Today GE issued a profit warning and cut its dividend to share holders from 12 cents to 1 cent. It is only the third time since the Great Depression that GE has reduced its dividend in this way. It told its share holders it would be taking a $22 Billion charge because one of its units, its power unit, is in deep trouble. GE has about $116 billion in debt.

In 2007 the banks had flooded the global market with sub-prime loans. The banks were also holding many of those same loans themselves or had transferred them to Special Purpose Vehicles (SPVs) they had set up, staffed and lent money to.

Today it is not the banking world which stands at the centre of the storm but the corporate world. In the last years they have flooded the market with junk rated bonds. At the same time they are also burdened with high yielding, leveraged and covenant- lite loans. Taken together they are about $2.4 Trillion of debt.

2007 sub prime loans. 2018 corporate junk bonds and leveraged loans. 2007 banks and SPVs funded by the banks. 2018?

Where is this sub-prime corporate debt sitting today?

Nearly half sits in Insurance Companies and Pension funds.

Given the close ties between insurance and pensions this is not a happy picture.

Along side the pension and insurance industry who are sitting on a mountain of high risk/high return junk there is the liquidity trigger of bond backed, fixed income and high yield ETF’s. They are admittedly still small compared to the still larger mutual funds but they are a choke and panic point. The ETF market is broad in its consumer appeal but very narrow where it counts – in who makes and provides the heavy lifting for the market. There are about 5 main companies who ‘Sponsor’, which means run and control ETF’s globally. They are BlackRock, Vanguard, State Street, Invesco and Charles Schwab.  According to Forbes in 2017,

Five Largest ETF Providers Manage Almost 90% Of The $3 Trillion U.S. ETF Industry

Of those 5,

…the top 3 ETF providers dominate the market with a combined market share of 82% …  the top-three players also account for more than 70% of all ETF assets globally.

The sponsors in turn rely for the heavy financial lifting – to buy and sell the assets that go into an ETF – on what are called the Authorised Participants. Who are they? The main ones are … the big banks like Merrill Lynch, Fortis bank, Morgan Stanley, HSBC, Barclays, Citi etc. Some companies are both sponsor and authorised participant.

And some of those banks are also the people who have extended the leveraged loans and revolving credit lines to GE and others. Something its banks may come to regret. Because as of today GE is now shut out of what is called the Commercial paper market which is essentially very short duration bonds. This means GE is now reliant for much of the cash flow it needs for day to day operations upon revolving credit from its banks.  The same banks who also buy GE bonds to put into their ETFs.

What could possibly go wrong?

Well… the Fed is trying to ‘normalise its balance sheet by withdrawing some of its liquidity. It is also trying to let interest rates rise. Taken together this is the Fed trying to bring to a much postponed end, the temporary and extraordinary measures brought in to deal with the little 2008 sub prime blip.  The ECB is also planning to end in December its vast 2.4 trillion euro bond buying stimulus package of the last three years.  Though it has said it will not raise interest rates till late next year. While over in China the central bank has, as far as I can see, lost control and is now more reactive than proactive.  It has again and again tried tho reduce official lending and hold back the flood of shadow bank lending that fuels the property speculation market that is the centre of all regional ‘development’ and social stability in China.

Corporates are floundering in a river of debt of their own creation. They are the ones who have taken on loans they will not be able to pay if interest rates increase even a little. The banks have packaged up and sold on that leveraged loan debt and those junk bonds and they have been gobbled up by pensions and insurance companies desperate for yield after a decade of ‘temporary’ low interest rates.

In place of zombie banks we now have zombie corporations kept alive by low interest rates and bond buying QE. Those low interest rates have created a dysfunctional market. Zombie corporations are kept alive because they can sell their sub-prime bonds and get sub prime loans in a market where the buyers of those bonds and securitised loans, the insurers and pension funds and fund managers, are so desperate for yield that they gobble up ‘high yield’ which is just a euphemism for sub prime.

This time it will not be the banks that trigger another financial collapse. Not HSBC or Countrywide this time but GE or Caterpillar. The companies who have been propping up their share prices with endless buy backs funded by… low interest rate loans and junk bond issues. Or perhaps it will be the corporates who are merging and acquiring.

Last time the top of the market was marked by and to some extent triggered by a wave of vast and disastrous bank mergers. HSBC was early when in 2003 it bought one of the largest subprime lenders in america, Household International for $15 billion. Bank of America bought Merrill Lynch. RBS bought ABM Amro. Hypo bought Depfa.  Every one of them saddled the purchaser with unmanageable debt and most ended in massive bail outs.

Today it is the turn of the corporates. 2016 – Bayer bought Monsanto. Funded with $15 billion in bond sales. 2017 – CVS, a retail pharmacy and health care company bought Aetna which is a health insurer for $70 billion 40 billion of which was funded by a bond issue. 2018 – American health provider and insurer, Cigna bought Express Scripts. Funded by a $20 billion bond issue.  2015 – AT&T bought DirectTV. Funded by debt. 2018 – AT&T bought Time Warner. Funded by debt. AT&T’s total debt is now around $180 billion which is a larger debt than many countries. Just yesterday IBM bought RedHat for $34 billion of which about $20 billion will be backed by new debt.

