Friday, April 24, 2015

Deutchse Bank fined US$2.5 billion over LIBOR scam

Germany's biggest bank, Deutsche Bank, has become the latest global financial giant to be fined for rigging a key interest rate known as the LIBOR.

Deutsche will pay a record US$2.5 billion to settle investigations into dodgy practices where it manipulated the benchmark rate for its own profit.


The bank has been slammed for "cultural failings" almost seven years after the Wall Street collapse was triggered by greed and bad banking behaviour.

LIBOR is the London Interbank Offered Rate and an average rate set daily to determine how banks borrow and lend between each other.

It is used to price hundreds of trillions of dollars of financial transactions around the world and a higher or lower rate can mean millions in big business deals.

The impact of LIBOR goes unseen by most people even though it can flow into mortgage rates, car loans, personal loans and credit card rates.

Deutsche's US$2.5 billion fine from US and British regulators comes as banks around the world - including Australia - are being scrutinised more than ever for alleged unlawful and unethical practices.

The settlement dwarfs fines paid by Barclays and UBS which paid $US500 million and $US1.5 billion respectively.

While the fine is less than what Deutsche Banks makes in a year it is around what it makes in a quarter.

But in the case of Deutsche the evidence has been damning and that appears to have ramped the the severity of the fine.

One request, now public, highlights the deals done on LIBOR with a Deutsche trader pleading with Barclays for a lower quote saying: "I'm begging you, don't forget me .. I'm on my knees."

Deutsche's image has not been helped by the accidental destruction of around 482 tapes of telephone calls of LIBOR transactions.

Martin Arnold, the banking editor at the Financial Times, says Deutsche sent the impression it had something to hide.

"It's pretty damaging and what stands out in this case is some of the language by particularly the UK's Financial Conduct Authority which is very critical of how the banks has behaved during this investigation and been very resistant to cooperating," Mr Arnold told the BBC.

"And it says misled the regulator at several points and even says that the bank destroyed some evidence that the regulator had requested it preserve. So there's a lot of criticism there and this doesn't reflect well on Deutsche Bank's leadership."

The US Justice Department says investigations are far from over and that a range of other banks and individuals are being quizzed about the LIBOR scam.

So far total fines are approaching $US9 billion but analysts say that's tiny compared to what banks could make through LIBOR fixing.


To date there has been no evidence that any Australian bank has been involved in LIBOR rigging although their reputations have been tainted by association. 

Thursday, April 23, 2015

Accused "flashcrash" trader to fight extradition to United States



A British trader accused of triggering a "flash crash" on Wall Street five years ago is fighting extradition to the United States.

The 36-year-old man, who was arrested at his parent's home in West London, faced court briefly and is about to be released on US$7.5 million bail after a night behind bars.

Navinda Singh Sarao was arrested in the living room of his parent's home dressed in a tracksuit rather than the pinstripe fashion that many would associate with high powered market traders.

It is alleged that Sarao was responsible for a sudden crash in share valuations on May 6 2010 which saw the Dow Jones Industrial Average briefly plunge more than 1,000 points.

The crash temporarily wiped nearly a trillion dollars off sharemarket valuations.

The high speed trader made his first court appearance after the US Justice Department charged him with wire fraud, commodities fraud and market manipulation over several years.

Sarao is accused to using a complex automated program to "spoof" markets which saw him reap a profit of US$40 million.

The court heard that the "spoof" program generated large sell orders that pushed down prices which allowed Saroa to cancel trades to buy in at lower prices.

It is alleged that Sarao's activity on 6 May earned him a profit of US$750,000.

However, experts are divided on whether US regulators have the necessary proof to secure a conviction against Sarao.

Hain Bodek, a former trader with UBS and Goldman Sachs, became a "whistleblower" on irregularites caused by high speed trading.

But he told the BBC there is no firm agreement on what actually caused the "flashcrash" in 2010 and that prosecutors will need to come up with hard evidence.

"It's a very bold approach for the regulators. It would require that they provide some form of analylitics or some real concrete scientific justification," Mr Bodek said.

"And even with this latest action we still don't have a general agreement on the cause or the trigger of  the flash crash."


Navinda Sarao will remain on bail before he faces an extradition hearing in August but has indicated he plans to fight the action to place him on trial in the United States.

Tuesday, April 21, 2015

Wayne Swan rejects retirement call as he launches Labor-backed inequality think tank

The former Treasurer now Labor backbencher, Wayne Swan, has kept a low profile since the Abbott government was elected in 2013.

But today he's launching a new Labor-backed think tank, to highlight what it believes is growing economic inequality in Australia.


Mr Swan will co-chair the Inclusive Prosperity Commission which will mirror the body established in the United States by President Obama to counter the fallout from the global financial crisis.
  
