Archive for May, 2015

A breakthrough got Tsipras – but for how long?

May 26, 2015

Greece-Debt_medium

Greek Prime minister Alexis Tsipras got Syriza’s approval to reach a bailout deal with the country’s creditors. As the Financial Times reports, he managed to overcome the objections of his leftist party’s most extreme fringe.

Government officials in Greece are saying they hope to reach an agreement by the end of the week. But the two sides are still far apart on issues Mr Tsipras calls “red lines we cannot cross”, including pension reforms and increases in value-added tax, according to several people with knowledge of the negotiations.

Pension reform, labour deregulation and the ever-incendiary topic of the primary surplus are on the table. Tsipras’s anti-austerity administration has argued that its creditors’ demands for a budget surplus higher than 1.5 per cemt will exacerbate the country’s economic death spiral. The IMF, wants Greece to achieve a 3 per cent budget surplus as a minimum requirement before releasing bailout funds. And therein lies the problem.

Nikos Voutsis, the tough-talking interior minister, told a private television channel at the weekend that without a deal, Greece would not be able to pay pensions and public-sector wages at the end of May while also meeting its IMF loan obligations. He claimed a default was legitimate because Greece was being blackmailed by its creditors.

So after four months of fruitless negotiations, both sides are waiting for the other to blink. And for Greece, the stakes are high as it teeters on the edge of insolvency.

But then, as the New York Times reports, Greece is already operating as a bankrupt state with universities, hospitals and municipalities struggling to provide basic services, and the country’s underfunded security apparatus losing its battle against an influx of illegal immigrants.

Forex rigging scandal: now for the lawsuits

May 23, 2015

A wooden judge gavel and soundboard isolated on white background in perspective

Yesterday I did a blog asking why none of the bankers involved in the recent forex rigging scandal had gone to jail.

It’s only a matter of time until the law catches up with them. There will have to be class actions. Currency trading is a vast business, with $500 billion exchanged daily in the dollar-euro market. The number of people affected by the manipulation is huge, not to mention the institutions.

The Bank of New York Mellon is already paying $180 million to settle a foreign exchange-related class action lawsuit, resolving almost all of its currently pending forex-related actions and Citigroup is paying $394 million to settle a lawsuit from investors who have accused the bank of manipulating foreign-exchange rates, the parties in the case announced.

British law firms are now warning that it would be “surprising” if FTSE 100 firms have not looked into the merits of potential claims against the banks over this latest scandal.

They’re saying the banks should brace themselves for claims, particularly from pension funds and other money managers that have suffered losses on foreign exchange trades as a result of market manipulation.

And you can bet American companies would be planning the same.

Lawyers would be rubbing their hands in anticipation of the barrage of civil lawsuits. And the fact that four banks — CitigroupJPMorgan Chase,Barclays and Royal Bank of Scotland — pleaded guilty to conspiring to fix prices and rig bids all points to liability. That’s money for lawyers. Bad luck for investors.

Why aren’t any bankers in jail?

May 22, 2015

prison

Earlier this week, we saw how five banks were fined $5.7 billion for cheating the public and rigging the market.

The banks admitted to the crime, they paid $5 billion and no-one went to jail. People and institutions lost a fortune but the bankers got off scot-free. The question is why?

Rolling Stone journalist Matt Taibbi in this interview says it’s quite simple: governments don’t want to take on the banks.

“By and large, the general problem is more unwillingness to enforce existing laws,’’ Taibbi said. “And it wasn’t so much an absence of new regulations that was the problem in 2008. It was more a failure of will on the part of the government. We had laws on the books that were perfectly sufficient in the late ’80s and early ’90s, when we, you know, conducted over 1,800 prosecutions and put 800 people in jail after the S&L crisis. We can do the same thing now, if we want to, with this or with robo signing or with subprime mortgage fraud or any of another dozen other scandals, and we just haven’t done it. And that—I think that’s the main problem, and it’s a failure of will.”

Matt Levine in Bloomberg says the banks will just keep doing it because they can’t admit they did anything wrong.  As they explain to their shareholders, these weren’t crimes, they were practices. They say it’s unfair to be punished retroactively for doing things that everyone thought were fine.

“The Justice Department doesn’t like these practices, the banks like them fine, and they’ve agreed to disagree,’’ said Levine .”These practices have been singled out, in the context of criminal plea agreements (a bad context!), as things that happened. But not quite as crimes. And the banks are careful to make clear: They’re going to keep happening.”

And as the Financial Times says, when you fine the banks, it’s the shareholders who suffer.

Or as Elizabeth Warren puts it, it’s business as usual and it stinks.

“The big banks have been caught red-handed conspiring to manipulate financial markets, and several have even admitted in court that they’re felons — but not a single trader is being held individually accountable, and regulators are stumbling over themselves to exempt the banks from the legally required consequences of their criminal behavior,” Warren said. “That’s not accountability for Wall Street.”