Buy backs supporting share prices, while huge acquisitions attempt to capture market share or buy growth that the parent can’t generate themselves and all funded by debt.

Of course you could say that issuing bonds insulates the corporates because the interest on those bonds is fixed. Quite so. The question I would ask is who bought those bonds and what with? Was it debt?

Variations of that statement seem to be the default defence of everyone from bankers to politicians when their names come up in the Panama Papers.

In the UK the latest to resort to some version of it, was first Downing Street on behalf of the Prime Minister David Cameron, and then HSBC on behalf of it’s notorious Swiss subsidiary.  The former because his father who lived in the UK, set up an off-shore company which has never paid any taxes in the UK, and the latter because it turns out HSBC has once again been handling dirty money, this time holding and moving money for off-shore companies owned by relatives of Syrian President Bashar al-Assad.

Now HSBC is a well known money laundering bank. They have been indicted and convicted of money laundering so many times in so many different countries.  The best known case was in 2012 when HSBC were found guilty of  laundering drug money out of Mexico. HSBC were tried in the US and fined $1.9 billion. They paid and said how sorry they were, and their group Chief Executive Stuart Gulliver accepted responsibility for their past mistakes, but assured everyone they had now put all that behind them and had even,

spent $290m on improving its systems to prevent money laundering,

That was 2012. In 2015 HSBC all that was found to be blather. HSBC were caught laundering  – again. This time it was HSBC’s Swiss subsidiary which had laundered

the proceeds of political corruption and accepted deposits from arms dealers while helping wealthy people evade taxes.

And so I have been thinking about this phrase we keep hearing, about not breaking laws and cooperating with governments.  Now obviously the first part is rubbish for the likes of HSBC, but perhaps not for the origin of the Panama papers themselves the Panamanian Law firm, Mossak Fonseca. I think they probably have been operating within the law. Doing so by having laws with more holes in than a sieve and governments who leave critical areas of compliance in the semi dark of self regulation or even connive with skirting round the rules.  And this connivance is why I am so interested in the second part of the phrase we keep hearing, the cooperating with governments.

You see I think when we hear the whole phrase, in one variation or another, we are meant to think the two halves of the statement are linked. The bank, law firm or individual has never, at least not ‘knowingly’, broken the law and is now cooperating with the government. The cooperating is seen as the antidote and response to the embarrassing lapse in obeying the law.

But let’s tease the two halves apart. The ‘knowingly’ is precisely how HSBC, Wachovia, Citi or Standard Chartered all admit laundering was done at the bank, but are never guilty of having laundered it…not knowingly.  It is always a huge surprise. A discovery which saddens and angers them. Which they then move on from…. with the blessing of their government.

This is how they are fined but never guilty, how dirty money can have engorged their balance sheet but they never lose their banking license.

I think we could be forgiven for getting the sneaking suspicion that governments cover for their banks.

So I look again at the phrase I started with and hear it differently now. Instead of hearing how the  bank, law firm or individual is contrite about an ‘unwitting error’ about which they are now cooperating with the government, I now hear first a lie about not breaking the law, but then a startling truth.  You see, I wonder if we shouldn’t think that the one truth being hidden in plain sight in all this is that the financial world has indeed been cooperating with governments – but doing so all along.

Does it not make more sense to think that what we are seeing is not a few rogue bank employees and lawyers breaking the law and embarrassing their employers and their pathetically useless, regulators, but rather two cooperating parts of a system of finance and government who are suddenly revealed together? It’s not dirty bankers and corrupt lawyers who are – now they have been caught – having to cooperate with government, to clean up. Not at all. I think we should at least consider that the better explanation is that the two, financial/legal world and government have been cooperating all along.

It stretches the limits of credulity to keep imagining that the bankers aren’t well aware who their clients are and how dirty the money is they are accepting. Equally it is ridiculous to think that governments aren’t aware of how oligarchs become wealthy or presidents suddenly become billionaires. And that dirty but hugely wealthy system is there just whispering to our leaders – who let’s face it are mostly drawn from the wealthiest families.

I suggest that what we are seeing with the Panama Papers is two partners in crime who have been caught together – The ‘criminal’ and the inside man/bent cop together. Normally the criminal – or at least the organisation that he works for – look to the bent cop to protect them. Someone will have to do time of course, but the arrangement remains hidden and therefore protected.

But now the arrangement itself might be uncovered. And if the bent cop, the inside man, is revealed, that threatens everything doesn’t it? That is far more serious. And so here they are, both caught in the light, both being questioned in public. The bankers and lawyers must be wondering how far they can trust the politicians.

Normally this sort of thing is covered over by finding some poor low level fall-guy. Who even if he tries to say the corruption goes higher is easy to discredit or shut up. But now big level people on all sides are blinking in the unwelcome lights.

