Nov 252013
 November 25, 2013  Posted by at 1:30 pm Finance

Library of Congress Dallas motorcade minutes before shooting November 22, 1963

Well, if you thought you’d seen all the madness and absurdity that could possibly come out of the financial system by now, you are definitely being caught on the wrong flat foot as we speak. And there can be no doubt that much more of this will be revealed as we go along. Jamie Dimon renting Buckingham Palace to celebrate his $13 billion settlement with US regulators is just the beginning, though it’s a pretty clear statement of just how untouchable too big to fail policies have made Wall Street and the City feel. And they don’t feel that way for nothing, in every sense of the word, count on it.

A Labour spokesman said this about the party at the Palace, which included appearances by the Royal Philharmonic and the English National Ballet: ““There is also the fact that this should be a special place. This is the home of the Queen. Where is it all going to end?“ Well, sir, maybe it’s time to wake up, because the new kings and queens of the world have taken over. And they intend to be loud and proud about it, like any group of conquerors throughout history ever did.

Fine dining for Dimon at the Palace raises concerns of commercialisation

It must have been a welcome spot of light relief for Jamie Dimon. Only days after he finally agreed to a $13 billion settlement with US mortgage regulators, the boss of JPMorgan – and dozens of his corporate clients – were sitting back amid the splendour of Buckingham Palace, enjoying a fine dinner and performances by the Royal Philharmonic and the English National Ballet.

The event, hosted by Prince Andrew, Duke of York, reflects growing enthusiasm by the Royal Family to use its premises to promote business interests. But it also risks stoking criticism over its apparent commercialisation and its intimacy with business.

The JPMorgan event on October 30, had a guestlist that included up to 100 corporate and political heavyweights, ranging from Kofi Annan, the former UN secretary-general, to Indian industrialist Ratan Tata. Also present was Tony Blair, the former prime minister who chairs JPMorgan’s “international council” of senior advisers.

That’s one sign that there’s been a takeover and a change of guards. The story coming out over the weekend about Royal Bank of Scotland – RBS – is another. And the “Royal” label in its name starts to sound mighty cynical. RBS is now being accused of pushing healthy client businesses into bankruptcy, so it could take over their assets for pennies on the pound. There’s one little detail that should make this even more preposterous: RBS is 81% government owned.

RBS accused of pushing small businesses to the edge to boost profits

City regulators have been handed a dossier of evidence compiled by an adviser to Vince Cable which claims that Royal Bank of Scotland was deliberately wrecking viable small businesses to make profits for the bailed out bank.

The business secretary – a long-time critic of the banking industry’s lending practices – said some of the allegations were so serious that he had handed the report, compiled by businessman Lawrence Tomlinson, to the regulators and the bank. It has also been given to Sir Andrew Large, a former deputy governor of the Bank of England, whose report on lending failures by RBS will also be released on Monday.

Tomlinson, appointed by Cable as “entrepreneur in residence”, has compiled evidence from hundreds of businesses which have approached him after ending up in the bank’s global restructuring group (GRG), and subsequently had their properties sold to its specialist property arm, West Register.

“There are many devastating stories of how RBS has wrecked good businesses and the ruinous impact this has on the lives of the business owners,” said Tomlinson.

How do you like them apples, right? Still, if I were a betting man, I’d put my money on these stories sounding so hard to believe, and on people being so unwilling to believe them, that they’ll be filed under ‘too far out of left field’, and we all go about our days as if nothing ever happened.

This thing about the Fed paying interest on reserves that banks have with it, is another example of this. We’ve all seen to which extent those reserves originate as directly as possible from the Fed’s own QE policies. They hand that $85 billion a month to Wall Street, much of it in exchange for MBS, so the mortgage debt risk no longer rests with the banks, and then pay interest on what it’s just handed to the banks. And whatever explanations and excuses may emanate from the banks themselves and the financial press that serves them, in essence it’s just another piece of too big to fail folly. Once it’s become acceptable to complain about the interest the Fed pays you on the reserves it’s just handed you, it’s like that Labour guy said about Buckingham Palace: “What’s next”?

US banks warn Fed interest cut could force them to charge depositors

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves. Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.

