Cathy O’Neil, mathbabe, data scientist, former Wall Street quant will explain how private information is collected, stored, sold, and used in Internet models including e-scores (electronic credit scores), advertisements, and other fun stuff.
Sunday, March 31 2-3 PM: Will be followed at 3 pm by the regular weekly meeting of OWS – Alternative Banking working group.
This is crossposted from mathbabe.org. Opinions expressed are those of Cathy O’Neil.
One thing I kept track of while I was away was the ongoing, intensely interesting situation in Cyprus. For those of you who have been following it just as closely, this will not be new, and please correct me if you think I’ve gotten something wrong.
Background
Cyprus banks have recently gotten deeply in trouble, partly because of their heavy investment in Greek government bonds which as you remember were semi-defaulted on in spite of them being “risk-weighted” at zero, and partly because of an enormous amount of Russian money they hold (Russian businessmen enjoy lowering their taxes by funneling their money to Cyprus), which created a severely bloated financial sector.
To be fair, just having deposits of rich Russian businessmen doesn’t make you fragile. But it’s just not done in banking, I guess, to simply hold on to money – you have to invest it somewhere, and they invested poorly.
To get an idea of how bloated the finance sector is and how badly the banks were hurting, if the Cyprus government was to give them the money they need, it would be 70% of GDP, and they’re already about 90% of GDP in debt. Even so, that’s only 17.2 billion Euros, or a bit more than twice Steven Cohen’s personal fortune ($10 billion) even after his firm, SAC Capital Advisors, settled with the SEC for insider trading “without admitting nor denying wrongdoing”.
What are the options?
Plan #1: anti-FDIC insurance.
The plan as of more than a week ago was to take money from all the accounts as well as bond holders and shareholders. This included even the so-called insured deposits of accounts below 100,000 Euros.
So normal people, who thought their money was insured, would be paying 6.7% of their savings into a so-called “bail-in” fund, and people with more money in their accounts would be paying 9.9%.
This was across-the-board, by the way, for all Cyprus banks, independent of how much trouble a given bank was in. The banks closed down before this was announced so people couldn’t grab their money.
Compare that to the US version of a bailout from 2008, when shareholders got partially screwed, bondholders were left whole, deposits were untouched, but taxpayers were on the hook (and still are).
Plan #1 was baldfaced: it was saying to the average person in Cyprus, “Hey we fucked up the banks, can we take your money to fix it?”. It was incredible that anyone thought it would work. The ramifications of such an anti-FDIC insurance would be immediate and contagious, namely everyone in any related country would immediately start pulling their money out of banks. Why keep your money in an institution where you’re surely losing 7% when you can hide your money in a suitcase with only a small chance of it getting stolen?
Reaction by public: Hell No
Needless to say, the people in Cyprus didn’t like the plan. In fact, they strongly objected to directly paying for the mistakes of rich bankers and to protect Russians. They protested loudly and the Cypriotic politicians heard them, and voted down plan #1.
Plan #2
Since plan #1 failed, how about we just take money from uninsured depositors? Oh, and also make it bank-specific. So the banks that are in bigger poo-poo would seize more of their deposits than the banks that were in less poo-poo. That makes sense, and seems to be the current plan.
Problems with the current plan
There are a few problems with the new plan. But mostly they are what I’d call transition costs versus long-term problems. Easy for me to say, since I don’t live in Cyprus.
Rich people moving their money
First, rich people everywhere will no longer park lots of money in uninsured accounts in weak banks. Rich people have lots of options, though, so don’t feel too bad for them. They will instead put their money into lots of little accounts in lots of places, each of which will be insured. If this means they distribute their money over more banks, this is good for the banking system because it diversifies the capital and we’d end up with lots of biggish banks instead of a few enormous banks.
I’m not sure what the technical rules are, though. Say I’m stinking rich. Can I open 15 Bank of America accounts, each with $250K and so FDIC-insured? If I can’t do that for my local Bank of America branch, can I use Bank of America subsidiaries? Are the rules the same in the US and Europe? These rules are all of a sudden more important.
This is a transition cost, and within a few months all of the rich people will have their accounts insured or hidden.