I think we should admit that both the global financial/legal system, and our governments are both systemically corrupt and have been partners in crime – laundering money and evading taxes – as a matter of undeclared policy. It has been and remains just the way the system they profit by, works.  The only people who were not to know is us – The little people of every country, who are told they must pay their taxes, accept cuts because they aren’t paying enough taxes, and obey the laws and respect their betters.

Time to wake up surely?

I removed it because I was threatened with legal consequences if I did not. (Plus, I would like to add, some of the way I had written the blog post was stupid and could have hurt someone who had helped me.)

The post concerned an article I had written for a division of Thomson Reuters which they decided they could not/would not publish.  The division of Thomson Reuters pulled the article because they and I had been threatened, by a major European Bank, with legal consequences if they did not. The title of the article was “Cyprus, Magnitsky and the truth about Money Laundering.”

Although I cannot publish the article I can show you how it began and tell you how it is, that the truth it contained was made illegal.

The article began:

Money laundering is the life blood of organized crime. Without it crime would simply not pay.  But who does the laundering? The easy and obvious answer is criminals. But that is completely wrong and is at the root of our inability to stop it.

Criminals are the people who need money laundering. They are the clients. But they do not, themselves, know how to launder money. The only people who do know, and who are in positions to do it, are those whose day jobs are the many professional services which make up laundering: the accountants, lawyers, company registration and management agents, account managers in banks and company directors in companies that have no reason to be, other than to pass hot money through an endless spin cycle. In organized crime, criminals provide the crime but professionals provide the organization.

Of course we could get jesuitical about it and say, but those professionals who launder are criminals. Which would be fine, except that we do not treat them as criminals. Criminals break laws. Professionals do not, they have ‘failures of compliance’. One is considered an active, purposeful ‘doing’ of something, for which punishment is de rigeur.  The other is excused as an unfortunate and unintentional ‘not doing’; an oversight, omisssion or failure to do, for which one and one’s employer get admonished to ‘do’ better. And as long as you promise you will, all is considered fine and finished. There may be a small fine but nothing to lose your bonus over. No one senior ever goes to gaol.

Criminals are investigated – by police. Professionals are ‘regulated’ – usually, and rather conveniently, by themselves or colleagues. People who rob banks have legal problems. People in banks, who rob people, or help others to rob them by laundering their money for them, they have regulatory issues. One is serious the other is a joke. How many bankers actually went to prison from Wachovia or Citi or HSBC?

All this might seem rather sweeping. But it is not. It is just that usually we do not get to hear about the people and businesses who do the actual laundering nor what happens to them afterwards. When money laundering is reported it is usually the lurid details of the clients of the money laundering, the drug cartels and terrorist organization, who get all the headlines. Hardly ever do we hear of the launderers themselves. And that is because, as already noted, they are never ‘guilty’ of having ‘done’ anything. But events in Cyprus have recently given us a rare opportunity to lift the sewer’s cover, peer inside and see at least some of the people who failed to act; who by omission, oversight, laziness or complicity, intentionally or otherwise, ‘helped’ to launder money.

As the philosopher Edmund Burke famously noted, “All that is necessary for the triumph of evil is that good men do nothing”.

As you can see the purpose of the article was not simply to prove, what everyone already knew, that Cyprus had indeed been laundering dirty Russian money, but to say something about WHO actually does the laundering. The point was to finger the launderers themselves not their clients.  Of course that meant naming companies, lawyers, company directors, company registration agents, and last but not least, the banks and individuals in them. These are, of course, people who are not used to the idea that they can be named, take grave exception to being named and who have the power, I discovered, to make sure they are not.

The article also did one further thing. When you added it all together and told the whole tale in all its detail, with all the names, dates, places and amounts, one further conclusion jumped out.  The lawyers, accountants, company directors and bankers, who did the laundering, are also the people who the anti money-laundering system relies upon to police the system and stop the laundering. The inescapable conclusion is that the anti-money laundering system not only does not work, but seems expressly fashioned to make sure it does not work.

It is possible – it happened in the Magnitsky case – for a criminal to buy a bank and be granted a bank license. Yet the law says it is the directors of such a bank who will be relied upon to contact the authorities about suspicious transactions. Criminals don’t often turn themselves in, yet in every country this is the non-system our leaders and financial experts maintain. In the UK the law is set up so that a company can be set up without any due diligence at all being done to determine the character let alone the actual identity of the owner. Because of this ‘loophole’ as the authorities coyly refer to it,  the UK is home to tens of thousands of shell companies set up by criminals and used for criminal purposes. This may sound like a fantastic charge and one I cannot possibly substantiate. Yet almost every major case of fraud or money laundering will involve UK shell companies. Follow the Magnitsky money and you will see it pass thorough UK shell companies. The same goes for the $64 billion of state money stolen from Kyrgyzstan much of it then passed through UK shell companies. Or the  on-going case of money laundered out of Ukraine by means of a fake oil rig purchase. That money too passed through UK companies.

I could give you plenty of other examples but the important point is that NO ONE in authority can offer a shred of evidence to show that I am wrong no matter how many criminal companies I claim there are likely to be, for one simple reason. THEY HAVE NO IDEA WHO OWNS THE COMPANIES. The system is set up so no one knows. Companies register owners but they can be other companies in other jurisdictions. And it is easy to set up a company in such a way so that no one checks on the owner at all, ever. That is the system we maintain.