The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year. Minutes of the Fed’s October meeting published last week showed it was heading towards a taper in the coming months – perhaps as soon as December – but wants to find a different way to add stimulus at the same time. “Most” officials thought a cut in the interest on bank reserves was an option worth considering.

Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors.

Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme. “Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.

Other bankers said that a move to negative rates would not only trim margins but could backfire for banks and the system as a whole, as it would incentivise treasury managers to find higher-yielding, riskier assets.

“It’s not as if we are suddenly going to start lending to [small and medium-sized enterprises],” said one. “There really isn’t the level of demand, so the danger is that banks are pushed into riskier assets to find yield.”

I suggested the other day that since the $85 billion a month QE that Janet Yellen intends to keep going is such an unmitigated failure – that is, from the point of view of the real economy -, why not try and give it to the American people instead of the banks? There’s no doubt that would do a lot more to revive the economy. Come to think of it: there’d be another advantage: the people wouldn’t insist on being paid interest on it, and whine and threaten and throw tantrums when they didn’t get it.

Yves Smith posted a nice piece by economics professor Rajiv Sethi on Saturday, who also looks at alternatives to the QE disaster:

Why Should Banks be the Only Ones with Accounts at the Fed?

About forty minutes into the final session of a recent research conference at the IMF, Ken Rogoff made the following remarks:

We have regulation about the government having monopoly over currency, but we allow these very close substitutes, we think it’s good, but maybe… it’s not so good, maybe we want to have a future where we all have an ATM at the Fed instead of intermediated through a bank… and if you want a better deal, you want more interest on your money, then you can buy what is basically a bond fund that may be very liquid, but you are not guaranteed that you’re going to get paid back in full.

This is an idea that’s long overdue. Allowing individuals to hold accounts at the Fed would result in a payments system that is insulated from banking crises. It would make deposit insurance completely unnecessary, thus removing a key subsidy that makes debt financing of asset positions so appealing to banks. There would be no need to impose higher capital requirements, since a fragile capital structure would result in a deposit drain. And there would be no need to require banks to offer cash mutual funds, since the accounts at the Fed would serve precisely this purpose.

But the greatest benefit of such a policy would lie elsewhere, in providing the Fed with a vastly superior monetary transmission mechanism. In a brief comment on Macroeconomic Resilience a few months ago, I proposed that an account be created at the Fed for every individual with a social security number, including minors. Any profits accruing to the Fed as a result of its open market operations could then be used to credit these accounts instead of being transferred to the Treasury. But these credits should not be immediately available for withdrawal: they should be released in increments if and when monetary easing is called for. [..]

Banks can continue to accept deposits but they will not be insured. If they want to promise redemption at par they will have to have a capital structure that has a lot more equity relative to debt. Admati and Hellwig have been arguing for significantly higher capital requirements to counteract the subsidization of bank debt financing; this will no longer be necessary under once deposit insurance is removed.

Bank loans will be financed by bank equity, long term debt, commercial paper, and money market mutual funds. The only source of financing to be removed is insured deposits.

The important point is that banks can be allowed to fail without putting the payments system at risk.

Don’t worry, I know how hard it is to make people realize to what extent QE is so bad for the US economy. Because they are being told to look at the stock markets, and the records they set, and interpret those records as evidence that QE is a big success.

The problem with that interpretation is that it’s evidence of the exact opposite. Stock market records in a time of global high unemployment, austerity and budget cuts are a sign of how, and to what extent, the financial industry has taken over our societies. Just like Jamie Dimon in Buckingham Palace, like RBS intentionally bankrupting its own healthy clients, and like Wall Street complaining about interest paid on free hand-outs.

And for those who care to look, there are more sign of this finance coup d’état we’re in the middle of. You have to look no further than that same $13 billion JPMorgan settlement. I’ve seen all sorts of interpretations of this, but I get back to the same point all the time: only $2 billion of it looks to be certain to be non-deductible.

All of the remaining $11 billion is at the very least open to interpretation. And with US banks having paid $100 billion (!) already in legal costs, vs $77 billion for their European counterparts, who would dare doubt that deals such as this have been very carefully constructed to favor the banks?