Job losses
Second, there will be severe job losses in the bloated finance sector in Cyprus. Right now there are protests by workers from Laiki Bank, which is the worst off Cyprus bank, because they’re poised to lose their jobs. Again, it’s easy for me to say since I don’t live in Cyprus, but that’s what happens when you have an industry that’s too big – at some point it gets smaller and people lose jobs. I was around when the same thing happened to fisherman off the coast of New England, and it wasn’t pretty.
Again, though, it’s transitional. At some point the number of people working in banks in Cyprus will be reasonable. The question is whether they will have found another industry to replace finance.
Capital controls
The banks re-opened today, and of course people are standing in line to get cash, but things generally seem calm.
The big problem for businesses in Cyprus is that various “temporary” capital controls (which just means limits on taking money out of the country and on taking money from your bank) have been put into place that may lead to long-term problems.
Update (hat tip commenter badmax): many Russians already took their money out before the capital controls were imposed.
Euros don’t flow into and out of Cyprus effortlessly anymore, so the so-called monetary union has been broken. Depending on how quickly those rules are removed, and how quickly Cyprus comes up with other things to do, this could be a huge problem for the country.
Take-aways
With Nick P. (Karl Trotsky of venturecommunism.com), who asks: “How do we bootstrap an alternative banking system based in real production? What are some of the possibilities given emerging web payments standards?” Nick P. recommends you watch the following video if you get a chance: https://www.youtube.com/watch?v=nORI8r3JIyw#t=14m35s
JPM London Whale – Indictments Coming? Cathy says she’s in the middle of the Senate Whale Report. “It’s crazy fascinating, you should all read it,” she says. On Friday, CNBC reported that the Department of Justice “is in advanced stages of a probe into the so-called London Whale traders… looking deeply… at whether certain trades mismarked intentionally and… hid losses, all of which could be the basis for a securities fraud claim of… criminal nature.”
HSBC Reports. If you can’t get enough of that sort of thing, and given our pickets at HSBC, isn’t time we all read the May 2012 Levin Senate Committee report on HSBC money laundering (executive summary here) and, of course, the December 2012 HSBC settlement with the Justice Department? (Download the four documents here. DOJ press release here.)
Cyprus, continuing crisis. See the post on our blog for links to a primer and analyses of how it developed. As I wrote on Wednesday, however, “it’s all dating fast as the situation unfolds. The people took to the streets, cabinet members resigned, and condemnations are coming from Russia (where many of the depositors actually live). [Tuesday], with the bank holiday in its second day, the Parliament rejected the first bailout plan with no one voting for it.” Since then, as per this coverage in the Guardian, the parliament passed nine new bills imposing controls on capital movement, limiting withdrawals, converting current accounts to time deposits, etc. The bank holiday continues into next week. The EU has set a new ultimatum of Monday for a vote on the bailout deal, which will involve a levy on deposits but no longer on the below the standard insured amount of 100,000 euros. (Coincidentally, right in the middle of this first-ever possible euro exit crisis, the French police raided IMF chief Christine Lagarde’s apartment in Paris as part of an investigation into corruption charges against the government of former President Sarkozy, in which Lagarde was the finance minister.)
Deregulating Derivatives? What could go wrong?
Cathy forwarded the following collection of news stories on the impending gutting of derivatives regulation (such as it is) as a possible discussion topic. I hope some of you will have a chance to review these stories and inform the rest of us. Looking forward to seeing you all tomorrow!
Nicholas
Earlier this week, the House Ag Committee marked up some bills deregulating derivatives. I don’t think they were expecting anyone to really notice, but there was a bunch of press on what they did. The next step in the legislative process is for the House Financial Services Committee to look at the bills. That will take place in April. Here’s a round-up.
Bloomberg: Wall Street May Win Swap-Rule Reprieve in U.S. House Legislation
Mother Jones: Sneaky House Bill Would Gut Financial Reform
Talk Radio News Service: Get Ready For Another Derivative Meltdown
Jim Himes, House Democrat, Defends Bill To Weaken Dodd-Frank Derivatives Rule
Rough translation: “The money, the money, where did it go? Into the capitalists’ pockets.”