Every minister who has ever had the power to change this state of affairs has been aware of this but they have all chosen to leave it that way.

In short we have a system which is conveniently designed so it does not stop money laundering but does make sure no one will be prosecuted. It serves to shield the guilty not stop them.

I realize these are statements that can still be dismissed as ‘conspiracy’. Without the 8000 words of detail the article contained, without the references to over a hundred pages of bank transfers and company records, I am left with just what I know to be the case without being able to show you what convinced me.

All I can do, as promised, is show you the final ‘shell’ which surrounds everything else and which allows the rest of the corrupt system to exist and do its job. The last shell is a legal one and I had not understood its importance, nor its power, until it did its job and stopped me publishing.

This is how it works.

First a few facts. In the Magnitsky case  $230 million was stolen from the Russian state. That money was then laundered  in a scheme that involved five deaths, a lorry load of bank records that exploded, eight banks, numerous shell companies and complete, abject and total regulatory failure. It is called the Magnitsky case after Sergei Magnitsky who was found dead, handcuffed on the floor of a cell in a Russian prison. His body, photographed at the time, was covered in bruises.

Mr Magnitsky had been arrested and then held without charge or trial in the custody of the Russian Interior Ministry for nearly a year. He had been detained shortly after he had named in official testimony Interior Ministry officials and certain tax officials as the criminals behind the theft. The men he named were the ones who arranged his detention.

BUT, the Interior Ministry held its own investigation. What it found was that although the money had indeed ‘gone missing’, none of the officials Mr Magnitsky had named were, according to their official investigation, guilty of anything other than being ‘tricked’ by person or persons unknown. The Ministry did try to suggest several culprits but two of them died mysteriously of heart attacks a thousand kilometres from their homes before they could testify, while another had, rather embarrassingly, died before the crime he was accused of  had even been committed. The Ministry looked silly even by Russian standards and no case was brought.

Eventually the Russian officials accused the deceased Mr Magnitsky of being the mastermind behind the crime he had been investigating. At one point the Russian state said it was going to put him on trial posthumously. So far it has not. And thus the case rests with the conclusion that there was no crime, only a ‘trick’ with no one found guilty.

It was also decided in Mr Magnitsky’s absence that despite the photographic evidence of his beaten body, he had died of natural causes and no crime had been committed there either. Case closed. And that ‘Case closed’ is what it is all about.

In the end it doesn’t matter what actually happened nor what evidence is to hand. As long as some official body does its own ‘investigation’ from which it concludes nothing happened, then nothing did, and the  case can be closed. Not only that but if anyone should try to look for themselves at the evidence they cannot refer to anyone or any bank as being involved in criminal behaviour of any kind. Because there wasn’t any.

If no money was stolen – and none was because the Russian said so – then no one could have laundered any. How can you launder money that was not stolen?

The Russian decision meant, in legal parlance, that there was no ‘predicate’ crime – no crime from which other crimes followed. Which means, if one authority says there was no crime, every other authority in every other country, should it want to, can point to this judgment and say, ‘why should we investigate anything if there was no crime in the first place?’

This meant when an official complaint was sent to the Cypriot authorities in 2008 alerting them to the Magnitsky affair, right at its beginning, they could ignore it. And they did. The Cypriot police were sent an official complaint in 2008, and to this day they have never replied to it nor even questioned the people, even Cypriot people, named in it.

In fact even when the Cypriot Authorities were sent another much more detailed complaint in 2012, which gave them dozens of leads and lines of enquiry they wrote back saying,

“…it is important that we firstly obtain information from the Russian authorities about the predicate offence or offences committed in Russia.

Thus we plan to contact the Russian authorities in order to obtain information…”

And of course there was no predicate crime. Not officially. Even though companies were stolen and hundreds of millions did ‘go missing’.

Similarly, in 2010 another complaint was sent about the Magnitsky affair, this time to the Austrian authorities. The complaint alleged that the very large and powerful Austrian bank Raiffeisen, had handled much of the  money that had ‘gone missing’. The Austrian authorities opened an investigation which concluded Raiffeisen had done nothing wrong at all. Case closed.

The Russians found no crime had been committed on their patch. The Austrians found nothing on their patch either.

This is despite the fact that Raiffeisen did handle the money. But you see handling is NOT laundering. Laundering requires the money be illicit AND that Raiffeisen knew, or reasonably could have known, the money was illicit. And the Austrian regulator concluded that Raiffeisen could not have known there was anything wrong with either the money it was handling, nor the bank from which it came nor the owner of that bank. The owner we are talking about here  is the criminal – a convicted criminal who owned his own bank – mentioned earlier.  According to Raiffeisen and the Austrian regulator the criminal past of the owner of the bank Raiffeisen was doing business with, could not have been known till a later date.

Now I find this judgement to be difficult to understand since the man in question had been convicted in Russian court in 2006. There are court transcripts of his admission of guilt which I have read. Yet Raiffeisen was handling the money in question in 2008.

