Standard Chartered Bank, based in London, has been charged with laundering $250 billion of transactions for Iran, in violation of US and NY State law. The NY State Dept of Financial Services is quoted as saying:
The New York State Department of Financial Services accused Standard Chartered, which the agency called a “rogue institution,” of masking more than 60,000 transactions for Iranian banks and corporations, motivated by the millions of dollars it reaped in fees.
Senior management at the 150-year-old bank used the New York branch “as a front for prohibited dealings with Iran — dealings that indisputably helped sustain a global threat to peace and stability,” according to a regulatory order sent to the bank. The order requires the bank to explain the apparent violations of law in a hearing later this month and justify why its license to operate in New York shouldn’t be revoked.
Just a few weeks before, Standard Chartered, absent from the LIBOR fixing scandal, subprime mess, or the melt-down of IT systems leaving RBS account holders unable to pay bills or make deposits, was hailed as the model for modern banking. With considerable investments in both retail and deal-making in Asia, the bank’s shares rocketed to new highs. Only to dramatically fall, on the order of 16% or so, following the NY State DFS announcement of charges and possible revocation of the banking license. On the face of it, risking the bank’s ability to do business in New York City seems incomparably stupid, when all that was at stake was a few million dollars in fees. No one is getting filthy rich off doing business with Iran. And the experience of UBS with German Tax Authorities and the United States suggests that keeping secrets is nearly impossible for banks to achieve, with thousands of people needing access to accounts to do their jobs, and cheap/fast USB memory sticks allowing literally thousands of account holders data to walk out the door (to be sold to German tax authorities, which is precisely how UBS got caught). Any bank pulling anything at all questionable is as vulnerable as the discontent of the lowest paid worker with access to data, and his or her willingness to blow the whistle to authorities (often in exchange for considerable rewards). This is exactly how Bank of New York Mellon, State Street, and Bank of New York got caught. Insiders unhappy over termination, and others distressed with the action, filed a whistleblower lawsuit that will potentially net them millions.
NYC’s DFS quotes at length internal e-mails, from bank executives to one another, and to adviser Deloitte-Touche. How did DFS get the emails? They were given to them by insiders. This is so simple a child could see it.
But the deeper issue is why risk all that, for what amounts to a few million here and there? The answer is that banks, like nearly all of the West’s institutions, are failing. They are not making money. And that is the heart of Western failure, the inability to make any money, as the middle classes collapse under a tidal wave of PC, multiculturalist mass third world immigration, preferential legal treatment for non-Whites, crime and the cost of avoiding crime (constant new construction of exurbs and massive commutes), and an elite so monumentally stupid and convinced of its own cleverness that it thinks dealing with Iran and pulling ‘cute’ tricks like wire-stripping is a smart move that will NEVER be discovered.
As I pointed out some time ago, comic books don’t make much money. For Disney/Marvel, and Time-Warner/DC, they are little more than intellectual property holding operations, designed to keep ownership of characters like Wonder Woman, Captain Marvel, the Punisher, and Superman from the creators and their estates/families. The same holds true for movies, as I pointed out in Hollywood’s Crisis, most movies lose money, and the primary objective for movies designed to make studios money is to act as a two hour commercial for things that do: toys, games, merchandise, and theme park rides. TV Networks don’t make money either, CBS generally ekes out a few million each year, NBC generally has a loss, and Fox and the other networks are somewhere in between. Cable networks depend on operator fees, from satellite and cable companies, and with a lousy economy and consumers cutting back, that’s not sustainable. As Oprah Winfrey found out with her OWN cable network, in the hole for millions already and with cable operators threatening to drop it, unless fees get considerably cheaper. Newspapers and magazines are of course, failing almost completely, with Newsweek and the New Orleans Times Picayune transforming into online only, following many other publications. Books, too, don’t make much money, save a few hits like the Twilight and Harry Potter series. Ford is mildly profitable, but GM continues to burn money, and Chrysler is only slightly better. Toyota has lost money, and Sony is famously in a tail-spin, so the problem is not confined merely to American companies. Most of China’s State Owned Enterprises are a joke, there to launder money for regime insiders, the Red Princelings, and employ a lot of people. Losses there are staggering, as are the lower level of entrepreneurs who tend to simply flee failing factories.