"The challenge we have in Australia is that the Federal Government has taken up the agenda of the radical right, and of course that agenda of deregulation, slashing wages, cutting up the social safety net, is actually a recipe for increasing wealth concentration and income concentration and a reduction into the high degrees of social mobility that we've got," Mr Swan told AM.

"We need a new set of policies, to spread the benefits of growth, and they don't come from the trickledown economics model adopted by the Federal Government and put in place by the Reaganites over 30 years ago."

The commission is planning to present a formal public report in the leadup to the 2016 federal election.

The commission, which will be hosted by the Chifley Research Centre, includes a high profile cross-section including the former National Australia Bank chief executive Cameron Clyne, ACTU secretary Dave Oliver and economist Stephen Koukoulas who advised Prime Minister Julia Gillard.

"It's clearly a group of people who are in the centre and the centre left of politics. So unashamedly we've got a group of people who are very well qualified from the centre of Australian political life working to put together a new set of ideas to make sure we, as Australians, continue to grow, but grow fairly. Because fairness is the essence of strong sustainable growth for the long term," Mr Swan said.

Mr Swan said the windback of the mining investment boom presents policy challenges given the wealth for corporate taxes and royalties over the past decade.

"I'm not a pessimist about the Australian economy, but we do need a balanced set of policies which promotes growth, with fairness. We are ideally placed to maximise the opportunities which are going to flow from the Asian century, if we get our policy settings right," Mr Swan told AM.

"Australia does need to be competitive, but we also need to have appropriate fiscal and monetary policies, we've got make sure that we've got the industrialisation policies which are not only fair, but drive productivity growth.

"And we've got to make sure above all, that we continue those critical investments in health and education that drive equality of our human capital. That's what makes the difference for Australia, and that's what will make the difference in the Asian century".

Mr Swan, who served as Treasurer for six years under Prime Ministers Kevin Rudd and Julia Gillard, is stepping back into the limelight at the same time that pressure is mounting for him to retire from politics.

Some colleagues are urging him not to re-nominate for his Brisbane seat of Lilley.

But Mr Swan has rejected the calls to go and says he wants to play a mentor role to other Labor members of parliament.

"I've recommitted to running for another term to seek the support of my electorate for a further three years.

"I'm passionate about making Australia a better place in the future and I believe I can make a contribution from the backbench utilising my experience as Treasurer of Australia for six years and I intend to do that.

"I also think there's a role for people such as myself to act as a mentor to members of parliament".

But Mr Swan said despite renominating he did not harbour ambitions for front bench or leadership positions.


"No I don't - I certainly don't."

Reserve Bank cleared of leak in ASIC suspicious dollar trading probe

The Reserve Bank appears to have been cleared of an internal leak after unusual trading in the Australian dollar seconds before two key interest rate decisions earlier this year.

The suspicious trading in February and March had been referred to the Australian Securities & Investments Commission (ASIC) given concerns about the security of board decisions and the potential to move markets.

A third incident of unusual trading before the cash rate decision in April has also been referred to ASIC.


The minutes from the RBA board's most recent meeting says members were briefed on the progress of the ASIC probe but that the theory of a rogue insider leaking the information had been ruled out.

"Internal work since March has not identified any evidence of procedural lapses or conduct that could have led to the early release of relevant information," the minutes say.

The RBA is now working on the theory that the unusual trades could have been caused by algorithmic or high speed trading the triggered other buying or selling in currency markets.

"Illiquid conditions that existed in the foreign exchange market at the time meant that small trades could move by relatively large amounts," the minutes say.

"Once such movements occurred it would be highly likely that algorithmic trading strategies would exacerbate such movements."

In keeping the cash rate on hold at 2.25 percent a fortnight ago the Reserve Bank also repeated its warning that record low interest rates could "foster imbalances" in Sydney's booming housing market.

"The most recent data suggested that activity in the housing market "remained strong" and that "there had been little change to housing market conditions or in the growth of housing credit in early 2015".

Earlier today in New York, the RBA governor Glenn Stevens ramped up his concerns saying that prices in Sydney were "rather exuberant".

However, Mr Stevens also said the current focus on Sydney real estate in terms of monetary policy tended to ignore the softer trends in the remaining 80 percent of the country.

While the minutes say "a further easing may be appropriate" in interest rates, it would be important to receive more economic data to determine the impact of the February rate cut.

The latest reading on quarter consumer inflation out tomorrow now appears to be key in whether the Reserve Bank will decide on a pre-Budget rate cut in May.

The minutes also express concern about the economic slowdown in China where deteriorating conditions in the property market had "increased the vulnerability of leverage property developers".


The RBA also noted the weakness in China is flowing through to lower demand for steel which has contributed to the current plunge in the price of iron ore.

