on fixed incomes are spending less, not more, because their income is reduced, and borrowers faced with high interest rates are choosing to cut spending in order to maintain debt repayments. The overall effect is to take money from the real economy and transfer it to banks, who use it to shore up their damaged balance sheets. This raises questions about exactly what QE is supposed to stimulate and who it is supposed to help. What it is doing is reducing banks' funding costs and increasing their spreads. How that helps the cash-strapped people and businesses on whom the UK's economic recovery actually depends is a complete mystery to me.

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