I mean, once you note that these legal costs, $177 billion, are much higher than the actual penalties and fines and settlements, estimated at $125 billion and largely tax-deductible to boot, doesn’t that tell you the whole story?

JPMorgan can deduct big chunk of $13 billion deal

The majority of the $13 billion settlement JPMorgan struck with the government Tuesday is likely to be tax deductible, reducing the bank’s financial hit. Here’s why: Many of the costs associated with corporate legal cases are treated as deductible under the tax code, in much the same way that a company’s wages or equipment expenses are.

That means JPMorgan will be able to reduce its tax bill because of many of the settlement payments that it must make. “From 1913, our tax laws have permitted companies to deduct their ‘ordinary and necessary’ expenses, which include compensation and restitution payments,” said Steve Rosenthal, a lawyer specializing in financial institution taxation and a visiting fellow at the Tax Policy Center.

But not all types of settlement payments are deductible. For instance, companies are prohibited from deducting fines and penalties payable to the federal government. “In 1969, Congress decided that allowing companies to deduct fines and similar penalties frustrated public policy, so it disallowed deductions for these payments — and, separately, disallowed deductions for antitrust damages, illegal bribes, and kickbacks,” Rosenthal said.

The U.S. Department of Justice, which negotiated the deal with JPMorgan, said the bank will pay $2 billion as a “civil penalty” to settle certain legal claims. And it’s JPMorgan’s understanding that the $2 billion is not deductible, the bank’s chief financial officer said on an analyst call Tuesday.

It wasn’t immediately clear how much of the rest of the $13 billion settlement, if any, may be considered non-deductible as well. But here’s the general bottom line: The compensation or restitution portions of a settlement like the one struck by JPMorgan may be deducted, but the penalties can’t.

While that may seem like a bright line, settlements are often written in a way that can leave a lot open to interpretation. In some deals, for instance, a penalty may be characterized in such a way that the company could argue that it should be deductible.

And the guys and dolls on Capitol Hill of course put in a token appearance, but in (sad) reality they have no more power left than the Queen of England does.

Congressman Peter Welch (D-VT) sent a letter to Jamie Dimon:

It was the taxpayer who initially funded the bailout of Wall Street. It was the taxpayer who continues to endure the consequences of the worst recession since the Great Depression. The taxpayer should not, therefore, be required to contribute a nickel towards the fines imposed for conduct that got America into this mess in the first place.

What, that’s supposed to make Dimon see the errors of his ways? Bring him to tears? Report to the nearest police station? No, this is simply Welch illustrating the demise of the American democracy in two simple sentences.

The JPMorgan settlement, and the shenanigans that surround it, is not an isolated case. It perfectly fits an established pattern. Remember Libor? Here’s the Wall Street Journal’s interpretation of events, with some great graphs. And before we go any further, why not ask yourself how it’s possible that this long term and at times hefty manipulation of an instrument to which according to the WSJ, $800 trillion in securities and loans are linked, results in total fines of just $5 billion or so. But that’s not even what I would like to point out here, that’s a story for another day.

The Libor Settlements

Banks across the world face a hefty bill for alleged attempts to manipulate Libor, the London interbank offered rate benchmark, and other interest rate indexes. More than a dozen banks remain under investigation and civil lawsuits are under way. More than $800 trillion in securities and loans are linked to Libor. The charts below show regulators’ principal allegations and settlements agreed to by that particular company.

The WSJ added a number of graphs, which I’ll post in order, with the question if you can spot a common feature in all of them:

If you didn’t see that common feature, that’s alright, it wasn’t the first thing that I thought of either. But it’s there: all these banks pay far more in fines to foreign regulators than to their own. In particular, these European banks pay by far the biggest chunk of their fines to US regulators. But why?

Dutch newspaper NRC asked that same question a few weeks ago, and, focusing on domestic Rabobank, concluded that A) the Dutch central bank (the regulator), which got zero, doesn’t have the legal power to fine more than €60,000 no matter what, while the Dutch justice department, having never fined a bank anything near €96 million, was even sort of embarrassed to do so. A source at the justice department is quoted as saying the “fines culture” in the US is much more developed than in Holland. Also, that Holland doesn’t want to copy/paste the US: “you don’t want two cops”(?!). And finally, that the US simply started its investigation sooner.

