Bloomberg: Tougher Russia Sanctions Measure Moves Ahead in U.S. Senate

The following is an excellent article written by Terrance Dopp and Justin Sink on the Bloomberg website on June 14, 2017 titled “Tougher Russia Sanctions Measure Moves Ahead in U.S. Senate” and I quote:

“Tougher Russia Sanctions Measure Moves Ahead in U.S. Senate”

June 14, 2017, 1:45 PM CDT June 14, 2017, 2:50 PM CDT
  • Amendment would require review process to ease penalties
  • Senators insert sanctions into legislation punishing Iran

How Putin Became the Symbol of Russian Power

The Senate signaled it’s ready to expand sanctions against Russia amid a probe into its meddling in the U.S. presidential election, and to let Congress review any move by President Donald Trump to lift existing penalties.

The Senate on Wednesday voted overwhelmingly — 97 to 2 — to add the Russia measure to a bill sanctioning Iran for its work to develop ballistic missile technology, in a bipartisan rebuke to Trump’s suggestions about improving relations with Russia. A date hasn’t been set for a final vote on the full measure.

The legislation comes after U.S. intelligence agencies concluded that Russia sought to influence the American presidential election last year. Congressional committees and the Federal Bureau of Investigation are examining the Russian interference and whether there was any collusion with Trump’s campaign.

The Trump administration is reviewing the Senate measure, according to a White House official, who asked for anonymity to discuss internal deliberations. The official said the administration is committed to keeping current sanctions in place until Moscow honors commitments it made over Ukraine and that the existing framework for sanctions is the best way to pressure Russia.

Secretary of State Rex Tillerson suggested Tuesday that the administration might oppose the Russia sanctions amendment. “What we would like is the flexibility,” he told a Senate panel.

‘Cyber Activity’

Under the legislation, new sanctions could be levied on entities engaging in “malicious cyber activity.” It would require the administration to explain any moves to ease or lift sanctions, and create a new mechanism for Congress to review and block any such effort.

The provision would put into law penalties that were imposed by the Obama administration on some Russian energy projects, a move in 2014 that came in response to Russia’s actions in Ukraine. It would also allow new sanctions on state-owned entities of the Russian economy, including mining, metal, shipping and railways. And it would ask the administration to prepare a study on the possible effects of expanding sanctions to cover sovereign debt and any derivative products.

Lawmakers advanced the measure just days after it was announced by Banking Chairman Mike Crapo of Idaho and Foreign Relations Chairman Bob Corker of Tennessee, as well as the ranking Democrats on the those panels, Sherrod Brown of Ohio and Ben Cardin of Maryland.

“Most members of both parties are concerned about the president’s lack of interest in doing anything about the Russians,” Brown said in an interview.

While backing Trump on most issues, leading Republicans such as Corker have challenged his assertion that he can make deals with Russian President Vladimir Putin.”


LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

Posted in Uncategorized | Leave a comment

Daily Kos: Money Laundering? Offshore Accounts? You Don’t Say!

The following is an excellent article written by Bob Johnson on the Daily Kos website on June 14, 2017 titled “Money Laundering?  Offshore Accounts?  You Don’t Say!” and I quote:


Has anyone heard from Mike Flynn lately? What happened to him? Witness Protection program? Heh.

Just to add to the breaking news this evening from the Washington Post on Mueller looking into possible obstruction of justice by Trump, The New York Times follows up with a story that ends with this paragraph:

A former senior official said Mr. Mueller’s investigation was looking at money laundering by Trump associates. The suspicion is that any cooperation with Russian officials would most likely have been done in exchange for some kind of financial payoff, and that there would have been an effort to hide the payoffs, most likely by routing them through offshore banking centers.

Recall that on May 31, Bloomberg reported that Mueller had added Andrew Weissmann, the DOJ’s top corporate fraud and foreign bribery investigator, to his team:

Justice Department fraud chief Andrew Weissmann is the most senior government lawyer to join Mueller, the former Federal Bureau of Investigation director who became special counsel on May 17, said two people, who asked not to be named discussing a personnel matter that hasn’t been made public.

As the head of the fraud section in the Obama administration, Weissmann’s specialties have included overseeing investigations into corporate wrongdoing and foreign corruption — including probes into Volkswagen AG over diesel-cheating, global banks over market manipulation and Brazil’s state-owned oil company Petrobras over corrupt payments.

Payoffs? Offshore accounts? No wonder Trump wanted Comey to drop the Flynn investigation. Well, that plus Mike Flynn is just a great, great guy. Right?