Rising income inequality hinders economic growth

May 21, 2015

unequal

The Organisation for Economic Co-operation and Development has pointed to growing inequality as a drag on global economic growth.

The Wall Street Journal reports that the OECD has found that the growth of “nonstandard” employment and a sharp reduction in the proportion of workers in the middle of the skills and incomes range has created a more unequal world. As a result, it’s damaging economic growth.

Add to that research from the Institute for Policy Studies in the US which found that $28.5 billion in bonuses doled out to Wall Street employees is double the annual pay for all 1,007,000 Americans who work full-time at the minimum wage of $7.25 per hour.

The OECD report, as reported here, found that an increase in income inequality between 1985 and 2005 knocked 4.7 percentage points off cumulative growth between 1990 and 2010. That was on average across a range of its 34 member countries.

The OECD report In It Together: Why Less Inequality benefits all tells us that the richest 10 per cent of the OECD eans 9.6 times the income of the poorest 10 per cent.

UBS slapped with fine for rigging markets

May 20, 2015

ubs

UBS has been fined $545 million after pleading guilty for manipulating foreign exchange rates.

Sweden’s biggest lender isn’t being criminally charged – which means no one goes to jail – but the fine includes a $342 million penalty it has to pay to the US Federal Reserve and a $203 million penalty for rigging Libor interbank lending rates.

Attention is now being focused on Barclays, J.P. Morgan Chase & Co., Citigroup. and Royal Bank of Scotland who are all expected to enter guilty pleas.

Several traders are also under criminal investigation by the US Department of Justice and the UK’s Serious Fraud Office although no one has been charged.

The Libor interest rate benchmarks are used for trillions of dollars worth of loans around the world. Tiny shifts in the rate, compiled from daily polls of bankers, could make dealers in complex products very rich.

The question is whether a fine is enough. These banks were gaming the system. As The Guardian noted three years ago, these fines seem almost like the costs of doing business – irksome, sure, but a punt worth making.

“It is surely time to talk about depriving major offenders of their licences to do some kinds of market activity. “

China’s impact on the coal industry

May 19, 2015

coal

China has dramatically cut back on its coal use bringing carbon dioxide emissions down with it. And that will have an impact on the world’s coal industry. It’s a message to investors: stay away from coal.

Last year China placed an ­absolute cap on its coal use for the first time ensuring annual consumption growth will not exceed 1.5 per cent over the next seven years. That followed moves by Beijing to impose a tariff on imports while also raising quality standards.

The Independent reports that China’s reduction in coal use this year equalled the UK’s total emissions for the same period.

Analysis by Greenpeace has found that coal consumption in the world’s second largest economy fell by almost 8 per cent and CO2 emissions by around 5 per cent in the first four months of the year, compared with the same period in 2014.

Naturally, this will have an impact on coal prices around the world. Coal demand in China has peaked,” Laban Yu, a Hong Kong-based analyst at Jefferies told Bloomberg. “It went down last year, it’s probably going down even more this year. Coal prices will never recover, ever.”

That’s why it’s a bad time to invest in coal mining companies. And it might also tell us that plans to build Australia’s biggest coal mine, the $16.5 billion Carmichael mine and Abbot Point port expansion, hatched by India’s Adani Group, just as coal prices have collapsed is madness.

Tom Sanzillo , director of finance at the Institute for Energy Economics and Financial Analysis, told The Guardian
that the plans do not add up. “The combination of the expense of the development – a mine, a railway and a port – and a weakening of the coal price around the world combine to make this project financially unviable.”

Time is running out for Greece

May 18, 2015

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The Greek endgame is nigh. Bloomberg reports that Greek banks are running short of collateral to keep afloat. Desperate to stay in business, they are using the collateral parked at the Greek central bank. In other words, they are tapping more and more emergency liquidity every week. And as Bloomberg points, they could only do that for another three weeks.

Greece is cornered, The IMF and ECB refuse to relent. Greek Prime Minister Alexis Tsipras is running out of options.

The newspaper Ekathimerini reported on Sunday that he had sent a letter to IMF managing director Christine Lagarde on May 8 telling her that Greece would not be able to make its May 12 IMF payment. He had also sent the letter to the EU’s Jean-Claude Juncker and the Mario Draghi of the ECB.,

Peter Spiegel at the Financial Times says IMF board members are raising the possibility of presenting a “take it or leave it proposal” to Greece. The IMF and ECB have form on this strategy. It was similar to what happened when the Cypriot government was presented with a severe bailout plan and told it must agree or lose ECB support for its failing banking sector.

Wolfgang Schäuble, Germany’s finance minister, is pushing for a Greek referendum which would see Mr Tsipras taking the bailout ultimatum to a nationwide vote for approval.

With the two sides at loggerheads on the key issues, all signs are pointing to a Greek default.