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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Angels and Demons - banks and financial institutions disrobed in Europe

Angels and Demons - banks and financial institutions disrobed in Europe

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sriranga

sriranga
Co-Admin
Are there lessons for Sri Lanka?

By Maheen Senanayake

The Olympics if only for two weeks provides an economically exhausted Europe a moment of distraction. The 27 member states interlocked by a common currency, the Euro has been battling several fundamental issues including the Tiresome Trinity of interest rates, exchange rates and inflation. Furthermore, bankruptcy and non-ethical performance and in some instances criminal negligence has lead to a loss of confidence in the hitherto dogmatically revered financial space/circuit in the western hemisphere.

It all began with Greece. In January 2001, Greece entered the Eurozone, and embraced the zone’s single currency, amidst advice from Wim Duisenberg, the then European Central Bank President, urging her to keep working hard to improve its economy. Duisenberg opined that the euro could in fact suffer from the inclusion of weaker European nations.

Fast forward to November of 2004 and Greece makes the historical admission that its deficit had never been less than 3%, a fact that was only discovered upon closer scrutiny of its budget, a prerequisite to join the EU. Ever since the Greeks have struggled to keep their economy afloat (Please see time line Greece for a chronological record of events). With fears mounting as to whether Greece might be forced to exit the euro, a new France and Italy battle to bring their economies back on track began.

As unemployment in Europe rose to 22 million a couple of weeks ago, the financial world is seeing a new wave of revelations that is doing more harm to an otherwise dogmatically revered financial circuit.

Enter Goldman Sachs

It might be interesting if nothing else to note that Goldman’s boss, Lloyd Blankfein, has been quoted as saying that he is doing "God’s work". However, investigations have revealed his use of aggressive tactics against rivals and customers that included the design of a series of complex derivatives [a derivative instrument is a contract between two parties that specifies conditions especially the dates, resulting values of the underlying variables, and amounts) ] to help a previous Greek government hide its debts from the EU regulator. Then it has also been accused of profiteering from the country’s sovereign debt crisis and in particular for short selling its bonds. The Financial Services Authority had fined Goldman Sachs £20m after the investment bank failed to disclose some vital information to the regulator. Some sections of Wall Street together with the press have now portrayed Goldman Sachs as "a great vampire squid wrapped around the face of humanity"

Mis-selling interest rate swaps & redressing past sales

Early June this year Britain’s four main High Street lenders agreed to compensate small and medium sized businesses to whom interest rate hedging products had been mis-sold according to the Financial Services Authority had found "serious failings" in the way they marketed to some customers. Accordingly, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have all agreed to immediately halt the sale of complex interest rate hedges to smaller businesses and have pledged to compensate potentially thousands of customers who have been hurt by the products that have left some firms with hundreds of thousands and even millions in costs they say they were never warned about. According to the FSA about 28,000 businesses had been sold interest rate hedges following a two-month review of the product that was prompted by an investigation by The Sunday Telegraph and The Daily Telegraph that uncovered widespread evidence of mis-selling by banks. The silver lining however is that the banks will offer redress on previous sales.

Then came the Libor scandal.

Threatening the integrity of the banking industry as a whole, the Royal Bank of Scotland (RBS) and Barclays along with a few influential banks have come under investigation for allegedly fixing of the key Libor bank rate. This has raised huge concerns and consumer confidence has hit an all time low, with most analysts and consumer watchdogs calling for tremendous changes that called for the strengthening of ethical foundation in the industry.

The Libor (London Inter Bank Offered Rate) is the rate at which banks in London lend money to each other. The fraud involves giving a lower reading than the true rate which would give the impression other banks thought it was a better risk to lend to than it was. So when it’s manipulated the rate banks pay to raise money affects how much they charge on loans and mortgages. Thus, an increase in Libor can add hundreds of pounds to households’ annual mortgage repayments or a loan to a small business. Some of the major banks that came under investigation were Bank of America, Citigroup, UBS and JPMorgan Chase.

Barclays was the first bank to be fined £290m ($450m) by the Financial Services Authority and had agreed to pay for lying about the interest rate other banks were charging it for loans. Despite this, Barclays chief executive refusing to quit expressed disappointment but took responsibility.

