A Cypriot Tragedy

Tragedies are usually associated with Greece - a tribute to the richness of its theatre in the 5th Century BC. Over the weekend, you could be forgiven if you changed your tastes to a Cypriot tragedy. For that's exactly what has happened - albeit in the more prosaic world of economics.

 

These are the facts. Cyprus is another Eurozone country in deep trouble. It needed a bailout. So far, nothing unusual. A bailout was duly announced over the weekend. It was the terms of the bailout that sent a jolt reverberating through the world of economics. The EU is bailing them by about €13 bn (chickenfeed by the standards of bailout). But the conditions of the bailout are that all bank depositors would be levied a tax of between 6.75% and 9.9%. That means on Tuesday when banks opened, all depositors would lose that amount instantaneously.

 

The genesis of the problem is, alas, not new. Cyprus is a very small country. In boom times, it went berserk pushing its financial industry, positioning itself as an island finance centre. That's fine, but it just went way over the top. Cypriot banks had made loans to outsiders equivalent to 8 times the country's GDP. Worse still, a lot of those was to Greece its neighbor. When Greece began to go under, Cyprus was given an almighty whack. The bailout was then a question of when, and not if.

 

Another actor muddling the issue is Russia.  Of the € 68 bn bank deposits which are going to get a "haircut" (the tax referred to above) , a full € 21 bn comes from Russian companies. We shall not speculate where from this close affinity of Russia came from - let us just say that the word "money laundering" comes to mind. Now the Russians will instantly lose € 2bn. Enter Vladmir Putin. He is howling against the "$%^&* Germans who are the orchestrators of the bailout.

 

What about Joe Public in Nicosia. Even if you had say € 100 Euros in the bank, tomorrow it is only € 93. If ever there was a recipe for street riots, this is it.

 

And what about nervous bank depositors in other troubled countries - say Spain or Italy. Tomorrow it might be their turn. Only an idiot will keep his money in a bank anymore if you are an European. Take it out IMMEDIATELY. Dig a hole and bury it in your backyard. Keep it under the pillow. But don't deposit it in a bank even if a gun was pointed at your head.

 

What a mess. The world badly needs a new economic order. Fire all economists. Go back to the basics of countries balancing their budgets. Living within their means. Curbing the excesses in the banking and finance industry ruthlessly. It will be a prolonged period of pain. But when the clouds disperse, it will be a saner and fresher world. 

 

This, of course, is a Utopian dream - which leader is going to tell the truth to his voters. And even if he did, which voter is going to accept it. We shall stumble along from one crisis to another.

Out of the mouths of babes ......

Isn't that a brilliant question.  This is a question asked by 7 year old Loulou.

 

This is part of Facebook initiative by the Holland based banking giant ING . Its is part of their recruitment portal called ING Careers and this idea is called Next Generation banking. In it they are asking children to ask simple questions and for prospective employees who wish to join ING to answer them.

 

Here are some of the answers

 

• We need banks to keep money moving and safe
• Banks are also a safe place to put your money and not only that but the bank will even make sure the amount you gave them increases over time by using it in different businesses
• We need banks for your money:
  1. To be safe - Your piggy bank can get lost, stolen or empty.
  2. To grow - Do nothing and see your money grow each year because of interest.
• So banks were a place you could keep your money safe and also get some extra money if you agreed to pay it back soon
• So you see banks are there to help people. They have a lot of helpful ideas to make life easier for everyone
• We need banks because there are two kinds of people, people who has money and want their money to be in a safe place where they could get it anytime they want and people who wants money to make things and sell them in order to make more money.
• To keep it very simple. Banks make our life easy

 

------- And so on and so on.

All perfectly true of course. The problem is that this is no longer what banks mostly do.  If senior bankers read this and reflect, perhaps some blinding truths may strike them.

 

Maybe every industry must do something similar and try and explain their reason for existence to children. They may find themselves squirming and very uncomfortable.

 

As it is said in Psalm  8:2 , "Out of the mouth of babies and sucklings hast thou established strength ......... "


PS : This blogger had to hold his nose and go into Facebook to get the material for this post. He has quickly exited and is somewhat affected even by this short experience. He won't be going anywhere there in a hurry !

The Eighth Deadly Sin

Alongside  wrath, greed, sloth, pride, lust, envy and gluttony - the seven deadly sins - should surely be added "money". For it is now proving to be a deadly sin even in the Vatican.

News came out on Wednesday that all forms of plastic money - ATM cards, credit cards, debit cards, etc have stopped functioning in the Vatican. So if you want to visit the Sistine Chapel, you have to fork out cash for admission - cannot wave your plastic.

This has happened because the Bank of Italy (Italy's Central Bank) has suspended all electronic operations by banks inside the Vatican in exasperation at the Vatican's continued inability to follow anti money laundering and anti terrorist financing regulations. This has been going on for a long time - the Vatican does not meet the anti money laundering requirements that all countries have to meet and has not been able to set this right for years.

Part of the problem is "Ramamrithamisque". Regulations demand all sorts of KYC forms and it is quite likely that the Holy Fathers have not been rigorous enough in filling 74,432 forms - their minds being, hopefully, absorbed with higher matters. Here, my sympathies are with the Vatican.

But the other half of the problem is serious. The Vatican, as indeed many successful religious organisations are, is a huge business enterprise. In this, they must follow laws that seek to curb international crime. But they usually turn a blind eye to where their money comes from , and this is an unpardonable eighth deadly sin.