There’s a good primer on the situation in Cyprus from Alternet, “7 Things You Need to Know About the Shocking Cyprus Bailout Crisis That Has Everyone Freaked Out.” I also liked the analysis in the Michael Roberts Blog. But it’s all dating fast as the situation unfolds. The people took to the streets, cabinet members resigned, and condemnations are coming from Russia (where many of the depositors actually live). Yesterday, with the bank holiday in its second day, the Parliament rejected the bailout plan with no one voting for it. Now what? With Intrade no longer operating, where can I bet on a surprise Russian bailout?
I had an interesting dinner conversation with some City University scholars (of the radical set) last night about how this case is more complicated than it looks. Cyprus, the latest EU crisis and Troika austerity victim, is also a haven for tax evasion and money laundering. Most of the deposits affected may be Russian, although as always in Cyprus there is also British capital. The island (or the recognized Greek part of it) is relatively wealthy compared to other periphery targets like the SPIGI or GIPSI (please call them that – not PIIGS), and the financial haven plays no small role in that.
One professor for whom I have developed great intellectual respect despite certain differences between us argued that the case of Cyprus isn’t comparable to the SPIGI because (for the sake of argument) to keep the two Cypriot banks from going under there is no one else to hit besides the depositors. He also asked: How is this worse than hitting pensioners and cutting social welfare benefits that are needed more desperately, with far worse human consequences? To the fact that people around the SPIGI and EU are now inspired by the example of so-far successful Cypriot popular resistance to the proposed measures, he said that, they were getting their analysis wrong. This case is not driven by quite the same power constellation as when the Troika imposes austerity on the SPIGI, because with the SPIGI you have a united front of EU and national elite interests carrying out the policy, with uninvolved elites at best indifferent. With Cyprus you have Russia and England pissed off about the EU plan. He pointed out that Putin never issued a statement damning the EU for the human price of austerity in, say, Portugal. He does so with Cyprus only because Russian elite interests are affected.
My answer was, first, that going after depositors (especially below the 100,000 euro level of guaranteed deposits) crosses a red line in capitalism’s own rules, and thus damages the ideology in a shocking way that’s cannibalistic to the powers that be. At the same time it is also an experiment in total exercise of class power, to see how far a people can be pushed and what might be learned for future cases. So this is the same forces, doing the same thing, with different means, in a different situation. At least, it is so if you understand that the key point is not in the measures imposed (deposits seized instead of pension and health care cuts) but in the sheer unconditionality of class power and the demand it never be questioned. Thus, while my professor friend’s analysis is true in terms of conflicts in elite interests and in the economic picture as can be seen by scholars and experts, the social movement response is another thing altogether. If there is inspiration among peoples in the SPIGI or EU at the Cypriot example of turning back that class power (for now, and perhaps with ugly consequences), and if this helps to spark upheavals against that power elsewhere, it wouldn’t be the first time a justified revolution (so to speak) was fired up by a rumor that turned out to be false after the train had already left the station.
By the way, while I don’t always say so, anything on here you see with my name on it represents my views and opinions, just like with Cathy and Josh, and any errors are mine.
At the OWS Alternative Banking working group meeting of March 10th, 2013, those present (numbering about 30 persons) passed the following resolution by acclamation:
Endorsement of Robin Hood Tax
Occupy Wall Street – Alternative Banking Working Group endorses the initiative of a “Robin Hood Tax,” as advanced by Health Global Access Group and a coalition of other groups (see http://healthgap.org/rht-101). The initiative, also sometimes called a Tobin Tax or a Financial Transaction Tax (FTT), would impose a tax of less than one-tenth of a percent on speculative financial transactions such as the trading of equities, options, currencies in bulk and derivatives. Forms of this tax already exist in other countries and the idea is currently on the G20 agenda.
In endorsing the idea of an FTT, we wish to make three points:
1) We agree with the additional idea of earmarking all revenues raised from an FTT for specific spending on global health and mitigating climate change, as specified by Health GAP.
2) We believe an FTT would help in curbing certain classes of systemically risky and non-productive speculative trades, such as High Frequency Trading.