Friday, April 17, 2015

Greece back to brink of default (again) as frustrated IMF signals end game


For weeks, months and years the economic crisis in Greece and the prospect of a Greek exit from the Eurozone has been simmering in the background.

But now it's looking serious and a showdown between Greece and the International Monetary Fund appears to be entering its final dangerous phase.

Financial markets, which until now have been numb given the duelling rhetoric, are now bracing for the fallout if Greece is pushed from the Eurozone or decides to walk away.


Just last week Greece made aUS$485 million repayment to the IMF on its massive debt of US$260 billion to ease concerns about debt default.

In return, Greece asked for more emergency cash to keep the government running so it can maintain social services could pay public sector workers.

But the IMF and Eurozone leaders, led by Germany said "no"  and demanded that the Greek government deliver on promised economic reforms within six days.

The deadline for the updated reform strategy us now up and rather than signal it would comply, Greek finance minister Yanis Varoufakis is giving every indication that the default prospect is real.

"We need to convince our partners, especially in northern Europe, that this government is not about going back to the profligacy of yesteryear," Dr Varoufakis said in Washington.

"They need to convince us that they are serious about rebooting a series of measures, programs, fiscal consolidation plan that has (to date) failed.

Setting the end of June as a deadline he said "this negotiation must succeed".

The hard talk is becoming ominous with Greece scheduled to deliver on a US$1 billion debt repayment in the coming weeks.

But the prospect of that repayment going down to the wire prompted the IMF's managing director Christine Lagarde to remind Greece that a replayment delay would not be tolerated.

"Payment delays have not been granted by the board of the IMF in the last 30 years so while all options are available to all countries, it's clearly not a course of action that would actually fit or be recommendable in the current situation. We have never had an advanced economy asking for payment delays," Ms Lagarde said in Washington.

European markets reacted cautiously and the standoff between Greece, the IMF and Eurozone leader was a factor that prompted investors to sell.

However, there appears to be greater confidence six years after the Greek crisis began that an ultimate exit would not result in a domino effect with other weak nations like Spain, Italy, Portugal or Cyrus deciding to go it alone.

But as a result, Greece is now paying more for its debt with its three year bonds now at around 30 per cent.


It's the best sign that in addition to the IMF, financial markets still see Greece as a very risky nation to lend to especially as its next debt deadline gets closer. 

Tuesday, April 14, 2015

Australia world's tenth most socially advanced nation - but scores badly on housing affordability


A survey out today shows Australia is the world's tenth most socially advanced nation.

But while Australia scores well on personal rights - such as freedom of speech, freedom of movement and political rights - it's falling well behind in housing affordability.

Listen to my report from this morning's edition of AM

The study comes as spiraling real estate prices in Sydney fuel fears about a potentially dangerous housing bubble especially if the Reserve Bank cuts interest rates in the coming months.

The report also underscores that the end of the resources boom, illustrated by the falling iron ore price, has the potential to damage living standards of Australians.

The Social Progress Index which is published by the US not-for-profit group, Social Progress Imperative, ranks Norway as the world's most socially advanced nation.



Norway is followed by Sweden, Switzerland, Iceland, New Zealand and Canada.

At number ten, Australia is in the middle of the rankings but ahead of the bigger economies such as Britain, Germany, Japan and US.

Australia ranks in the middle, but ahead of Britain, Germany, Japan, the United States in terms of social progress.

But Lynne Pezzullo, lead partner of health economics and social policy at the accounting firm Deloitte, says Australia only ranks 19th in the world when it comes to shelter and 51st in terms of housing affordability.

"Access to affordable housing is a key issue and Australia is not doing particularly well in that area, even though we have very low interest rates at the moment," Ms Pezzullo told AM.

"But importantly it's our housing pricing and our access into the housing market, both in terms of rent and also in terms of purchase, which are driving the poor performance we have in that area."

Ms Pezzullo says deepening worries about housing and basic shelter have potential psychological impacts that could ultimately lead to suicide.

"There's a link between housing affordability and homelessness and then through to domestic violence and suicide rates," Ms Pezzullo said.

"Australia performs particularly poorly relative to other countries in relation to our high suicide rates."

Ms Pezzullo also warns that the fallout from declining commodity prices could ultimately hurt living standards in Australia.

"Australia has had a really good free kick in the last three decades from particular factors, which have been very gracious to us," Ms Pezzullo said.

"But this coming decade we've got the baby boomers exiting the population and therefore reducing participation rates, we haven't had major investments in infrastructure or micro reforms to benefit from and of course we've got the iron ore price in particular falling and the coal price falling," Ms Pezzullo said.

"Other commodity prices are falling which means we have got particularly issues across the Australian economy - particularly in the Western Australian and Queensland economy."


The Social Progress Index is closely-watched because it does not use gross domestic product as the sole factor in measuring a nation's wealth.