There is an old joke from Israel at the
time of the first Gulf War, after national radio
announced that the chances of any Israeli being
hit by a Scud missile launched by Saddam Hussein
was about the same as the probability of winning
the national lottery. "Oh yeah," deadpanned a
comic, "but they didn't tell us there would be
three draws daily".
Amidst all the hoopla
of the Olympic games, bankers in London will
probably be thinking something similar after the
scandals around Barclays and HSBC (see my previous
articles "Who
put the lie in Libor", Asia Times Online, July
7, 2012, and "Laundry
of your choice", Asia Times Online, July 21,
2012) have now led to a scathing report about
London-based bank Standard Chartered
involving alleged violations
of United States sanctions on Iran. The Department
of Financial Services (DFS) in New York, one of
the alphabet soup of banking regulators in the US,
went so far to declare the bank a "rogue
institution".
This is sensational stuff,
but unfortunately also sensationalist in my
opinion. Firstly, Standard Chartered is a well-run
bank with an excellent top cadre of managers most
of whom have been promoted from within the ranks
of what is essentially an emerging markets bank
with a strong focus on Asia and Africa. In that
respect the bank is very similar (but arguably not
as solid) to the core management principles of
HSBC, another London-based giant.
Secondly, the amounts involved in these
alleged breaches are miniscule: some US$14 million
in remittances that were not fully compliant with
the US rules and "may" have violated sanctions,
according to the bank. The DFS statement of course
claims much larger sums - up to $250 billion
(casting aspersions on the entire gamut of a type
of remittance from the Middle East) - and alleges
other irregularities such as in "know your
customer" policies and (perhaps most damaging)
that the bank wailfully attempted to circumvent US
sanctions.
Thirdly, I personally find it
distasteful that US regulators are able to make
allegations public without having to subject their
suspicions to rigorous court processes. While a
number of such allegations do end up with
convictions, there is also growing evidence that
banks in particular simply choose to settle the
issues with the regulators albeit without
admitting guilt while paying financial penalties
(Goldman Sachs and Citibank are two US-based banks
that certainly appear to have a history of such
settlements).
The problem with such
settlements of course is that we as members of the
public never really know if the settlement was
intended by the banks to repair potential
reputational damage from a long-drawn out court
trial, or was guilt actually involved. More
troubling, once you have one bank or company
agreeing to such a settlement, regulators are
usually incentivized to pursue the same strategy
with other targets even when the body of actual
evidence is quite small and inconclusive.
As an example, the DFS has cited the
outburst of a particular employee of Standard
Chartered from their London office who abused
Americans, and questioned the need for the rest of
the world following US sanctions. This is an
entirely logical point of view for non-Americans
to have and by itself doesn't mean that a "crime"
is being committed against the US. More
importantly, the fact that the DFS played up this
particular juicy titbit appears (to me) to suggest
a strategy to sensationalize a case where actual
evidence on the ground may be sparse.
I
don't know much more about the details of the
case, nor do I wish to speculate on how it may all
turn out for a pretty good bank that seems to find
itself in the cross-hairs of the US regulators.
Doubts about London There are a
number of questions now confronting London's
status as a financial center: firstly, it is clear
that politicians in continental Europe would like
nothing better than destroying the city's
pre-eminent position in financial services. Partly
this effort is so that European politicians could
push through certain anti-market principles such
as the financial transactions tax (the so-called
Tobin tax being promulgated by the French) and a
ban on certain types of financial transactions
such as sovereign credit default swaps that they
believe are centered in London.
There is
of course the deep envy that German regulators
feel about the sheer irrelevance of Frankfurt as a
global financial center, not to mention the deep
resentment felt in France that even banks that
survive due to government bailouts end up having
significant operations, particularly those
involving higher-paying jobs out of London.
Then there is the whole question of how
financial regulators have operated in the UK,
essentially being accused by their colleagues
elsewhere in the world (Switzerland, the US,
Germany, Italy to mention a few) of allowing
roguish behavior from bankers peddling fairly
dangerous financial instruments (collateralized
debt obligations, or CDOs, structured investment
vehicles - SIVs - and whatever else have you) to
unsuspecting investors elsewhere in the world. I
have personally heard a couple of central bankers
echoing those very thoughts about the UK's
Financial Supervisory Authority.
More
recently, US regulators have taken to blaming lax
supervision in London for the travails of JP
Morgan and its multi-billion losses on bets taken
by the chief investment officer.
So, on
paper at least, a number of points can be made
that appear to highlight a systemic collapse of
regulatory oversight in London - at least that's
where the non-UK financial media appear to be
pointing in their summary of the Standard
Chartered case.
This is a tempting
conclusion but also an intellectually lazy one.