BUT it doesn’t matter if I or you find this odd. The only FACT that is important, is that the Austrian regulator looked and found Raiffeisen NOT guilty of any crime. And so they are innocent. Case closed.

This is how you can end up, as I did, compiling facts and dates, evidence of bank transfers subpoenaed in court, which lead you to a conclusion that you are nevertheless not allowed to make public. You can present all the evidence but you  must contrive to do it without ever mentioning the name of a crime, nor suggesting any illegal activity in the piece. And of course you certainly cannot conclude in writing what the evidence suggests. If you try to , as I found, you are threatened with the law.

And that is how you make the truth illegal.

If this was just one case it would be horrible but isolated. But it is not. This use of official and legal judgements to squash the truth is exactly what happened in the case of Jonathan Sugarman and UniCredit. He found evidence that UniCredit was very seriously breaking the law. He got an outside company to check and they agreed. The Irish regultor however,  said, ‘There’s nothing to see here move along’. And Jonathan was threatened with leagal action if he did not go quietly away and hide.

What does all this mean for money laundering?

Here is how I concluded the article I cannot publish.

People love to talk about the ‘risks to banks and companies’ from money laundering. What risks? Think of the notorious cases of money laundering before Magnitsky: Citi., Wachovia, HSBC. No one was gaoled. No one senior even lost their job. Fines are a joke. Wachovia, for example handled or laundered over $370 billion of dirty or suspect money out of Mexico. They were fined one two thousandth of that amount, just $160 million. As a percentage of the direct financial benefits accrued to Wachovia, from having the dirty money flowing through their books, fines for money laundering are vanishingly small and better thought of as a tip pressed into the palm of a compliant doorman.

In reality, simply looking at the facts of what it has cost the banks in gaol time, fines or even something as intangible as their standing with their regulators and governments, it is very much worth it to launder. As for ‘standing’ or reputation – being guilty of huge money laundering did no harm to Citi when it came to bailing them out. Nothing untoward has happened to Wachovia or HSBC. In short – on a cost benefit analysis I would say it is of huge benefit and virtually no risk, for any bank large enough to be able to launder money, to do so.

And what of all the many companies and professionals, the company agents, lawyers and accountants, who do the jobs which make up the bulk of the work of laundering? Are there any real risks for them? I would say there are few because our system simply does not investigate what they choose to do. Instead it is very careful to only ask them to fill out forms, to self regulate and to ‘comply’.

I think the questions we need to ask ourselves and our politicians is why is it that the financial world is ‘regulated ‘ while we, ordinary citizens, are policed? Why do they have regulations to observe, while we have laws to obey? Why are they asked to merely assess themselves  while we are investigated by officers of the law? Who profits from this careful double standard?

When you boil it all down, anti-money laundering is about asking criminals and the law abiding, both, to write reports about themselves. Needless to say the criminals lie. But we pretend not to notice, and so in every country all the paperwork says there is no money laundering going on. Yet hundreds of billions is laundered every year.

In America Massachusetts Senator Elizabeth Warren, when she was grilling federal bank regulators at a Senate Banking Committee hearing, said

“No one individual went to trial, no individual was banned from banking and there was no hearing to consider shutting down HSBC’s activities here in the United States.

Which did seem outrageous at the time given that, for example, according to Senate and Justice department reports, HSBC had,

…failed to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical US dollars from HSBC Mexico from at least 2006 to 2009.

And that,

HSBC’s Mexico bank had a branch in the Cayman Islands that had no offices or staff, but held 50,000 client accounts and $2.1 billion in 2008.

Who in the bank knew about this? Evidence uncovered by investigations into HSBC’s activities revealed,

“senior bank officials were complicit in the illegal activity.”

The Question

No wonder then, that Senator Warren was driven to ask,

So … what does it take? How many billions of dollars do you have to launder for drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution like this?”

What indeed.

In the UK it was noted that during the time the laundering was going on, the chief executive of HSBC in 2003 who then became its chairman in 2006, was Lord Green, who is now the UK trade minister. So obviously no great concern to get to any truth about HSBC, in the hierarchy of the UK establishment.

Warren’s question, ‘What does it take?’ was finally answered by U.S. Attorney General Eric Holder in March 2013, when he told the U.S. Judiciary Committee that the Justice department had decided not to pursue any criminal prosecution of HSBC because ,

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,”

The U.S. Justice Department felt it could not criminally prosecute the bank because a criminal conviction would mean the bank would lose its license to bank in the US which would kill it  and a whole range of other institutions, which the bank relies on to buy its debts and its investment products would be prohibited from doing so as soon as the bank was deemed to be criminal.

So the official answer to Senator Warren’s question, according to the mighty U.S. Justice Department, is that ,yes, HSBC had laundered, but it was simply too big to prosecute. The bank and its senior staff were and are untouchable. They could be fined but not criminally prosecuted. The real answer to Senator Warren’s question, “What does it take…?” is … that she asked the wrong question.