3) While it is a good idea, in no way do we believe an FTT would be sufficient in solving the problems of the financial and monetary system, which even with an FTT will continue to pose unacceptable systemic risks, concentrate wealth in the hands of the 1%, and cause bubbles and periodic crashes such as the one we saw in 2007-2008. Much broader and further-ranging reform of the financial and monetary system remains necessary.
In other words, we think an FTT is an excellent idea whose time has come, even if it cannot suffice as a replacement for true Alternative Banking.
As far as “further-ranging reform” is concerned, it should be obvious to readers of this blog that our group is unanimously in favor of breaking up the private megabanks and re-instituting strong Glass-Steagal limits between commercial, speculative investment and insurance activities. And of course we are perhaps even more passionately in favor of enforcing all existing banking, fraud and conspiracy laws and regulations, so that the criminal behavior by the biggest players in the financial sector is actually punished – unlike the sorry reality of today, in which the regulators are captured and the government actively rewards criminals by agreeing to bogus institutional settlements that forego criminal investigations, thus guaranteeing further and even more ambitious criminal activity in the future.
But even all that would only put us back in the less-than ideal situation of the 1980s. Among us there are supporters for a wealth of more radical ideas: bank nationalization, modern monetary theory, debt-free or interest-negative money, public state development and commercial banks (like the one in North Dakota), community currencies or electronic currencies based on labor time or energy, independent non-profit ratings agencies, a cooperative Occupy Bank, a wealth tax, and of course expanding the credit union system. (Move Your Money!)
So watch this space as we discuss and debate just what kind of “different world is possible.” And join us!
Our meetings are held weekly at 3 pm on Sundays without fail, usually with pre-meeting talks and presentations starting at 2 pm. Right now we are preparing to write an OWS Alt-Banking book and planning many other actions and initiatives. For scheduling and details, please join our recently established Meetup group (bearing in mind that the RSVPs there reflect only a fraction of the actual attendance).
That’s what a regulator called the “hedge” that lost JPMorgan $6 billion last year.
The Volcker Rule was supposed to stop proprietary trading by the banks. A clearer name for proprietary trading is “banks betting with FDIC insured deposits”. That is supposed to end.
But, by law it should have been implemented last year but we are now told it probably won’t be “effective” until 2014 (despite the best efforts of our friends at Occupy the SEC).
And when it is, it will only be “effective” in the legal sense of “in effect” not in the English meaning of doing what it is intended to do. It will not ban hedges which are basically whatever the banks say they are — even “make believe magic voodoo composite hedges”. So, proprietary trading will be alive and well.
So, the megabanks are still Too Big, Interconnected and Complex to Oversee (TIBACO), and they are still abusing the privilege.
Should JPM CEO Jamie Dimon go to jail for lying to shareholders and Congress?
Don’t hold your breathe waiting for this to happen.
Do, get involved in working to stop the banks abusive practices.
Obama promised us the “most transparent government ever”.
The NY Federal Reserve Bank is making secret deals to protect Bank of America.
The latest outrage is that the FDIC is doing its best to sweep settlements it is making under the rug also to protect the banks.
The only good news in all this is that at least some of the mainstream media are still doing their jobs.
LET US TAKE A LOOK AT THE CAREERS of two men who live in the incestuous world that C. Wright Mills, in his classic and still-contemporary 1956 study, called The Power Elite. As Mills wrote and many others since have found, the really key people at the rarified heights of American power and policy tend to rise up from a narrow group of universities, enter the same country clubs (like the Council on Foreign Relations), and in their careers revolve seamlessly between high positions in the “private” and “public” sectors. They serve the needs of the far-less-than-one-percent who effectively own both sectors; in the course of which they usually make themselves stinking rich (in those cases when they weren’t already born that way). If you want to see a great film about these meritocrats (a term originally coined ironically in the 1950s by UK political scientist Michael Young), we recommend Lewis Lapham’s terrific documentary musical, “The American Ruling Class” (2005), which also foresaw the nascent rebellion of the 99%.
Now let us meet David S. Cohen of the US Treasury Department and Stuart Levey of HSBC – or is it the other way around?