The problem is in short, a global elite that is founded on hereditary connections, pre-existing wealth, and the ability to parrot the correct thinking on any single subject. An elite so stupid, so massively idiotic, that it could crash companies like Sony, or NBC, or fail consistently to make money off Superman and the other DC comic book characters. Standard Chartered is a good example of looking at the failure in detail to see the whole story.
Standard Chartered, like most banks, generates profits in one of two ways: retail banking, and big-time deal making. Retail banking was the go-go fad of the 1980′s and 1990′s. Particularly in the US but also in the UK, larger institutions swallowed up smaller ones. The idea was to build national, or even global economies of scale, and using considerable IT investments to make more money off customers. Like offering cheaper checking, or identity theft protection, or loyalty rewards for bank issued credit cards, and the like. As with retail banking, money is made when the bank charges a higher interest rate (the spread) for loans than it pays in deposits. Thus it needs at heart a wide spread. That’s where the money is in retail banking.
In turn, this depends on a middle class with good credit (so they’ll repay the loans on time), that is willing to take out a loan, at a relatively high spread. Interest rates near zero do banks no good, because they indicate an economy that has fallen and can’t get up. Middle and upper class consumers with good credit withdraw from loans, and regulators demand gold-plated credit for any loans made (generally in the aftermath of a credit bubble, barn door, horse, closed).
Retail banking chugged along, fueled by the housing credit bubble, with banks such as Washington Mutual making good money. Until they didn’t, when the bubble collapsed in late 2007. The point being that the credit bubble alone was responsible for the retail side of the profits. Wages were not rising, supporting greater loan amounts. Real income was not rising either, and the economy had no boom mechanism that indicated a long period (20 years or more) of good times ahead. Since the 1970′s in the US, the 1990′s in Japan, and probably the 1960′s in Europe, wages and income for the middle class has been stagnant, making Western institutions like banks dependent almost entirely on jiggered booms that predictably blow up.
Standard Chartered boasted that their investments in Asia led them to tap the growing retail banking surge in that area. But no one in China trusts banks, where in effect negative interest rates are paid (far below the rate of inflation). Various arcane trusts that lend out money in weird, cronyistic ways, inventory financing (retail investors will lend a construction company money to buy equipment which is then used as collateral to buy more equipment, like cement pumpers, that sit on lots), and real estate purchases are where China’s middle classes put their money. Koreans and Japanese don’t trust foreign institutions, which are in any case tightly controlled in how they can approach the retail market. That leaves the thriving nation of India, where power goes out reliably, and perhaps Pakistan, where doubtless a bin Laden was Here Museum is going up as this is being written.
That left deal-making. The deal-making, high risk, high reward, was all that Standard Chartered (and other institutions of the West) had left. Viewed this way, being Tehran’s willing facilitator in breaking the US sanctions, is entirely predictable. Perhaps the Bank hoped to win concessions from Iran’s patrons, Beijing and Moscow. Or was just in the habit of picking up nickels in front of the steamroller. The problem with that strategy is that you inevitably get squashed when you are not quick enough, and die poor anyway.
Deal making in the West, with robust legal institutions, a far lower level of graft, and no sanctions to bust, is pretty much moribund. Apple, Microsoft, and Facebook like to buy companies that are small but have talent, rather than buy a mega competitor. You don’t see Microsoft, for example, going to banks to buy out say, Sony and offer a Sony-Microsoft tablet to fight the Ipad. Mega deals are dead because the possibility for mega growth in the West is dead.