This isn’t about lack of proof or the complexities of financial crimes or showing who knew or proving actual intent. It is not about proof or criminality at all. It is about there being a new category of  financial entity which our law makers and prosecutors have decided for us, is above the law. They are called  G-SIFIs, Globally, Systemically Important Financial Institutions or G-SIBs, Globally Systemically Important Banks.

I think  we have not yet thought through the immense consequences of the decision that has been made for us, that G-SIFIs are above the law.  But I think we need to make a start.

The List

We all know the HSBC isn’t the only bank too large to prosecute. There is in fact a list.

The list is decided upon by the FSB. It is updated every year.

The FBS (Financial Stability Board) is a new international body. It is made of representatives from the central bank, financial regulator and Treasury from each of the 25 member nations plus representatives from:

The Bank for International Settlements (BIS), the ECB, the European Commission, the IMF, OECD and World Bank, plus representatives from the Basel Committee on Banking Supervision (part of the BIS), the Committee on the Global Financial System (another part of the BIS), the Committee on Payment and Settlement Systems (another part of the BIS), the International Association of Insurance Supervisors, the International Accounting Standards Board, and the International Organization of Securities Commissions.

Guess which institutions provide the membership for ALL of the above international bodies? Yes, you got it – the big banks. And how many Central banks can you think of that are staffed or even headed by people formerly from one of the Big Banks?

You tell me who is really staffs the FSB and whose world view and interests the FSB actually represents?

Then consider, they are the ones who decided who is above the law.

28 banks are officially above the law and WILL NOT be criminally prosecuted no matter what they do. Remember that’s not me saying this. It is the U.S. Department of Justice saying it.

Not only 28 banks but all their senior executives, chairman/woman and board members. It would be very difficult to find a senior person in a bank to be criminally guilty but yet not find the institution guilty. So we could compile a list of people who are now, at least as concerns any financial and professional actions, also above the law. They can do things you would go to goal for. How does that feel?

Oh, by the way, this year, in April, we will see the announcement of another list, this time of Globally Systemically Important Insurers (G-SIIs). They too will be above the Law.

Assets Above the Law

When we say a bank is above the law, not only should we remember that this means specific people are above the law (at least in how they make money) but we should also remember that this also means the assets in those banks are above the law. This means if a banks does things which are illegal but lucrative – such as laundering money in order to get the use of those laundered billions to then use them as, lets say, capital to underpin loans or for speculating, for example, and by doing those illegal things it makes out sized profits for its shareholders and staff, that money, those profits are also above the law.

Since the bank and its senior staff are above the law and breaking the law is profitable, a) no one has an interest to say no, b) shareholders and staff will directly benefit from breaking the law. They will make more money by participating in law breaking or by investing in a bank which is law breaking. They will, in fact have an interest making sure it continues.

Two questions. Whose wealth are we talking about and how much?

Second question first. Is this a big problem?

There are many ways of measuring how much wealth we are talking about as being above the law. Not all are publicly available and not all banks quote things in the same way. So by necessity the figures I have are not a perfect or even direct measure but they are a good indicator of the scale of the assets which are essentially above the law (they can be used for illegal purposes and the bank will not be punished nor the profits severely harmed even if the bank gets fined)

Here is the above list with the bank’s total assets. The figures are mostly from the Banker’s Almanac with a couple added from Wiki. This give a good idea of how much wealth is above the law by virtue of being in banks which are above the law.

Bank                                Total Assets

Citi                                     $ 1.2 T

Deutsche                          $2.8 T

HSBC                                $1.2 T

JP Morgan Chase         $1.8 T

Barclays                           $2.4 T

BNP Paribas                   $2.5 T

Bank of America           $1.45 T

Bank of  NY Mellon     $1.4 T ( this is not Total Assets but Assets under management)

Credit Suisse                  $1.08 T

Goldman Sachs            $0.92 T

Mitsubishi IFJ FG       $1.9T

Morgan Stanley           $0.74T

RBS                                 $2.2T

UBS                                 $1.5T

Bank of China              $1.87T

BBVA                              $0.77T

Group BPCE                  $1.4T

Credit Agricole             $2.23T

ING Bank                      $1.2T

Mizuho Bank               $0.91T

Nordea                          $0.92T

Santander                    $1.6T

Soc Gen.                       $1.53T

Standard Chartered $0.599T

State Street                  $2.01T  ( Assets Under Management)

Sumitomo Mitsui      $1.68T

UniCredit                    $1.2T

Wells Fargo               $1.16T

______________________

Total                            $42.169T

I know these figures are only an indicator but when you get to $42 T I think the indication is clear.

What you will notice is that there are quite a number of banks not on this G-SIFI list which are larger than some on it.  What does this mean?  Two things I think. First some banks are on not because they are the biggest  but because they have vast assets under their management. Other are there, such as Goldman, because they are counter-party to vast swathes of other people’s derivatives. And some are not on because their country does not have the clout to have above a certain number of banks on the list.

What this last point tells us is that there are other banks that if it came to it would be treated as too big to fail/prosecute but are not on the list. A whole category of such banks are those which are not globally systemically important but which are vital to the country they are incorporated in or do business in. There are a number of banks in Europe, not on the G-SIFI list but which their national governments would never allow to go down or  be criminally prosecuted. These banks to are therefore, also above the law even if they’re not on the list.