Wednesday, Jun 14, 2017 · 10:14:02 PM CST · Bob Johnson

And jaywillie reminded me of this story reported by USA Today yesterday:

Over the last 12 months, about 70% of buyers of Trump properties were limited liability companies – corporate entities that allow people to purchase property without revealing all of the owners’ names. That compares with about 4% of buyers in the two years before.

Just a coincidence, of course.

Posted in Uncategorized | Leave a comment AP-NORC Poll: Most in US Think Trump Meddled in Russia Probe

The following is an excellent article written by Josh Lederman and Emily Swanson of the Associated Press on the website on June 15, 2017 titled “AP-NORC Poll: Most in US Think Trump Meddled in Russia Probe” and I quote:

“AP-NORC poll: Most in US think Trump meddled in Russia probe”

WASHINGTON (AP) — A clear majority of Americans believe President Donald Trump has tried to interfere with the investigation into whether Russia meddled in the 2016 election and possible Trump campaign collusion, a new poll shows. Just one in five support his decision to oust James Comey from the FBI.

June 15, 2017Following Comey’s blockbuster appearance before Congress, an Associated Press-NORC Center for Public Affairs Research poll shows 68 percent of Americans are at least moderately concerned about the possibility that Trump or his campaign associates had inappropriate ties to Russia. Almost half of Americans say they’re very concerned. Only 3 in 10 say they’re not that concerned.

Americans largely view the issue along partisan lines. Sixty-two percent of Republicans say they’re not very concerned or not at all concerned about any Russia ties. Though just over half of Americans say they disapprove of Trump’s firing of Comey, the number grows to 79 percent among Democrats. Overall, only 22 percent of Americans support Comey’s dismissal.

For Sandra Younger, a 50-year-old from San Diego, Comey’s exit reinforced her suspicion “something fishy” was going on with the president and Russia. She said it was inappropriate to fire Comey given that he was overseeing the Russia investigation.

“If I had nothing to hide and someone wanted to investigate, I would say, ‘Go ahead, do your thing, I don’t care, because you won’t find anything,'” said Younger, a Democrat who imports jewelry supplies. She added of Trump: “He seems to be buddy-buddy with these epic creeps.”

Ads by Kiosked

But William Shepherd, a maintenance worker from Anderson, Indiana, felt it was the president’s prerogative to choose his FBI director. He said he was untroubled by claims Trump tried to persuade Comey to back off the investigation, saying those revelations only emerged after Comey was fired and wanted to defend himself.

“These headlines don’t really concern me, although they are attention-grabbers,” said Shepherd, a 40-year-old Republican. Of the six in 10 Americans who think Trump tried to obstruct or impede the investigation, most are Democrats and independents. Only a quarter of Republicans feel Trump meddled in the probe.

The poll began the day before Comey testified publicly before the Senate intelligence committee and continued through Sunday. Three percent of interviews were conducted before the hearing. For many Democrats, there’s some irony in coming to Comey’s defense and embracing his concerns about Trump. Last year, Democrats aggressively attacked Comey for his handling of the Hillary Clinton email investigation, with many calling for his firing.

Now that Trump is president and Comey has emerged as a top Trump antagonist, some former Comey critics see his willingness to go after the leaders of both political parties as proof of his independence.

“I’ve not ever been a particular fan of Mr. Comey’s,” said James Shaw, 53, of Olney, Illinois, pointing to the Clinton saga as a key reason. “But he’s an honest broker. I don’t think he’s politically motivated. I don’t think he’s partisan.”

Trump’s reference to the Russia probe as a reason for firing Comey bothers Linda Richardson, 62 — but not enough to second-guess his decision. Richardson, who said she’s a registered Democrat but has voted Republican for years, said Trump might have had other reasons, too.

“I guess you feel like you just need to trust your president,” said Richardson, a retiree from Meade County, Kentucky. “He just knows more about it than I do.” Americans are mixed on whether the Justice Department investigation, now led by Robert Mueller, can be fair and impartial. Twenty-six percent are very or extremely confident it can be. Thirty-six percent are moderately confident and an equal share of Americans aren’t very confident or are not at all so.

Mueller, the former FBI director, was put in charge of the investigation after Trump fired Comey and public pressure mounted for a special counsel to take over. Comey later testified that he’d authorized a friend to disclose to the media his notes on conversations with Trump about the investigation, in hopes that it would lead the Justice Department to name a special counsel.

The poll shows the public relatively unsympathetic to those leaking information about the investigation. Fifty-four percent say they’re doing more harm than good by potentially damaging national security. Forty-two percent think they’re doing more good by giving the public necessary information.