This is not the inevitable outcome of declining population. Income and deals rose in Europe, during the 1950′s and 1960′s, as population remained relatively stable. Here in the US, the wealth-generating population, Whites, have been in decline since the 1980′s. Yet mega-deals particularly in banking remained stable until the mid 2000′s or so. Bank of America was bought in 1998 by Nation’s Bank, to give one mega-deal example. Lots and lots of poor people, and a growing pool of them, don’t generate much wealth or business investment. Pakistan, Bangladesh, India, Indonesia, the Democratic Republic of the Congo, Venezuela, are just some examples. No one is rushing to invest in Pakistan because they have lots of more poor people every year.
What matters is how much the vast middle grows, in both size and wealth. And one can be traded off for the other, up to a point. If the Middle Class doesn’t grow much in size, but doubles in wealth, you see mega deals and lots more money being made off all sorts of things catering to that disposable income, from car makers to TV manufacturers to retail outlets and services. The converse, drastic declines in wealth, leaves companies scrambling to pick up nickels in front of that steamroller, desperate just to stay alive.
Spike TV’s Bar Rescue illustrates the dynamic. A failing bar has an owner telling bartenders to “save the foam” and serve it to customers to save a few pennies. Along with recycling poorly cleaned (lipstick stains) disposable glasses. Naturally few sought to drink there.
Standard Chartered Bank is a good case study of why the West failed. Outside factors, basically incompetent leadership at every level of society as money, heritage, connections, and spouting PC nonsense matters more than anything else, destroyed their customer base. Not just in the US and Western Europe, but in Japan and to an extent, China and South Korea as well. Bo Xilai and his wife are the symptoms, not the cause, of the mismanagement disease in China. Just as Barack Obama is the symptom, not the cause, of it here in the US.
And as more and more incompetence causes more and more failure, like one of the failed bars John Tapper must rescue, the leaders double down on stupid. Save the foam, recycle the glasses, let’s run a pirate barrrrrrrr! matey. Yes why not deal with Iran, what are the odds someone will figure out they’ll get fired in a staff reduction, and take out confidential information? Meanwhile critical upgrades to IT systems are put off because as the Financial Times notes, the banks don’t have the money. Estimates in the article range from 7 to 10 percent of annual revenue as the floor for investing in technology, particularly for banks that have acquired other banks and hold things together with kludges prone to failure.
Standard Chartered bet the bank, lock stock and barrel, essentially, for a few million in fees. They wagered they were much more clever, and smarter, and superior, to those low level regulators and icky politicos. That’s a bet they’re likely to lose.
Yes, the DFS is run by a protégé of Charles Schumer. Who wants to be the next Mayor of New York City, or governor, or senator. Yes the bank is contesting most of the charges. Good luck with that. Yes the other regulators have so far taken no action, guess what no one gets rewards for taking the side of IRAN and British Bankers, expect the feds to come down hard as well. If the banking license is revoked (and why wouldn’t it be) then there won’t be any other issuer eager to give them a license. Political fallout is just too intense. Particularly after another British Bank, HSBC, pled guilty to laundering money for Mexico’s drug cartels. None of this is rocket science. Any reasonably well informed twelve year old could figure this out.
Yet that was the bet made by senior people at the bank. It was as stupid as JP Morgan’s “London Whale” bet on interest rate swap derivatives. The one that blew up, costing the bank about $10 billion or so, by various estimates, and sparked a couple of congressional investigations.
This is a pre-revolutionary symptom. A corrupt, decadent elite that is manifestly incompetent at nearly everything. An elite that furthermore learns nothing, because no one in the elite is never punished, terribly, for failure. An elite, furthermore, that can’t see the systematic failure and work to change it, and adapt to the failure.
An awful, terrible wind is coming. One that fills me with dread, because as a middle class White guy, I have much to lose in chaos and destruction. Nevertheless, it is coming. For the elites, and us at large. There was a time for the elites to avoid the fate of Moammar Khadaffi, once the great leader of Libya, who inspired fear and respect if not love, and ended up hiding in a culvert, stabbed up the rectum (to death), and used as a puppet in a meat locker by a rabble of rebels. All the “zenga zenga” in the world could not change that destiny.