Now, I’m not an expert in international banking law, but I do find it curious that a company pays far more in fines to foreign authorities than it does domestically, for having engaged in fraudulent behavior globally. For instance, does this mean Rabobank and RBS can expect fines from all 200-something countries on the planet? I doubt it.

The EU is preparing its own settlements with banks over various Libor and Euribor frauds, but it has already announced Rabobank won’t be fined over a yen Libor case it’s working on. I love the – partial – explanation for that: a large part of Rabobank’s involvement in yen Libor fraud consisted of internal communications between it own traders and benchmark submitters, and that means a charge of conspiracy to commit fraud is not applicable, because under antitrust law you can’t conspire with yourself.

So why do the Dutch let their own bank pay over $1 billion to foreign regulators, while they get less than 10% of that? I tell you, when I finally figured it out, I felt really stupid for not having thought of it before. It’s so simple: what Rabobank pays in fines abroad is tax deductible!! Of course! Now it all makes sense!

And I don’t know what exactly the situation is for RBS and Barclays and UBS, but I do have a hunch. You, the taxpayer, get to pay the fines. The EU will fine US banks a billion here and there in return, just for good measure, and use it to build a swanky office or two in Brussels, and bob’s your now poorer uncle.

There’s a lot more symbolism hidden in JPMorgan’s temporary takeover of Buckingham Palace that you might want to concede. But it getting ever harder to ignore, and you really shouldn’t.

Just to be clear on one thing: for people like Jamie Dimon, it’s all a big game. No matter what his bank is fined, he’s not paying it from his own pocket, the bank pays. It’s merely a matter of sport to try and lower the fine for the bank as much as possible, using billions in bank assets to pay lawyer’s fees.

But even more than that, it’s a way – while everybody else remains blissfully unaware, thinking this can’t possibly be true – to show kings and queens and regulators and justice departments and parliaments and presidents alike who’s really king of the world today.

Home Forums Who’s Really King Of The World Today

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    Library of Congress Dalls motorcade minutes before shooting November 22, 1963 Well, if you thought you’d seen all the madness and absurdity that could
    [See the full post at: Who’s Really King Of The World Today]


    I hope your articles keep showing up at Yves Smith blog.


    A person has got to wear a tin hat to see reality.


    When will the U.S be forced to quit QE? It seems like as currency of last resort that it has a long way to go. Maybe 2 or 3 more years. Ted

    steve from virginia

    Rajiv Sehti, Ken Rogoff and Susan Webber/Yves Smith are all wrong about central banking. Not just a little bit, either: they offer politically-motivated drivel/wishful thinking.

    The Fed is a reserve bank not a depository institution. It’s job is to backstop deposit banks when the market mis-prices bank assets during a money panic. It does so by lending against these assets at par (face price). During a panic, the market discounts assets in ‘unpleasant ways’; the central bank insists that the market is temporarily wrong and backs its opinion with credit.

    The central banks can hold reserves (they do not create reserves). Reserve amounts in excess of currency are for all practical purposes non-existent. They are assets that only appear as bank liabilities in the even of an extraordinary demand for them — shrinking deposit bank balance sheet as during a bank run.

    QE is lending against assets; a) without a repurchase agreement, b) when the asset holders are insolvent rather than during a money panic, and c) when the cause of financial distress is outside the reach of monetary policy; the relentlessly increasing real cost of energy. QE = scraping the bottom of the barrel.

    Sehti & Co.’s claim is as clueless as Susan Bair’s ‘suggestion’ that the Fed lend everyone $10 million. Only those with $10 mil in collateral can borrow from the central bank … anyone with that much unencumbered collateral doesn’t need a loan! People with no money need the loan and nobody will risk lending to them because they cannot service the loan … that is they cannot borrow. (Loans are serviced by refinancing them.)

    Central banks have no capital structure, only balance sheets; there is very little capital and no equity to speak of. Fed capital is <$50bn yet is has a $3+ trillion balance sheet. However, assets and liabilities are equal, there is no leverage against collateral @ the Fed.