David S. Cohen
1) Since June 2011, the Under Secretary for Terrorism and Financial Intelligence at the United States Department of the Treasury has been one David S. Cohen (Yale Law School, 1989). Quoting his bio at the Treasury Department’s website, “As Under Secretary for Terrorism and Financial Intelligence, Cohen leads the Treasury Department’s policy, enforcement, regulatory, and intelligence functions aimed at identifying and disrupting the lines of financial support to international terrorist organizations, proliferators, narcotics traffickers, and other illicit actors posing a threat to our national security. He is also responsible for directing the Department’s efforts to combat money laundering and financial crimes” (all italics ours). Cohen had already been Assistant Secretary for Terrorist Financing since 2009.
2) Based on these portfolios, we would rightly expect Mr. Cohen’s responsibilities during the last two years to have included gathering intelligence on the notorious money laundering entity HSBC. The “too big to fail” megabank recently admitted to laundering billions of dollars for the Mexican and Colombian drug cartels and to violating rules on dealings with “terrorist” organizations in a settlement with the Justice Department that absolved all HSBC executives from a federal criminal investigation (December 2012).
3) David S. Cohen (it’s important to distinguish him from other David Cohens of note) also worked for the Treasury in 1999 to 2001, when he “was involved in crafting legislation that formed the basis of Title III of the USA PATRIOT Act, the 2001 update to the Bank Secrecy Act that provided Treasury new tools to combat money laundering and the financing of terrorism.” Once again, sounds just like HSBC!
4) In between his first stint at Treasury and his current stint at Treasury, Cohen worked seven years for the ginormously influential DC legal firm, Wilmer Hale Cutler Pickering Hale and Dorr LLP, where he focused on “civil and criminal litigation, the defense of regulatory investigations into accounting and financial fraud, and anti-money laundering and sanctions compliance advice for a broad range of financial institutions including banks, broker-dealers, insurance companies, mutual funds and hedge funds.” In other words, in his current job at the Treasury Cohen is supposed to investigate the very same kind of entities that he had spent seven years defending while at Wilmer Hale.
5) The doors for Cohen have been revolving a lot longer than that. In the 1990s, Cohen practiced nine years at the DC firm Miller, Cassidy, Larroca & Lewin LLP, specializing in “white collar criminal defense and civil litigation,” again working as defense counsel for the kinds of firms he is now supposed to be investigating. Miller Cassidy later merged into an even more ginormous DC lawyer-lobbyist entity, Baker Botts LLP of Dallas and Washington (in which the “Baker” is none other than the former Secretary of State and Bush family consigliere, James Baker).
While at Miller Cassidy, Cohen would have surely made the acquaintance of another high-powered lawyer working there in nearly all of the same years. His name is Stuart Levey.
So who is Stuart Levey and why do we care?
Stuart Levey
6) Stuart Levey (Harvard Law School, 1989), worked at Miller Cassidy (the later Baker Botts) as a litigation practitioner for 11 years before joining the Justice Department in 2001. In 2004, the Bush government appointed him the first Under Secretary for Terrorism and Financial Intelligence in the US Department of the Treasury, a position in which he served also under President Obama until February 2011. In other words, Stuart Levey was the almost-direct predecessor to David S. Cohen as the “top cop” at Treasury for investigations into money laundering, terrorism and the international drug cartels. And this after both men had once worked at Miller Cassidy for nearly a decade in the 1990s.
7) More about Stuart Levey’s intimate connections to both the US Treasury and the Justice Department: “After leaving the Treasury Department, Mr Levey was a Senior Fellow for National Security and Financial Integrity at the Council on Foreign Relations. Prior to his Treasury appointment, Mr Levey served as the Principal Associate Deputy Attorney General at the US Department of Justice, having previously served as an Associate Deputy Attorney General and as the Chief of Staff of the Deputy Attorney General.”
8) Where is Stuart Levey today? Why, he’s on the HSBC Board of Directors as the Chief Legal Officer of HSBC Holdings plc, the parent company of HSBC operations worldwide. We got all this information about Mr. Levey from his HSBC bio page. There we learned that he has been the drug money-laundering megabank’s Chief Legal Officer since January 2012. Thus, he would have been intimately involved in (and legally responsible for) the crafting of HSBC’s December 2012 “Get Out of Jail Free” settlement with the Justice Department. Intelligence from David S. Cohen’s group at Treasury must have also played a role in advising Justice on the historic settlement.
