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A bank too big to jail; The BIS says that Yellen and Obama are wrong.

Ruminations, July 6, 2014

A bank too big to jail
Although legally a corporation may have some of the same rights as citizens (e.g., freedom of speech), it does not have the right to vote or hold office nor, lamentably, can it be subject to capital punishment.

Of course a corporate board of directors or key officers should not be executed, but perhaps we should in some cases consider ending a corporation’s right to exist. It might serve to deter immoral behavior by some of corporations.

Consider the Banque Nationale de Paris-Paribas (BNP Paribas). Last week BNP Paribas agreed to pay a $9 billion fine to the United States for willfully violating sanctions that all banks operating in the U.S. must follow. Now $9 billion sounds like a lot of money to you and me but to BNP Paribas it’s table-wine money and represents something less than 5 percent of the more than $190 billion in transactions that the bank illegally handled (the fine will not require that BNP Paribas increase their capital reserve at all). The bank’s delays and obfuscations made it impossible to file any charges against individuals.

It was clear to all European banks that if they wanted to do business in the U.S. (and they did) that they would have to apply financial sanctions to Iran (who is committed to destroying Israel, sponsors terrorism and is acquiring nuclear weapons), Sudan (who has committed genocide) and Cuba (who sponsors terrorism, has confiscated American property and disallows human rights). In admitting to the violation, the BNP Paribas said that they knew nothing of the violations of the law and blamed a rogue operation by a few bonehead employees in the Swiss office. The Wall Street Journal quoted a senior director at BNP Paribas as saying that this excuse raised a paradox: “They claim they knew nothing but then who was running the bank?”

Clearly the sanction violation was company policy. The bank employs a force of 1,000 independent employees in its office of the inspector general. It is their job to ferret out any illegal behavior. They warned senior management of the illegality and immorality of these transactions. An internal email said, in part, “this practice means, effectively that we are circumventing the U.S. embargo on transactions in [U.S. dollars] by Sudan.” Can evidence of criminal behavior any clearer? If we need any further amplification, it is provided by Attorney General Eric Holder: “BNP Paribas went to really elaborate lengths to conceal prohibited transactions, cover its tracks and deceive U.S. authorities. These actions represent a serious breach of U.S. law.”

BNP Paribas created a network of satellite banks and transferred money between them without ever naming the blacklisted client but it often added instructions not to tell anyone in New York to avoid disclosure, according to New York’s Department of Financial Services, “to any potential investigatory authorities.”

Well sure, BNP Paribus violations are serious, but shouldn’t we give them a second chance? This was their second chance!

In 1996, Iraq was under sanctions, but activists were concerned that food and medical supplies were in short supply. Under the auspices of the United Nations, an Oil For Food (OFF) program was initiated whereby Saddam Hussein’s Iraq would sell oil and receive vouchers that could be traded for food and medical supplies (other monies would pay for reparations to Kuwait and UN expenses). So far, so good.

UN Secretary General Boutros Boutros-Ghali needed a bank to run the OFF program and, to the surprise of many, he selected BNP Paribas to administer the $64 billion program (for $700 million plus in fees.)

It seems as if BNP Paribas used the OFF project as a way not only to enrich itself and its friends but as a training ground on how to get around U.S. sanctions. It has never made its internal audits public and of the 54 audits of the U.N.’s associated activities, only one has surfaced. (Bear in mind that at the time of the OFF program, BNP Paribas was not operating under U.S. law and therefore not subject to U.S. regulations.)

The U.S. House Committee on International Relations (since renamed Foreign Affairs) found that the bank made payments to unauthorized people recommended by Saddam and made payments without proof of authorization. Kickbacks from commissions went into Saddam’s account.

Current BNP Paribas CEO Jean-Laurent Bonnafe in doing business in the U.S. has at least picked up the proper lingo used when one commits a crime. A week ago, communicating to the 200,000 bank employees, he admitted “mistakes were made” – a wimpy apology that means, in essence, “darn it, we got caught.”