In general, 29 percent of Americans say they have a great deal of confidence in the people running the FBI. Fifty-two percent have a moderate amount of confidence and 18 percent have hardly any confidence. Democrats are more likely than Republicans to say they have a great deal of confidence in the FBI, 38 percent to 24 percent.

The AP-NORC poll of 1,068 adults was conducted June 8-11 using a sample drawn from NORC’s probability-based AmeriSpeak panel, which is designed to be representative of the U.S. population. The margin of sampling error for all respondents is plus or minus 4.1 percentage points.

Respondents were first selected randomly using address-based sampling methods, and later interviewed online or by phone.

Reach Josh Lederman on Twitter at and Emily Swanson at




LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

Posted in Uncategorized | Leave a comment

Time: Donald Trump’s Suite of Power

The following is an excellent article written by Alex Altman in the June 19, 2017 issue of Time magazine on page 24  titled “Donald Trump’s Suite of Power” which is the cover story and I quote:

“Donald Trump’s Suite of Power’

<span class="credit">Christopher Morris—VII for TIME</span><span class="caption">Inside a standard Hotel Room at the Trump International Hotel, the epicenter of the President’s business interests in D.C.</span>

Trump International Hotel is the epicenter of the President’s business interests in D.C.

How the President’s D.C. outpost became a dealmaker’s paradise for diplomats, lobbyists and insiders


At the bar of the Trump International Hotel in Washington, you can order a crystal spoonful of Hungarian wine for $140. Cocktails run from $23 for a gin and tonic to $100 for a vodka concoction with raw oysters and caviar. There’s a seafood pyramid called “the Trump Tower” that costs $120, or you can hit BLT Prime, a restaurant where the $59 salt-aged Kansas City strip steak comes with a long-shot chance of seeing the President sitting nearby. It’s the only restaurant in town where he has dined.

If the urge to shop strikes, there’s a Brioni boutique in one corner that offers the same Italian suits the President favors, starting at a few thousand a pop. Downstairs, a 90-minute couples massage at the Spa by Ivanka Trump will set you back $460—roughly the rack rate for a recent night in a standard room, where the Trump brand adorns everything from the shampoo bottles to the wine in the minibar.

People pay these prices for more than just booze, caviar and back rubs. This is the new town square in Donald Trump’s Washington. Tourists perch on the blue velvet sofas in the lobby, snapping cell-phone pictures as power players stream across the dark marble floors and cream carpets: international business­men, Republican operatives, wealthy donors, foreign diplomats, former Trump campaign aides, the occasional Administration official.

<span class="credit">Christopher Morris—VII for TIME</span><span class="caption">Guests can order pricey cocktails and mingle with Washington power brokers at Benjamin’s Bar &amp; Lounge in the Trump International Hotel.</span>

Guests can order pricey cocktails and mingle with Washington power brokers at Benjamin’s Bar & Lounge in the hotel.

That’s partly because a President who once promised to “drain the swamp” of influence peddling now owns the city’s newest bog. According to Trump’s 2016 financial-disclosure statement, he owned a 76.7% stake in the limited-liability company that controls the hotel, which is now headed by his son Donald Jr. The place has been a magnet for the capital’s political class. “Of course we hang out there,” says a former Trump campaign adviser. “Everyone hangs out there. Being in the Trump hotel’s lobby is a way to get people to know you.”

The potential conflicts of interest are dizzying. In the soaring atrium, guests kibitz under a massive U.S. flag—a gift on loan from the Heritage Foundation, the conservative think tank that helps shape Administration policy and that thanked top donors by bankrolling a December gala here keynoted by then incoming Vice President Mike Pence. For Trump’s Inauguration, guests willing to fork over the steep fees could mingle with top federal officials. One VIP package, which offered lodging in a 6,300-sq.-ft. townhouse suite—two floors overlooking Pennsylvania Avenue, accessed through a discreet wooden door—was advertised for $500,000. The President invited members of Congress to lunch in the ballroom. “It’s an absolutely stunning hotel,” press secretary Sean Spicer told reporters on Jan. 19. “I encourage you to go there if you haven’t been by.”

Foreign governments seem particu­larly keen to patronize Trump’s property. Between Oct. 1 and March 31, lobbyists working on behalf of the kingdom of Saudi Arabia ran up a $270,000 tab on rooms, catering and parking, according to foreign lobbying disclosures filed at the end of May and first reported by the Daily Caller. That stretch coincided with a Saudi lobbying push against legislation that would allow victims of terrorist attacks to sue foreign governments. In May, Trump chose Riyadh as his first foreign stop as President, where he announced an arms deal, gave a major foreign policy speech and participated in a traditional ceremonial sword dance.