This problem is not unique to the Vatican alone. Every religious organisation, I dare speculate, would fail the test of anti money laundering. Much of their finances are murky, shady, and accounting rigour, transparency and tightness of control is conspicuous by their absence.  If you stretch the argument, is it right for the Tirupathi temple,to accept donations from every scoundrel who goes and makes an offering of a fraction of his ill gotten wealth as appeasement ?

Religious organisations have to be whiter than white. These days, they are as much business organisations as religious ones, commanding large capital and cash flows. Excuses that they are solely concerned with matters temporal, won't fly. They must meet every test of international law, as all of us are expected to. Failing which they must be blacklisted, as the Bank of Italy has tried to in a small way.

"In God we trust" cannot be an empty slogan.

Even crooks deserve a fair deal

Remember Jérôme Kerviel  ?  OK, very excusable if you have forgotten who he is. He was the rogue trader who almost brought Société Générale ( a reputed French bank) to its knees. This happened in 2008. Kerviel was a trader who punted like crazy in the casino, that is euphemistically called financial markets - he was making gigantic bets that involved European stock index futures. The whole thing unraveled, he was fired, Société Générale tottered and ultimately lost € 4.9 bn.

 

Criminal proceedings were launched against Jérôme Kerviel  and he was sentenced to prison and a fine. He appealed, and, on Friday, lost his appeal. What caught me was the quantum of the fine. He was fined € 4.9 bn, the quantum of the loss that Société Générale incurred.  A fine of € 4.9 bn ???? Kerviel has no money and is unemployed and probably unemployable. How on earth is he expected to pay  € 4.9 bn ?

 

This is outright crazy. The judges have fallen hook line and sinker to Société Générale's assertions that it didn't know what was happening and that Kerviel acted alone. PPPPlease ........ That, to put it mildly, is nonsense.  His bosses must have been cheering loudly as long as he made profits and have thrown the book at him, when the whole thing collapsed.  The bank didn't know ??????? Baloney.

 

Société Générale , and the judge, argue that the massive fine is to prevent him from capitalizing on his story by writing a book (which he has done) or making a movie. That is extreme logic. Every crook tries to make money from his infamy. Jeffrey Archer wrote a whole book about his prison experience and sold God knows how many copies. The fault is not that of the crook - the fault is with those who buy the book or go see the movie. 

 

Kerviel is not your ordinary villain. Sure he broke company rules and did unauthorized trading. But then a few thousand bankers have done the same . He made no money personally - even his bonus wasn't obscene. He was a case of gambling instincts gone completely out of control. Does he deserve a € 4.9 bn fine ?

 

The logic that employees are personally responsible to make good the losses that arise if they violate the rules is a dangerous one. Sometimes company rules are not explicit. Sometimes bosses nod and wink when they expect employees to do things that are shall we say, fifty shades of grey ! If I were to calculate the possibility of personal liability, when taking a business decision, I would never make a decision in the first place. Something like this is what is happening in Indian government circles today - no babu is making any decision for fear that Kejriwal will allege that he is corrupt. Everything has ground to a complete halt.

 

It is a reflection of the anger against bankers that public opinion has no sympathy for Kerviel. Nobody, but a few busybodies have raised a whimper. I however think this is an outrageous court decision. Kerviel deserves to be punished. He deserves to go to jail. But he should not be fined € 4.9 bn.

 

It is a mark of civilized society that even crooks are given a fair deal.

US law should stop at its borders

I recommend that Benjamin Lawski, head of New York state's Department of Financial Services takes my good friend Sriram's  Geography 101 course . He might want to learn where the borders of the United States lie and where his jurisdiction is. The laws of the United States are enforceable in the United States. They are not enforceable on the world.

I am referring to the spat between the DFS and Standard Chartered Bank. The problem is this. US law does not allow US entities to have any business dealings with Iran - neither the country nor its nationals. The US is perfectly entitled to have such a law - its merits or otherwise is for US citizens to decide. The problem is that the US would like everybody in the world to follow that law. That deserves the response - mind your own business.

Standard Chartered Bank is a UK headquartered bank that largely deals with Asia and Africa. It has very little business in the US. However it does have a branch in New York where transactions are routed through if they are in US dollars - since most Asian and African countries deal in US dollars for their international trade, much of it gets routed through the US.

There is no doubt that Standard Chartered Bank deals with Iran. But the laws of the UK where it is registered and the other countries where it operates, does not prohibit it from doing so. There are certainly laws  prohibiting dealings with crooks and terrorists, but it is a reasonable fact (that may however be surprising to Mr Lawski) that all Iranians are not crooks or terrorists. US law  permitted in the past  the sort of transactions that Standard Chartered did, called U turn, but there are grey areas and , no doubt, this case will be enmeshed in legalese.

But the impact of the DFS report has been devastating on Standard Chartered Bank. The damage has been done, irrespective of whether the bank is found guilty or not. It's share price tanked some 16% yesterday. 

Standard Chartered is livid and has said it would vigorously contest the case (code for saying screw you). It is asking the British government to intervene and put the DFS in its place. One Standard Chartered executive described the colourful DFS report – packed with allegations of “deception”, “fraud” and a “staggering cover-up” – as “like a John Grisham novel”. A director is reported to have allegedly remarked to a colleague "You f---ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians? "

My language is somewhat more restrained, but I must admit I have to agree with the worthy !