In truth, the United States could have been tougher on BNP Paribas and doubled the fine. But there were those, particularly in Europe, who worried such action could portend another world financial crisis. In other words, BNP is not only too big to jail, it is too big to fail.

On the other hand, there are some corporations that just don’t deserve another chance and, in fact, the new Dodd-Frank Act claims to have provided for a soft dismantling of banks that would not disrupt the entire economy. There would be no more fitting organization on which to apply the corporate capital punishment than BNP Paribas.

Who says that we have too much debt? The Bank for International Settlements, that’s who.
Someone said that the definition of insanity is doing the same thing over and over and hoping for a different result. By that definition, Federal Reserve chief Janet Yellen and President Barack Obama are insane – at least as far as the economy is concerned -- according to the Bank for International Settlements (BIS).

Headquartered in Basel, Switzerland, its mission “is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.” Originally founded in 1930 to aid in German reparations from World War I, the Bretton Woods 1944 monetary conference decided that the BIS would be “liquidated at the earliest possible moment” – obviously, 70 years later, that moment has still not arrived.

In its annual report issued last week, the BIS states that for the world economy “To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective ... The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.”

And yet, Yellen continues the policy of printing money (albeit at a slower rate than did her predecessor Ben Bernanke) and Obama continues his policies of running up the debt (albeit at a slower rate than he did in the past). Both focus on the Keynesian approach to economic growth (the stimulation of demand) rather than on the supply-side, as recommended by the BIS.

Well, what does all this mean and how did the BIS come to this conclusion? The Dow Jones Averages this week will open at an all-time high above 17,000, jobs are up and home prices are rising as lenders begin to again reduce loan requirements. Does BIS know what it is talking about?

Unfortunately they do. Claudio Borio, head of the BIS of the Monetary and Economic Department, says, “Financial markets are euphoric, in the grip of an aggressive search for yield.” That means that since central banks have artificially held interest rates down in the hopes of spurring economic development, investors have put their money in places where returns are higher, in speculatives such as stock markets, real estate and commodities. As a result, Borio says, “…investment in the real economy remains weak.” That’s not good. “Instead of adding to productive capacity,” the BIS report adds, “large firms prefer to buy back shares or engage in mergers and acquisitions.”

The BIS annual report goes on to state, “Some asset valuations showed signs of decoupling from fundamentals, and volatility in many asset classes approached historical lows,” One could interpret that to be that we are creating more economic bubbles, which have a nasty habit of bursting.

But, we can get out of these economic doldrums, can’t we? We’ve done it before and the Fed has made more money available for debt through its quantitative easing program – about $3 trillion – and Obama borrowed money to spend on government programs – cumulatively, about $17.6 trillion. Isn’t that good? The BIS says that “Good policy is less a question of seeking to pump up growth at all costs than of removing the obstacles that hold it back.” Well, what’s holding it back?

Debt holds us back. According to the BIS, we – and others like the European Zone Countries that use the euro – “could find themselves in a debt trap: seeking to stimulate the economy through low interest rates encourages the taking-on of even more debt, ultimately adding to the problem it is meant to solve.”

Will Yellen and Obama do an about face? Will they admit that their activities haven’t worked and it is now time to try something new and hard? It’s not likely. Remember that, in spite of all current recent history, in spite of the 1970s, these folks believe in the mystique of Keynesian economics more than did John Maynard Keynes. They believe that through the mechanism of creating demand or cash to banks, the economy will grow and jobs will be created and that debt is no obstacle.

Maybe they’re right. And that would be good. But, after watching them do the same thing year after year and hoping for different results, they’re probably wrong. And that’s bad.

Quote without comment
BIS General Manager Jaime Caruana speaking at the annual meeting, June 29, 2014: “It is hard to see how additional debt-driven demand can help… Ever-rising public debt cannot shore up confidence. Nor can a prolonged extension of ultra-low interest rates. Low rates can certainly increase risk-taking, but it is not evident that this will turn into productive investment... As debt increases, the ability of borrowers to repay becomes progressively more sensitive to drops in income and to interest rate rises. Thus, higher debt translates into greater financial fragility and financial cycles that may become increasingly disruptive.”