This week has opened with what has become a familiar drum beat and bass line. The banks are in trouble again. Or rather what has now been over a decade of trouble has just got worse.
HONG KONG (Reuters) – HSBC HSBA.L and Standard Chartered STAN.L Hong Kong shares dropped on Monday after media reports that they and other banks moved large sums of allegedly illicit funds over nearly two decades despite red flags about the origins of the money.
So this started before the wave of post credit crunch bank bailouts although those two banks were only implicitly rather then explicitly supported. The driver here is explained by Reuters below.
BuzzFeed and other media articles were based on leaked suspicious activity reports (SARs) filed by banks and other financial firms with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCen).
The revelations underscore challenges for regulatory and financial institutions trying to stop the flow of dirty money despite billions of dollars of investments and penalties imposed on banks in the past decade.
There are all sorts of issues here as we note that the supposedly reformed system has failed again.The reason for the article relating to Hong Kong is that is where the financial week has mainly started with Japan being closed for Respect the Elders day.
The share price impact is as follows.
HSBC shares in Hong Kong fell as much as 4.4% to HK$29.60 on Monday, their lowest level since May 1995. The stock has now nearly halved since the start of the year.
StanChart dropped as much as 3.8% to HK$35.80, the lowest since May 25 this year. The Hang Seng Index .HSI was down nearly 1%.
The two banks noted here have followed a typical path for banks as it was only a few short years ago that there emphasis on China and the Far East was presented as a triumph. Now HSBC has a share price at its lowest for 25 years.
Who are the main players?
According to the ICJJ report it is again a familiar list.
The records show that five global banks — JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon — kept profiting from powerful and dangerous players even after U.S. authorities fined these financial institutions for earlier failures to stem flows of dirty money.
Of these one is picked out.
JPMorgan, the largest bank based in the United States, moved money for people and companies tied to the massive looting of public funds in Malaysia, Venezuela and Ukraine, the leaked documents reveal.
However in terms of scale we have a case of hello darkness my old friend.
In all, an ICIJ analysis found, the documents identify more than $2 trillion in transactions between 1999 and 2017 that were flagged by financial institutions’ internal compliance officers as possible money laundering or other criminal activity — including $514 billion at JPMorgan and $1.3 trillion at Deutsche Bank.
Market Impact
You may not be surprised to learn that my old employer DB is down 6% this morning at 7.19 Euros. This compares to over 16 Euros at various points in the “Euro Boom” of 2017. It also rallied to above 9 Euros in early June presumably buoyed by the subsidy provided by the even better than free money provided by the ECB, For newer readers banks can go to it and borrow money at -1%. This is presently the lowest official interest-rate in the world.
If we switch to the Italian banks there are not many to look at as the falls have been so large that prices now mean little. If we go back to 2015 there were more than a few presenting Unicredit as a triumph of what was then being called Renzinomics. Anyway like so often happens with an Italian bank the around 30 Euros of late 2015 has been replaced by 7.23 Euros now sown 4% or so today.
If we switch to my home country the UK I noted this from @RonnieChopra1
UK economic bellwether, Lloyds Bank shares at 24p – lowest level since 2009.
I am not so sure they are a bell weather anymore but none the less. Barclays are down 6% at 91.5 pence as is Nat West.So the pain is widespread.
Bank of England
The official view is below.
Banks’ capital and liquidity positions have remained resilient through the shock so far.
It is based on this.
The global banking system entered into this shock in a much stronger position than the global financial crisis. Major UK banks and building societies (‘banks’), in aggregate had over three times their pre-crisis common equity Tier 1 (CET1) capital ratios at end-2019.
That is good except as we have been noting from the share prices it is not enough and the ever lower share prices limit the ability of the banks to raise new equity capital. Or of you prefer it becomes ever more expensive for existing shareholders in terms of dilution or weakening of their position.
Also whoever was responsible for this last week is probably hiding down in the darkest recesses of the Bank of England cellar where even the tea trolley fears to go.
Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative
Bank Rate could be implemented effectively,
As it put the UK banks on the back foot before the weekend just in time for the ICIJ news to break.
Neel Kashkari
The President of the Minneapolis Federal Reserve made an interesting speech on this subject last week. He thinks they need more capital.
This analysis shows clearly that large banks should fund themselves with equity of at least 24 percent of risk-weighted assets—up from around 13 percent today. That would maximize the benefit to society and protect taxpayers because, at those levels, banks could cover their own losses.
Also he points out that the US banking sector has grown.
But the 10 largest bank holding companies in America are around 45 percent larger than they were going into 2008, having grown from roughly $9 trillion to nearly $13 trillion in assets.2
But there has been something very worrying going on.
In fact, combined, the eight largest global banks headquartered in the United States bought back more than $110 billion of stock in 2019 alone.