The scandal has left many in and outside the banking sector doubtful of the integrity of the banking industry. The question posed by many is that if trusted banks such as Barclays and RBS will lie about something as fundamental as Libor to profit on its trades, how will clients trust them with their finances. The entire ethical foundation of the banking industry has become a question mark because of this scandal.

HSBC and the Cartels

Mexican regulators have imposed a fine of $27.5m (£17.7m) on banking giant HSBC for its failure to comply with money-laundering regulations. The fine comes a week after HSBC’s chief compliance officer resigned over allegations that the bank ignored warnings that Mexican drug money was being allowed to pass through the bank. Analysts who claim the fine is the highest ever imposed by Mexican regulators constitutes 51.5% of the 2011 annual profit of HSBC’s Mexican subsidiary. Mexico’s National Banking and Securities Commission (CNBV) said it had imposed the fine against HSBC due to its "non-compliance with anti-money laundering systems and controls". Meanwhile HSBC Mexico issued a statement acknowledging that it failed to report 39 suspicious transactions and had been late in reporting 1,729 others. The US department of justice is conducting a criminal investigation into HSBC’s operations.

VISA and those transaction fees

Visa posted a loss of $1.8 billion for the April-to-June period on an increase in litigation costs. Payments processors Visa and MasterCard, along with a number of major banks, recently settled a longstanding legal battle against stores over card fees. Visa, MasterCard and the banks agreed to pay the retailers $6 billion as part of the settlement. Visa had increased its litigation provision by $4.1 billion, which led the company to post a loss of $1.8 billion, or $2.74 per share, for its fiscal third quarter. Visa however, posted a net incomeof $1.1 billion. Visa makes money by processing card transactions. As the world’s largest processor of debit and credit card payments, its results provide insight into how much consumers are spending. In a sign that people aren’t spending as freely as they used to, the total number of transactions Visa processed worldwide in the quarter rose just 1 percent from last year to 13.1 billion. The slowdown was particularly pronounced in the U.S.

Lessons for Sri Lanka

Whilst such major concerns have not yet reached the Sri Lankan market, a brief perusal of the cases at the Financial Ombudsman’s office will demonstrate clearly that this market is not exempt. Furthermore, the cases above highlight the need for a regulator that is keen to champion the right of the consumers in a fair and just manner. Given the backdrop of the NSB –TFC scandal, the need for a justice system that is the bedrock of the democracy. Furthermore, the Central Bank as the apex body and ultimate regulator cannot afford to lose the confidence of the parties concerned.

For instance certain discrepancies in Central Bank data has been pointed out .Referring to the recent announcement by the Central Bank that apparel exports have fallen every month in spite of the depreciation of the rupee, Member for Parliament Dr. Harsha de Silva has pointed out discrepancies in Central Bank data. Monthly exports amounting to USD 367 million in January had dropped to just USD 278 million by May. He has cited an instance where, although the Central Bank had announced that the export income has exceeded $1,000 million a month in March with apparel exports increasing to $473 million in that month, later on this figure had been revised to $362 million.

Moral obligation

There is very little doubt that answers to these questions must be given if the Central Bank as the apex body is to regain the confidence of those around. Indeed it has a moral obligation to explain such drastic adjustments. Moreover, if anything is to be learnt it is that without realizing the true picture of the economy nothing of significance can be done to rectify it. Principally because the starting point would be fundamentally flawed.

Draft Week starting 30th July 2012
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=58447

http://sharemarket-srilanka.blogspot.co.uk/

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
The saga continues

by Maheen Senanayake

Barely into the first week of the Olympic games and the European economy is bursting at the seams. New hairline fractures are appearing in an otherwise bedrock of financial health. Germany of all the European countries is now gearing up for a recession. With Merkel's re-election campaign due in less than a year, the German economy is feeling the backwash of its neighbours' lapses.