But for the moment lets just stick with our total of ‘$42 Trillion and change’ currently in banks which operate above the law (Yes I know they can be fined but the fines are a wrist slap compared to the money they make by breaking the law).

You might at this point object that these banks contain deposits from all sorts of people, many of them ordinary. True. but the bulk of that $42 trillion is not the savings of widows and orphans nor charities and churches. It is the money of the top 1% or 10%.

In the UK, for example, 40% of the wealth is held by the top 10%. While in the USA the top 10% hold between 81% and 94% of all the wealth. Which means the bulk of the money in those banks, available for use in illegal but lucrative schemes, belongs to the wealthiest 10%. And they also happen to be the people who run the banks, sit on the board of the FSB  (there are no representatives from anti crime NGO’s for example and certainly no one representing the 3.5 billion people in the world who earn less than $2/day) and decide who and what is now above the law.  So very neat and tidy.

No dissent allowed

The concept of the G-SIFI also does violence to international law and sovereignty. Lets imagine some small rogue country, one which still believes in equality before the law, gets a rush of blood to the Judiciary and they file criminal proceedings against a G-SIFI for crimes committed in their country. Let’s imagine the bank is HSBC. Now the U.S Justice Department has already declared this bank is too important to convict. Would the US stand by, would the UK stand by, and allow some tin-pot country run by foreigners to imperil what the US has already said MUST NOT be imperiled?

Would they allow it to happen? Or would they bring pressure to bear? Would they find a way to stop a prosecution they felt could imperil US interests and the stability of their economy? You decide what they would not be willing to do.

Let’s just say that somehow it happens anyway. We would then be in a situation where countries would have to start to pull apart the entire system of international entente. Fellow UN members would have to start saying other countrys’ legal decisions and courts were meaningless and would not be recognized. Imagine the fall out from that.

One country would prosecute and provide evidence of criminal conduct and the other countries would have to not only instruct their own Judiciary to ignore it, but would have to say to its citizens and its press you too must ignore what you might read or hear, even if you can see it is the truth.  Even though the evidence might be crystal clear and indisputable, those hanging on to the G-SIFI list and concept  would have to insist everyone ignore the evidence on pain of legal action for libel and defamation, and refuse to allow the ‘foreign evidence’  to be used as the basis of a court action. Can you imagine the chaos? So we can conclude that  no country would be allowed to pursue a criminal case whose conclusions might create such a disastrous mess. What would be left of sovereignty?

It would be the reverse of what happens now. At the moment courts and national regulators are used to shut the door to prosecutions which might implicarte one of their banks, by either simply refusing to investigate or going ahead and ‘investigating’ and saying that their bank’s involvement was not a crime. Thus insulating their bank from any accusations in future. This has happened in three European countries in cases I have become aware of.

Sorry this has been such a long article. But the G-SIFI is here to stay and is already corrupting our judicial system. That corruption will only grow if we do not take notice of it now.

The threat has been made public – you do as we say and seize depositor’s money or –

Germany to Cyprus: your banks might never re-open

Either Cypriot members of parliament ignore the will of the Cypriot people or the ECB stops supporting Cypriot banks and they implode.  Which would mean either Cyprus leaves the Euro and re-introduces its own currency (which it could do)  or it tells its people that ALL their money is now gone.

The problem is the private Cypriot banks spent a great deal of the money deposited in them on buying high yielding Greek bonds/debt which were partially defaulted by Greece with the say-so of the ECB et al. So bear in mind that whatever else Cyprus is guilty of (and there is plenty of guilt to go around) it is NOT a case of a government spending profligately. Cyprus debt to GDP at 87% was lower that the Europe area average of 93%.

The ECB doesn’t care about that it just wants Cyprus to dry-run the new idea of making depositors pay for the sins of private banks directly from their savings rather than through the lengthy and ‘political’ process of official bail outs that we have had so far.  Cyprus is the test of a more ‘free market’, no messy voting, no lengthy arguments, technocrats-decide-for-us solution.

I expect the Cypriot parliament will do what its told by the man holding the gun. It will be interesting to see if they enforce it themselves or resign en-masse and allow Europe to  install  another non-democratic ‘Technocratic’ dictatorship. If so it will be just another sign we have left the modern era and that Europe, if not the whole West, is now Post Democratic.

So does Cyprus have an option? I think they do. A nuclear one.

It is true they have no fiscal bullets left. They never really had any. All they ever really had was a little plastic tomahawk they got from Woolies. Even that’s bent now. Even if they decide to let the ECB pull the life support on their banks the EU has said it feels confident no contagion will spread to the rest of Europe. What they mean is financial contagion. The contagion of one defaulted debt, causing another to default causing another. That danger, the EU thinks it has contained. And it may well have.

But Cyprus has one other option – not fiscal but legal.