ECB
It is hinting at this today.
They said important questions for the review would be to consider how long the Pandemic Emergency Purchase Programme should continue and whether some of its extra flexibility should be transferred to the ECB’s longer running asset-purchase schemes.
More support for the banks?
Comment
If we step back and consider the situation we are facing what looks ever more a fatal mistake bu the establishment. What was supposed to rescue the banks has ended up crippling their ability to make any money. As @Goldmarketgirl put it earlier.
Banks are screaming they need higher rates on longer term loans. Their business models are based on difference between long and short term debt.
For a while this was hidden by the capital gains on their bond portfolio’s especially in Italy where the banks hold a lot of sovereign. The issue that they could never get out in that size has been ended by the purchases of the ECB. But these are one-off and once you have taken them you are back with a struggling business model. That is why the share prices are so poor.
We were promised that in return for the bailouts and all the various subsidies the banks would recover and support the economy. Does anybody still believe that?
As to money laundering this is an ongoing issue that never goes away. There was a large swerve here though because the authorities put the burden of proof on the banks partly because it shifted it from them and partly because bodies such as the Serious Fraud Office are so useless. Perhaps they need the sort of emergency pack suggested by my local council over the weekend.
https://twitter.com/wandbc/status/1307645934021554177
Podcast
https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast96
Notayesmanseconomics's Blog 
hello shaun,
bug out bags, as our american cousins call them , have been around for a long time.
They have the advantage of guns and ammo though !
But mostly they have some country side to run to ( perhaps not New York ! )
Forbin
Hi Forbin
I dread to think what lots of guns and ammo would do in Battersea! As to bugging out well there is the park but apart from that there is this.
What a surprise more large scale money laundering through the major banks, and now we will have to support them otherwise they will go bust.
No doubt none of the senior bank staff responsible will be held to account, just big fines levied, paid for indirectly by customers and shareholders.
Ministers will show their disapproval, by accepting a job with them, when they retire as MPs.
Define ‘dirty money’ and the need to prove where your money came from. I’ve always said, pretty much anyone that sits in the House of Lords must surely fail. Just where did those land owning Lords get their money if it wasn’t from violent theft in the first place? So, is there a time limit or something that is convenient for those who now sit at the top of the pile?
Hi Hotairmail
The rules are invariably set for the benefit of the rulers. I recall my boss in my City broking days telling us that insider trading only became an offence when those outside the ruling circle began to do it successfully.
The relentless decline continues and the previous, very costly attempts to put lipstick on the pigs is slowly unraveling, the truth is coming out. Now the UK banks are little more than penny stocks.This money laundering story is just that, the media always have to have story to attach to explain events such as this and usually it is not the real underlying reason.
The continuing policy of central banks to impose ever greater negative rates is weakening them to the point of collapse, a bit like the medieval quacks who thought using leeches to relieve the sick and dying of further blood would aid their recovery. But the central banks have a difficult choice to make – allow long term rates to rise and save the precious and in the process blow up the housing,bond and stockmarket bubbles they have created or continue with NIRP and see the banks and the economies they operate in collapse as well, they have more or less intimated they are going to manage the yield curve so probably giving the death sentence to the precious in the process as I alluded to on here recently.
Will they go through with it, or will there be a last minute pardon from the “governor”?
Old Mr Red Suit should be getting a bit nervous about his BTL portfolio now, especially since the second stage of the scamdemic is underway to help destroy our economies.
Hi Kevin
The central banks must be getting ever more nervous. Because as you say the banks are getting ever more vulnerable. As The Sweet sang.
“Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way”
Shaun, surely the time to raise rates is now, while other central banks are printing like mad. It’ll be a lot harder if the Fed and ECB are putting up their rates at the same time.
I noticed this gem from the money laundering reports:
UK is called a “higher risk jurisdiction” and compared to Cyprus, by the intelligence division of FinCEN. That’s because of the number of UK registered companies that appear in the SARs.
Over 3,000 UK companies are named in the FinCEN files – more than any other country.
– so not just the banks…
Cyprus runs red hot with Russian money – provided in return for citizenship to move freely around the EU. I always remember the day the Turks invaded Cyprus. That day, I was going with my mother and sister to visit my great-aunt (whose house I have mentioned a few times). We got off the Tube at Fulham Broadway and got a bus a short distance to Wandsworth Bridge Road. As we got off the Routemaster about halfway down, there was a shout from the conductor. “You’ve left this lot” and he threw a whole pile of thick leaflets out of the back. They weren’t ours, so we crossed the road and disappeared.