In December, diplomats from Bahrain shifted that country’s National Day festivities to Trump International’s gilded, 13,000-sq.-ft. presidential ballroom. As if on cue, Kuwait moved its own annual gala in February from the Four Seasons across town to Trump International—even though the former location had already been reserved. The embassy of Azerbaijan co-hosted a Hanukkah party in the hotel’s elegant Lincoln Library, with a roster of guests that included Russian Ambassador Sergey Kislyak, who has become notorious this spring for meeting with several Trump Administration officials. “You know, successful people own things,” Azerbaijani Ambassador Elin Suleymanov tells TIME. “That is a natural thing.”

The view of Trump International Hotel Washington, D.C. The Old Post Office Pavilion is the second tallest building in D.C., after the Washington Monument. Christopher Morris—VII for TIME

The Old Post Office Pavilion is the second tallest building in D.C., after the Washington Monument.

One longtime Republican power broker summed up the role the hotel is playing in Trump’s Washington: “It is a magnet for unsophisticated foreign governments and companies to offer tribute. It does not work, but it is perceived as a path to influence.”

Yet domestic groups have found reasons to do business there as well. Last year, evangelist Franklin Graham planned a global conference on Christian persecution at the Mayflower Hotel for this May. Two months after Trump was inaugurated, Graham decided to add a closing banquet at Trump International, where he also reserved rooms for select guests, which meant ferrying them between hotels in a fleet of black SUVs. Among the guests was a delegation from Moscow headed by Metropolitan Hilarion Alfeyev, a top cleric of the Russian Orthodox Church and a close ally of Vladimir Putin, who met during the conference with Pence. A spokesperson for Graham said neither the Mayflower nor a nearby Hilton could accommodate the banquet, and up to 40 rooms came as part of the package.

Not everyone found the fancy digs necessary. “We didn’t have to stay there,” Ignatius Aphrem II, patriarch of the Syrian Orthodox Church in Damascus, told TIME. Speaking of Graham’s organization, he added, “Maybe they have special arrangements. Maybe they are friends of the President.”

In the past, Presidents have often gone to great lengths to assure the public that they aren’t mixing the nation’s business with their own. Many of Trump’s predecessors voluntarily divested their business assets or placed them in a blind trust administered by an independent third party, to avoid both conflicts of interest and the appearance of them. Trump has taken a different approach. He has stepped away from the operations of his business, but he has not relinquished ownership. Critics say the approach falls far short. “He is one great big example of exploiting public office for private gain,” says Kathleen Clark, a law professor at Washington University in St. Louis, who trains governments around the world in ethics and anti­corruption practices. “Of course it’s a scandal.”

Which doesn’t mean it’s illegal. Trump does not seem bothered by the appearance of conflicts, often doing his public business in his private holdings. During the campaign, Trump visited his properties across the U.S. as well as his golf courses in Scotland. He used televised campaign events to promote Trump products, including bottled water and wine. As President, he decamps on many weekends for his golf courses in Virginia and New Jersey, trips that guarantee free publicity from the press corps. He took Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping on separate trips to his Florida estate, Mar-a-Lago, where the club entry fee doubled after his election, to $200,000.

Trump denies any impropriety. “The law’s totally on my side,” he said in November. “The President can’t have a conflict of interest.” Or rather, as his lawyers point out, as President he is not subject to federal conflict-of-interest laws, which offer broad latitude for the Commander in Chief. And his sprawling business empire was front and center on the campaign trail, with aides highlighting a track rec­ord of delivering projects under budget and ahead of schedule.

To address concerns, Trump announced in January that he would hand control of his business empire to his two adult sons and a trustee, halt all new foreign deals, terminate some pending ones and wall himself off from company decisions. Because the emoluments clause of the Constitution bans most transactions between government officials and foreign governments, the Trump Organization pledged to donate its profits from foreign governments to the U.S. Treasury. “President-­elect Trump should not be expected to destroy the company he built,” said his lawyer Sheri Dillon. “This plan offers a suitable alternative to address the concerns of the American people.”

The firewall between the Trump presidency and the Trump Organization has turned out to be less than airtight. His sons have participated in political meetings and are sought-after speakers at ­Republican functions across the U.S. Eric Trump’s wife Lara is employed by the digital firm working for Trump’s re-election campaign. Meanwhile, the company, according to internal documents released in May by Democrats in Congress, has since determined that it is not practical to segregate all foreign sources of income, arguing that such an effort would not “even be possible without an inordinate amount of time, resources and specialists.” The donation will be made on an annual basis at the end of each calendar year, according to a Trump Organization spokesperson. It’s unclear who would ensure that the company complies with its pledge.