Germany not immune

According to analysts, the German economy which has so far stood strong amidst the Euro zone debt crisis of three years, fears that it could fall into recession in the second half of this year. This prediction was made as Europe's largest economy was hit by a series of increasingly gloomy data releases, showing declines in manufacturing orders, industrial output, imports and exports. Adding to the fear, the economy ministry pointed out that these figures and a sharp drop-off in business sentiment in recent months led to "significant risks". However, despite the slowdown in the economy, there is hope in that Germany's internal demand in the form of private consumption could make up for losses in global consumer pull. However, the challenge is to maintain interest levels, ensure unemployment does not rise beyond control and inflation is manageable.

In this backdrop, the Standard Chartered Bank is in the middle of a 'wire stripping' scandal.

Bedfellows Standard Chartered and Iran


Cited as a British bank, the Standard Chartered Bank schemed with the Iranian government to launder $250 billion from 2001 to 2007 leaving the United States' financial system "vulnerable to terrorists," New York's financial regulator charged Monday.

In a statement released Monday night, Standard Chartered Bank had said it "strongly rejects" and "contests" the New York regulators' portrayal of its transactions with Iranian banks. It said it voluntarily began reviewing the transactions since 2010 with U.S. regulators and claimed the findings did not match the accusations leveled at the bank Monday. Meanwhile, according to public reports, State Financial Services Superintendent Benjamin Lawsky had signed an order that requires London-based Standard Chartered Bank to answer his questions following an investigation into "wire stripping," the practice of removing crucial identifiers in financial transactions.

According to the reports, the bank conspired with its Iranian clients to route nearly 60,000 different U.S. dollar payments through Standard Chartered's New York branch "after first stripping information from wire transfer messages used to identify sanctioned countries, individuals and entities," according to agency's order. The order said the transactions provided the bank with millions of dollars in fees at a time when such trade was restricted. The state agency said the bank's actions "left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes and deprived law enforcement investigators of crucial information used to track all manner of criminal activity." The bank stripped information from the money transfers that is used to identify countries being sanctioned and replaced it with false entries or returned it to Iran for "wire stripping" and resubmission, according to the order.

According to public information the bank operates in 70 markets and handles about $190 billion per day in business for its clients, according to the order.

The Swiss

The United States authorities are holding up resolution of a tax dispute with Switzerland by making new demands, according to Swiss Finance Minister Eveline Widmer-Schlumpf. The minister said Switzerland was looking for a solution that addressed the situation of the 11 Swiss banks under investigation by the US authorities for allegedly aiding tax evasion, as well as other Swiss banks. As such, "a line needed to be drawn under the past".

The Swiss government wants to get US tax investigations against the 11 banks - including Credit Suisse and Julius Bär - dropped in exchange for the payment of fines and the transfer of client names. It is also seeking to shield the remainder of its 300 or so banks from US prosecution.

The US wants Swiss banks to provide information on undeclared funds belonging to American citizens in Swiss banks. A global settlement between the two countries would end ad hoc requests by the US.

It comprises a double-taxation accord signed by the Swiss and US governments in September 2009. It was revised and ratified by the Swiss parliament in March 2012. It was cleared by the US Senate's Foreign Relations Committee in July 2011 but still requires ratification by the US Senate.

Switzerland and the US have been hashing out a new deal on double taxation ever since 2009 when Swiss bank UBS paid $780 million (SFr 757 million) to settle criminal charges. Switzerland also agreed to deliver UBS client data to the US without demanding documentation of suspected tax fraud, thus undermining banking secrecy.

Banking secrecy was enshrined in Swiss law in 1934.

Conclusion

Any fool can see that the Financial and Banking system currently at play is one that was or has never been designed for the greater good. It is therefore no wonder that we are now beginning to see the cracks in that otherwise, stealthy and Goliath industry. Abraham Lincoln, did after all say that one cannot fool all the people all the time.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=58961

Hanoifortune

Hanoifortune
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Between 2013 to 2022 , Euro, EU,US$,USA,democracy,capital market,banks ,media and multinational companies will collapse.The paper money & Gold will lose the value.Then There will be a new world order.

K.Haputantri

K.Haputantri
Co-Admin
It appears that the whole world is manipulated by crooks at every level of governance. Sri Lanka is not an exception. This article gives timely warning to us.

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