Our last claim is, again, based on Cohen’s portfolio; if he was not at all involved in the process leading to the DOJ/HSBC settlement, then just what is the purpose of his job?
Until now we have been privy to few details about what inside dealings went on in advance of the settlement, other than admissions from the recently disgraced and departed Deputy Attorney General Lanny Breuer that DOJ indeed considered the bank too big to fail. Last week, however, Attorney General Eric Holder reinforced before the Senate Banking Committee that he believes the executives of some banks are impossible to prosecute under criminal law because the possible failure of their institutions would risk a general financial crash.
It gets better. Also last week, David Cohen and officials from other ostensible financial regulatory agencies were called to testify before the Senate Banking Committee on the failure to bring prosecutions of banking criminals. Sen. Elizabeth Warren questioned Cohen about the HSBC case. We’ll let the excellent coverage by Erika Eichelberger in Mother Jones tell the rest of the story:
…it’s not just HSBC—this is a systemic problem. Ten banks have been penalized in recent years for failure to comply with anti-money laundering rules. The Senate banking committee held the hearing in order to interrogate regulators at the Federal Reserve, Treasury Department, and the Office of the Comptroller of the Currency about why they are not doing more to stop these kinds of shenanigans.
All of the regulators said they were working on improving regulations and enforcement and protested that it was up to the Department of Justice—not them—to decide whether prosecution was appropriate. (The Justice Department did not have a witness at the hearing.) They were reluctant to weigh in on whether they thought HSBC should have faced trial, even though they consult closely with the DOJ on bank activities. That infuriated Warren:
The US government takes money laundering very seriously for a good reason. And it puts strong penalties in place… It’s possible to shut down a bank… Individuals can be banned from ever participating in financial services again. And people can be sent to prison. In December, HSBC admitted to… laundering $881 million that we know of… They didn’t do it just one time… They did it over and over and over again… They were caught doing it, warned not to do it, and kept right on doing it. And evidently made profits doing it. Now, HSBC paid a fine, but no individual went to trial. No individual was banned from banking and there was no hearing to consider shutting down HSBC’s actives in the US… You’re the experts on money laundering. I’d like your opinion. What does it take? How many billions of dollars do you have to launder for drug lords and how many sanctions do you have to violate before someone will consider shutting down a financial institution like this?
David Cohen, the undersecretary for terrorism and financial intelligence at Treasury, responded that his department had imposed on HSBC “the largest penalties we’ve imposed on any financial institution.”
Warren got annoyed. “I’m asking: what does it take to get you to move towards even a hearing to consider shutting down operations for money laundering?” she said.
Cohen kept evading and Warren got more annoyed. “I’m not hearing your opinion on this,” she said. “What does it take even to say, ‘here’s where the line is’? Draw a line, and if you cross that line you’re at risk for having the bank closed.”
Cohen said he had views, but couldn’t get into it.
“It’s somewhere beyond $881 million in drug money,” Warren concluded on her own, and went on to spell out the injustice of it all. “If you’re caught with an ounce of cocaine, you’re going to go to jail… But if you launder nearly a billion dollars for international cartels and violate sanctions you pay a fine and you go home and sleep in your own bed a night.”
The claim from Treasury officials at the hearing was that they couldn’t move to pull HSBC’s license to kill to bank as long as Justice had not filed criminal charges. So Treasury and the other agencies couldn’t do nothin’, because Justice was too busy doing nothin’, apparently because Treasury wasn’t advising them to do anythin’.
As we consider this round-robin of abdication from the pretense that the government has either the responsibility or the power to prosecute the World’s Gangster Banks, remember our meritocratic takeaway for today:
HSBC’s top counsel, Levey, preceded Cohen at his present job as the top money laundering “investigator” at Treasury, after both spent nearly a decade together at the same high-priced DC law firm.
Small world!
Nick Levis writes for OWS Alternative Banking blog (alternativebanking.nycga.net). Any opinions and errors are his.