No great surprise to see that despite all the regulatory training that banks and organisations like the Chartered Institute for Securities &Investments, all this laundering is going on. Much like the failures around Leeson, while the profits and bonuses were coming in, nobody cared. Even the compliance staff are too scattered for anyone to see the whole picture and even then, if some junior went to a senior about it, they would just be told to keep quiet. All this is well portrayed in films like Rogue Trader, The Big Short and Margin Call (Irons is a nob, but he is great in this).
There is another problem I saw quite recently. When I trained as a lawyer, we were told that if we ever wanted to hide something in a letter, put it on the second page as most people don’t bother to read it. Recently, I was involved in a case, where a large pension pot had been lifted. On reviewing the notes by contact centre operators and processing staff, it was instantly obvious to me how it was done. The red flag was there – yet because everyone just added their own note, no-one looked back to see what was just a few lines below.
There has always been cognitive dissonance in these situations, but computers and fad management have made it worse. I was thinking of applying to one large institution up here, when I discovered they had fallen for this “unconscious bias” nonsense. It is apparently a USD 8bn industry, so guess who has a vested interest (yes, that again) in keeping it going. Out of random curiosity, I had a look at HSBC and this came up from 2013. https://www.about.hsbc.co.uk/-/media/uk/en/news-and-media/rbwm/130418-hsbc-times-top-50-employers Looks like they had their eye well off the ball, but liked getting a pat on the head from the Thought Police. Having been fired by Barclays for speaking up, their travails come as no surprise to me either (£2.65 I seem to remember as the share price we were told to invest at)
It was the same with the PPI cases I saw: badly paid staff doctoring loan applications to get a bonus and using PPI to get fees, because margins were already under pressure in 2001 in the aftermath of the AQ attack and then followed the next year by the dot.bomb crash. As Shaun also notes in his Soundcloud video, low rates have crushed the ability of the banks to make money by the traditional margin between borrowing and lending. It is a key reason for Lloyds to dump Standard Life as their fund managers and go on an active management joint venture with Schroeder’s, while Barclays have been building up their investment banking arm too. Not that it is working well at the moment!
I have seen a lot of criticism of buybacks. My MBA course noted that it showed a lack of imagination in where to invest (and Shaun notes that low rates have not encouraged investment either) for future gains. By buying back, senior management has just either enriched themselves from their own holdings or as in the case of Barclays p155ed the profits away when the share value fell. It might have been an idea to share the profits with the staff to avoid the slack, careless attitude that has led to the problems turning up now.
At the heart of this then lies – once again – the low rate policy. But the spirit of Steve Priest still moves among us. I am now convinced that I will be carried out feet first before this situation changes.
Hi Dave
For all the protestations of change these sort of scandals are remarkably familiar. Frankly I would not be surprised if it just carried on as normal tomorrow. The ECB is carrying on as normal today anyway.
“The ESCB report proposes to reduce the reporting burden for banks in the fields of statistical, resolution and prudential reporting without losing the information content that is indispensable to monetary policy, resolution and supervisory tasks”
https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200921~9a495de06b.en.html
“Honestly, 95% of the buyback criticisms are misunderstandings of corporate finance. The most common lazy generalization is that firms borrow to buyback stock so they can “manipulate” their share prices higher and enrich executives. This might be true in some cases, but the truth is that corporate equity is the very most expensive thing on the liability side of a firm’s balance sheet. If you believe that firms should be more prudent then you should be a strong advocate of buybacks.
Firms can raise capital by issuing debt or equity. While most people tend to think debt is expensive (because they’re personally familiar with it) the reality is that equity is MUCH more expensive to issue. Having outside investors is incredibly expensive to the firm as a whole. You not only cede a share of growth to outside investors, but you’re constantly paying everyone dividends. Retiring stock is a very prudent move in the long-term, even more prudent in many cases than paying down debt. But narratives tend to trump reality and the buyback narrative is constantly misconstrued around political narratives and misunderstandings.”
https://www.pragcap.com/fed-truthers-are-wrong-again/?utm_source=dlvr.it&utm_medium=twitter
I followed your link, I welcome your challenge even though I take the distaste angle on buybacks. I believe overly cheap money has enabled buybacks. I don’t disagree with your argument that equity is expensive to service but no one forced these corporations to issue it did they? They could have asked executives and staff to “buyin”.
What I really resent is the cronyism to protect friends of the state. Oversight or lack of it enabled DotCom Boom and GFC, that is a state resp. Now we have a “natural” virus that could not have been forseen… except Fauci and Gates have promised us one s8nce 2017.
I expect exceptional response, I see none.
Hi All,
reported shopping was intense at the weekend. Tomorrow I’ll go an see if any bog roll is left and report back
Forbin
Hi Forbin
There was plenty of stock at Battersea Park Tesco earlier although I confess I went for some food rather than anticipating another lockdown. Some must still be stocked up surely…..