    Think of the Fed as a giant pawn shop. It will lend you $500 (billion) but you have to hand over the Rolex watch. No watch, no $500. The Fed cannot lend $500 billion against a watch. It has no underwriting department. It cannot tell of the loan is good or bad. At the same time, if the Fed loaned $500 bn against a watch, all the other banks would show up @ the Fed’s doorway with watches. Long before that point the Fed would cease to be a serious institution => would be a joke, instead.

    If the central bank leverages against its collateral it becomes instantly insolvent … and is so the same as the other insolvent deposit banks … and for the exact same reason. When the central bank becomes a deposit banks there is effectively no lender of last resort => no guarantor of assets => bank run.

    This would be a bank run that could not be stopped by the central bank = it would be a run out of the currency. This run is already underway with all this foolish nonsense in the media about NGDP targeting, Abenomics and from the central banks themselves. This is the reason for the taper talk:

    This is what a run out of dollars looks like, folks.

    BTW: giving depositors incentives to flee is also a bank run, not likely that any bank would do so. Sometimes the things bankers say is simply gibberish.

    Liabilities are impossible to guarantee b/c they are pledged as collateral as soon as they appear on the bank ledger. Any subsequent pledge(s) become … ‘excess claims against underlying real wealth’.

    Insert gratuitous, well-deserved clubbing of Webber here, she’s clueless … I don’t know about the other dude but Rogoff should know better, he’s a paid economist. Next thing you know he will be saying the Fed prints money … oops, he did!

    (Central banks don’t create new money, they cannot.)


    “But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Ben Bernanke

    How many electrons in a keyboard?

    “Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.” Ben Bernanke

    Sufficient injections? No limit?

    “A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.” Ben Bernanke

    Deflation remarkably ended? And all it took was a 40% devaluation? A 300% devaluation might be even more remarkable!

    Still believe deflation is just around the bend?

    Inflation first, then the Crack Up. Then deflation, after the Fed has imploded, along with it’s FRN’s. Cue Steve’s Confederate note link.


    Large multi national corporations are sovereign or at least approaching it. The problem now is governments still claim sovereignty so there is a dust up over which power is sovereign over what. It’s kind of a dual sovereignty system. Corporations have almost achieved sovereignty over money. Not by force but simply by convincing anyone who can achieve political or government backed power that corporate interests are in the interest of the common good. Oddly the only common good that is accepted as being define-able or recognizable comes out of things that allow corporate profits. It’s really all a stunning intellectual achievement. Well if historical trends are an intellectual affair. Maybe a better word is cognitave, as in cognative shift.

    Let’s face it, central government have not always been a benign organizational model over the last 100, 500 or 8000 years. So if the environment allows it I posit that a newer form of human organization based upon corporations will continue to evolve.


    Limited liability entails limited morality.

    John doe

    Insertable bits are definitely not kings of all that may be surveyed but merely what they survey . The keystroke made, the burger flipped but never how life could be lived.

    I was in to Vancouver for an overnight stay, first in several years, last being just before the 2008 episode. It never struck me, till now, just how insertable and part-like people had become under the newly anointed corporate kings and Queens. Watching, from my hotel bedroom downtown, the day starts with a frenetic activity of machine parts reinserting themselves after their period of downtime. Bikes and cars the two main means of reinsertion are for a brief period ubiquitous. As the system reboots these become rarer with merely the odd late, or replacement part passing. Next the greaser parts start moving about 10 am, these are the bits that the machine needs to grease it’s wheels of commerce and are commonly called consumers. At one time they might have been considered to be citizens but that was in the time before global corporatism.

    That was just my impression that morning, but it seems to have stayed and these past few days I have been left increasingly wondering that ‘they’ allow themselves to be used so.
    Myself I am old enough to predate the brave new new corporate world and currently live in a secluded universe that allows the freedom that most under that thrall of amalgamated rule have never known. If the machine were to stop what indeed will all those parts do. Keystrokes and burger flipping are not skills easily transferable to a life outside the machine. When there is no cry of ‘long live’ after the shout goes up that the king is dead, how will those parts function? What will they do when the kingdom and so their horizon explodes?

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