The nuclear option of Cyprus is to not seize the money in peoples’ accounts but the information about that money. Such as where it came from, if it was criminal or laundered, and if so which banks, businesses and professionals knew about it and helped it on its way. The information which their regulators should have been collecting but never bothered to for the last 15 years. But even so, it is still there. Could still be used.

Cyprus has been laundering money. Its banks and businesses have helped. But so too have the banks and businesses of other countries. To my knowledge there is documentary evidence which implicates at least two huge European banks. A third, a German bank, would, I think, find itself dragged in also.  As would dozens if not hundreds of British registered shell companies and the British authorities who do nothing to regulate them, and yet are implicated in four major fraud cases I know of personally.

You might say, ‘So what! Nothing ever happens to the banks when they are found guilty of laundering. How does that  count as a nuclear option for Cyprus?’ and you’d be right. Nothing ever does happen to the banks. They pay a fine, and then carry on.  But what would change everything and strike a cold fear into the heart of Europe, its banks and its ruling class, is if Cyprus decided to do what nobody anywhere has done – begin a proper criminal investigation.

And it is the word criminal which would set a fuse burning which if not extinguished WOULD spread a contagion that would threaten Europe’s banks and political system.

To understand why,  you have to look at the monumentally important ruling in America in the case against HSBC. When the case first broke the headlines were all about the $1.92 billion fine HSBC had agreed to pay. What was made slightly less clear was that there had been an agreement between HSBC and the US Justice Department  that HSBC would pay the fine in return for not being found criminally guilty of anything.

HSBC was not criminally prosecuted. They agreed on what is called a ‘Deferred Prosecution Agreement”. Which means they were only ever going to pay a fine, agree to improve, try to look sorry and walk away with a ‘No admission of guilt’ settlement.

This despite the FACTs that, as Lanny Breuer, Assistant Attorney General for the Department of Justice (DOJ) said, the evidence they had gathered proved,

“…stunning failures of oversight .… The record of dysfunction that prevailed at HSBC for many years was astonishing.”

To which U.S. Attorney Loretta Lynch a lawyer involved with the case added, 

“HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881 million in drug proceeds through the US financial system…”

Yet HSBC were not guilty of any criminal act, certainly not guilty of Money-laundering. Not only that but even though the case found that,

 “…senior bank officials were complicit in the illegal activity.”

No senior management was taken to court, no one faced criminal charges, no one went to gaol. Officially no one was guilty of anything more serious than having “turned a blind eye”. That was the phrase used.

All of which festered quietly just out of public consciousness. Until Eric Holder, the U.S. Attorney General testified before the U.S. Judiciary Committee in March 2013 and made the astonishing admission,

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,”

In other words here was the starkest admission, from the most powerful judiciary in the world, that the big banks are officially above the law.  The law will not be applied to them.  The U.S. Justice department made clear is that if you criminally prosecute a bank, and find it criminally guilty, the bank would most likely lose its banking license and the many institutions that the bank relies upon to buy its bonds, lend it money and purchase its securities would no longer be able to. They would not be allowed by law to do business with a criminal institution.

So the answer is to allow the institutions to act illegally but not prosecute them. That way everybody can do business with people breaking the law but without the nasty word ‘criminal’ being around to stink up the party.

Only poor and ordinary people are Criminals. Rich people have regulatory failures.

Sorry for the lengthy digression. Now back to Cyprus. I think you can see where this is going.

Cyprus’ nuclear threat and option is to make it clear it is going to open criminal investigations into not just its own banks and those who run them, but the huge, systemically important foreign banks who have been dealing with Cyprus and its dirty money for years.

Every nation has so far done what the U.S. did to HSBC. They investigate and fine them making VERY sure there is no mention of criminal guilt. If one single country were to break this agreement and go after the criminals as criminals, the whole edifice is threatened with destruction.

It does not matter that Cyprus is small. Of course being found criminally guilty in a large country like the U.S. is an immediate death sentence. Guilt in Cyprus would not have the same immediate effect. But there would be a legal contagion because a judgment in one country is the basis of filing suit in others.

Currently the opposite is the staple of international banking. A regulator in one country ‘investigates’ one of its own systemically important banks and surprise, surprise finds that though there were ‘problems’, there was no criminal guilt. There are any number of ways of making sure you arrive at this happy conclusion. One way or another no one finds their important financial institutions criminally guilty – ever.

If Cyprus did, the plague would be out.

Even the knowledge such an investigation was underway would shake share prices at the banks under investigation. Once the evidence came out in court it could not be put back. That evidence would be there for all to use in their own countries. Even if governments refused to do it, ordinary people and NGOs could.

This is the option Cyprus still has. I know, as well as you it won’t happen. But it could. It should.

The Cypriot people know they have been guilty of turning a blind eye to tax evasion and laundering. They know the  EU wants to strip them of their low tax regime just as they want to strip it from Ireland as well. But they also know the EU doesn’t really want to lift the stone and expose the extent of  criminal activity that has been going on because of who and which banks they might find hiding under there.

The Cypriot people have to decide will they try to save themselves by trying to carry on with the same criminals or will they turn to the one option no one even seems to be aware is a possibility – the Truth.