The other banking problem

Deutsche Bank is the most connected bank in the world. As such, it poses the greatest risk to a banking crisis. And right now, in the midst of good trading revenue being reported by banks this season, Deutsche Bank’s problem makes it difficult for banks to keep fueling the economy and reduce the impact of risk weighted assets.

And despite what people say about low unemployment rate, let’s remember that we have the lowest labor participation rate. Nearly 1 in 10 working age men are on disability. Women, less. The current gap between the working and the working population is more than twice what it used to be. 
Plus, we have been spending the past 8 years replacing higher paying jobs with lower paying jobs. Not only that, we have been replacing a lot of higher productivity jobs with lower productivity jobs. Another way to look at it, we have been taking a road construction worker from building roads and placing him at the fact food cash register, or nothing at all. Nothing is wrong with working as a cash register person, but feeding a few people simply isn’t as productive as creating a path for food to travel to that fast food restaurant and thousands of other ones. 

The saving grace on this is that corporations have more cash than ever, which has reduced the need to borrow. The US policy of letting corporations to pile up cash when we have a year’sworth of GDP in debt, $1.3 Trillion of which is student loans, seems ridiculous. At least that means there is more money to lend to smaller businesses. 

Now, back to the issue of risk: smaller businesses are riskier. This makes it difficult to manage risk. The result is back to where we started. That is part is the nasty cycle Deutsche Bank may worsen. 

Banks can thank Wells Fargo for the additional expense

Due to sales practices at Wells Fargo, banks across the industry are being examined. Banks are always being examined, of course, but additional examinations are being added. And, this is all being done in quick order. When the Wells Fargo CEO testified in front of Congress, it sent a single to the industry that this was likely to happen. It isn’t so much about what was said but that it was taking place that indicated to the industry. 

One thought on blockchain

I have been thinking a lot about blockchain this past month, especially in terms of anti-money laundering. Blockchain could make AML obsolete, in theory. Blockchain is the decentralized database system that allows for recordkeeping of transactions nearly impossible to fake. And because of it, it sort of creates a world that is zero sum. It isn’t completely zero sum, especially in the beginning because no sources of transaction have been recorded, but eventually so many transaction have been recorded that whatever currency is being tracked could be traced to its original source, in this case the first transaction on the database. 

Theory is always beautiful and clean. The reality is that this would require the Office of the Comptroller of the Currency and the Federal Reserve Bank to have their own blockchains and run their own transactions. And I don’t see any interest in that happening. 

Another thing that must happen in reality is that all US dollar transaction would need to have unique identifiers for every penny of that transaction. Why? Well, the nature of blockchain is that, the smallest common denominator will be the base currency. That means, every penny will be tracked as a unique object. 

Also, as a result of the penny becoming the de facto currency and the zero sum-ness of the blockchain, it would only makes sense to have their equivalent physical currency. As long as we have physical currency, and we have digital to physical convertibility at today’s rates – meaning, being able to go to the ATM and withdrawing funds without needing to match the funds to any physical bill – we will not benefit greatly from blockchain’s true potential. 

This is all from an AML perspective. There are a whole host of applications I did not address. 

What negative interest rates mean for you?

Short answer: nothing.

Janet Yellen, Chairman of the Federal Reserve said the Fed will not rule out negative interest rates.

Let’s first explain what happens normally when interest rates are positive. You know that when you borrow money from the bank, you pay back the debt you borrowed and interest. That interest payment is a result of a positive interest rate.

With this logic, one would think that when the interest rate is negative, when you borrow money, you will actually be paid an interest payment rather than paying it. But that’s not the case unless something else happens. But i can’t talk about the something else until I explain what does happen with a negative interest rate.

The Fed lends money to banks at a negative interest rate. Now the bank has a lot more money to lend and so they do. Why? Because they could earn a lot more money by lending rather than simply sitting on it. But the banks lend it at a positive interest rate. The difference between the bank received by borrowing money from the Fed and lending money to borrowers is their profit. That means that if you qualify for a loan, you will likely see a slightly lower interest rate but it will not be negative. This announce means little to most people, then.

In this sense, there is no difference between positive and negative interest rates.

In another sense, they are encouraging borrowers to effectively lend money to other borrowers for an easy return on the borrowed funds. As a matter of fact, because of the stringent lending standards, those who can afford to not borrow will borrow and create their own portfolio of loans. This is essentially expanding the shadow banking industry, rather than decreasing it, which was what the fed tried to do a couple of years ago.

This about face is a result of very low inflation rates in April, which indicates reduction of the economy might be eminent. April’s annualized inflation rate was 0.8%, which is almost non-existent.

The Fed only has two tools: interest rates and money supply. If they increase money supply, they will devalue the currency and make it cheaper for economies using other currencies to purchase US products and services. If they decrease interest rates, they will increase spending because it won’t be as enticing to save money when interest rates are so low.

in re there’s something wrong with the labor market

In a recent article on Business Insider, there is a great economics overview of what it means to have 5.8 million job openings when the US economy has 5% unemployment – that is to say, lots of job openings and low unemployment.

It didn’t cover, however, the economics of job opening. As a matter of fact, it gave itself the opportunity to do so when it explained that this phenomenon could mean there is a mismatch between what employers are seeking versus what employees can offer. Yes, there might be a large gap. But unlike in the past, job openings cost less to have open than before. They can essentially be open for free forever and they can collect CVs even when they are not actively seeking to replace or fill a role. As a matter of fact, employers can simply have a job opening for every role in the firm at all times.

The forever job opening is happening to some degree. There are posting for entry level jobs from five years ago cuz, well, why not. If you are collecting CVs and purging them as they reach their 6 month anniversary, then thry have an ongoing active list of jobseekers when the current employee leaves.

The Panama Papers, see for yourself

From Deutsche Welle

The International Consortium of Investigative Journalists (ICIJ) has created a database where anyone can look through the Panama Paper. You should be hearing a whole lot more about it in the coming weeks as outsiders see morr recognizable names start to surface.

There has also a dirth of reaction from Congress, as some have been complaining. Many in Congress probably do not want to discover that their associates and allies are linked to this inflammatory issue.

Len Gotshalk, former NFL player, created a shell corporation. Whether the activities in his. company are lehal or not is one concern. Another is that not his nme is along side other American clients of Mossack Fonseca, many of whom have criminal records. Most seem to have been found guilty of financial crimes.

Even national governments have created shell companies. Such is the case for the African nation of Ghana, which created a shell corporation for, among other things, its tourism bureau. While the activities in it are not yet known, if it went through MoFon, then we will find out.

This all happened because the hacker, known as John Doe, was able to take advantage of an insecure out-of-date SSL v2 protocol. It turned out that the Firm was using an out of date version of Drupal content management system. This basically means, MoneyCompliance is more secure than the lae firm creating secretive legal entities.

John Doe seems unhappy that governments are not trying to fix inequality. Goes to show how hackers cannot control the story.

SWIFT-ly robbed
from Wikipedia

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is the messaging system banks use across the world to send each other messages. These messages contain transfers of money, securities and instructions on what to do with them. It is being reported everywhere that its servers at the Federal Reserve Bank of New York was breached and a number of accounts have been touched. The current estimate is that the cybercriminals got away with $81 Million from Bangladeshi account at the FRB.

Here’s are the latest:


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.