Let us take the issue of the CDOs and SIVs
that proliferated out of London but ended up
damaging investors in the US, Germany, Switzerland
and elsewhere. The suggestion behind the train of
thought of course is that the British exported a
financial opium that the rest of the world got
pulled into without realizing the full costs. This
is nonsensical, firstly because UK banks also
suffered from the fallout - Northern Rock, RBS,
Halifax - to name but a few. Even the ones that
survived - Barclays, HSBC - did so mainly because
of their global strength, even as their specific
operations out of London were damaged massively.
More importantly, the investors in SIVs
and CDOs were themselves lazy - by depending
purely on a rating agency assessment of quality
rather than doing their own homework, these
investors simply failed to observe and follow the
core principles of investing. If it hadn't been
CDOs that blew them up, it could well have been
something else.
The discussion around the
role of London in promoting such exotic financial
products also masks the regulatory and supervisory
failures in the US, Germany and Switzerland to
name but a few countries that were damaged. The
central banks of these countries simply failed to
monitor their "wards" and allowed reckless
gambling on financial instruments that was
eventually to fell many hundreds of thousand jobs.
Similarly, on the JP Morgan case it is
clear that US regulators had nothing but praise
for the London-based chief investment officer when
they were making outsize profits (over 15% of the
bank's total profits in some quarters) - indeed
the sheer size of such profits should have invited
intense scrutiny but did not because US regulators
were and still are in awe of the bank and its
senior management.
The case against London
is weak. That doesn't of course mean that it won't
succeed - if anything, I would say that chances of
a knee jerk reaction from UK regulators to protect
their global reputation may be quite high, with
the resulting regulatory over-reach helping to
destroy the city's financial services business
rather effectively.
Status of the US
dollar The decline of London though may
actually end up hurting the US and particularly
the position of the US dollar as the global
currency of choice.
There are a number of
structural and geopolitical reasons for the dollar
to lose its position, not the least of which is
the country's yawning budget deficit and its lost
wars in Iraq and Afghanistan. The effect of the
George W Bush / Dick Cheney "War on Terror" is
such that Muslims around the world feel rather
inclined to avoid the US currency entirely. Poor
Muslims may prefer the US dollar to their own
currencies controlled by tottering dotards;
however, there is enough evidence that rich
Muslims have simply diversified from US dollar
bank accounts into British pound and euro accounts
not to mention physical gold.
Among
exporters of oil, the dichotomy is increasing:
Russia, Iran and Venezuela all prefer to avoid oil
payments in US dollars entirely; getting paid in
Chinese yuan through bilateral currency swaps for
example. As other countries such as Libya and Iraq
re-emerge as oil exporters, it is quite possible
that the influence of Islamists would help to
initiate similar anti-US dollar policies.
A second set of reasons for the decline of
the US dollar is the diminishing influence,
globally, of US financial institutions. A number
of household institutions - Lehman Brothers, Bear
Stearns, Citibank, Wachovia, Merrill Lynch - all
have fallen by the wayside while amongst the
survivors such as Bank of America and Wells Fargo
there is a clear tendency to go "back to basics",
ie the core US business, while eschewing their
non-US presence. A number of financially strong
institutions such as Morgan Stanley and Goldman
Sachs no longer have the same access to global
deals (and dealmakers) as in the days before the
crisis.
As a financial center, London
actually has been a gateway for a huge number of
transactions that pump capital into the US
economy. Bond, currency and rate markets
essentially operate out of London - hence the
recent fracas about the London Interbank Offered
Rate, or Libor - while key segments of global
financial services including insurance and hedge
funds are based in the city. Reduce the role of
London and it is very likely that the worst
affected will be US financial markets as a number
of market participants who are shut out of the
market end up trading in other currencies such as
the pound or euro, far from the prying eyes of US
regulators.
A large number of Chinese,
Russian and Middle Eastern banks operate out of
London and evidence suggests that a large portion
of this business ends up touching the US markets
either through trade finance or capital transfers
to US companies. Shut down their London operations
and those banks will simply start using currencies
other than the US dollar; they will simply not
risk moving those businesses directly under the
nose of US regulators.
Meanwhile the US
stock market is itself in bubble territory, with
underlying economic weakness being masked by
one-off gains in profits and remittances that have
helped to flatter results. Weakness in Asia and
Europe has not been fully factored into US
earnings; I therefore expect a significant
downturn in equity valuations over the next six
months or so.
Political rhetoric in the US
isn't helping matters either, as the upcoming
presidential election appears to cast further
aspersions on US attitudes towards China. Already,
there is clear evidence that China has been
selling its US dollar furiously; any move towards
trade wars (candidate Mitt Romney promises to
label China a "currency manipulator" on the first
day of his Presidency) only makes matters worse
for the US dollar.
I wrote on the subject
a long time ago (see "Dead
Dollar Sketch", Asia Times Online, March 4,
2008). In the intervening years, the decline of
the euro has helped to increase global acceptance
of the US dollar as the next easy choice. History
reminds us though that, time and again, the lack
of alternatives is never a sufficient reason for
the status quo to remain intact.
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