In response to the unusual arrangements, multiple groups have filed civil lawsuits against Trump, aiming to force the courts to step in. Citizens for Responsibility and Ethics in Washington (CREW), a progressive watchdog group, filed suit alleging that he has violated the Constitution by accepting emoluments. Cork Wine Bar, a D.C. restaurant, filed another suit that claims Trump’s stake in the hotel’s restaurants gives it an unfair competitive advantage in the city’s fine-dining market. House and Senate Democrats are also planning to sue Trump to stop emoluments violations, according to Politico, arguing that he is breaking the law by continuing to profit from his businesses while serving as President.

<span class="credit">Christopher Morris—VII for TIME</span><span class="caption">Luxury SUV's line up outside of the presidential ballroom at the Trump International Hotel.</span>

Luxury SUVs line up outside of the hotel’s presidential ballroom.

The story of Trump and the Old Post Office Pavilion is a tale of grand ambition, outsize promises and a complex deal that left a trail of criticism. Built in the 1890s, it is the capital’s second tallest structure, a landmark of gray granite and steel girders with a glass atrium and an iconic clock tower that overlooks Pennsylvania Avenue and the Mall. Over the years, it had become an aging orphan nobody wanted, scheduled for demolition several times over the past century, only to be spared by preservationists.

With a nudge from Congress, the General Services Administration (GSA), began soliciting bids in 2011 from private companies looking to redevelop the building. Trump put together an appealing proposal, promising to pump some $200 million into a renovation and partnering with a venerable D.C. architect who had worked for years to save the building. Trump lined up financing from Colony Capital, a major developer run by his close friend and future inaugural committee chairman, Tom Barrack. And he promised to pay the federal government $3 million annually in rent for 60 years. GSA picked Trump from a crowded group of bidders, including such hotel chains as Hilton and Hyatt.

The promises began to unravel. The architect, Arthur Cotton Moore, dropped off the project. The financing partner fell through. Once work got under way, the Trumps quietly reneged on commitments to preserve historic features, from the lighting scheme to the wall trim, according to a person closely involved. The Trump Organization denies that charge. “Throughout the revival process and restoration of this iconic asset, we worked tirelessly to maintain the integrity and storied history of the original landmark building,” said a spokesperson for the organization. “We worked meticulously with the GSA and a team of consultants on the historic preservation and are incredibly proud of the extreme attention to detail that we paid.”

<span class="credit">Liz Gorman/Robin Bell</span><span class="caption">A projection by artist Robin Bell on the facade of the hotel on May 15. </span>

A projection by artist Robin Bell on the facade of the hotel on May 15. Liz Gorman/Robin Bell

But the biggest complication was still to come. The 263-room hotel opened in the fall of 2016. A few weeks later, Trump won the White House, making him, if somewhat indirectly, both landlord and tenant of a valuable government property. His contract with GSA, the federal agency that administers the lease, explicitly forbids elected officials from being admitted to “any share or part of this lease, or to any benefit that may arise therefrom.”

And so, shortly after the election, congressional Democrats summoned a GSA official for a briefing about how it would handle the situation. During the meeting in the Rayburn Building on Capitol Hill, the GSA official said the agency had concluded that Trump would be in breach of contract upon Inauguration, according to a letter signed by four House Democrats and confirmed by two other people present.

But when Trump took office, the GSA went mum on the matter. On March 23, Kevin Terry, the GSA contracting officer responsible for the deal with Trump, clarified the agency’s position, declaring the President to be in “full compliance” with the lease. There is no evidence Trump or anyone in his Administration pressed GSA about the arrangement. But critics say the fact that the President has the power to appoint and remove the head of the agency may have influenced the move. And while members of Congress have pressed GSA for more information about the decision, it lacks the power to reverse it. (Terry referred questions to a GSA press representative, who declined an interview, asked that TIME supply written questions and then never responded to them.)

In the beginning, business at the hotel was sluggish. During its first two months of operation, September and October 2016, Trump International lost more than $1.1 million, according to a letter from a group of House Democrats to the acting GSA administrator. But such struggles faded after the election. At happy hour, the lobby bar fills with guests nibbling charcuterie and sipping Trump-branded rosé beneath flat screens tuned to Fox News. Patricia Tang, director of sales and marketing, said the hotel’s ownership hasn’t affected its bottom line. “The whole situation has been neutral,” says Tang, an industry veteran. “You win, you lose. The result is we’re doing fine.”

In late May, Tang took TIME on a tour of the hotel’s gilded spaces, from the townhouse suite—replete with a gym and private dining room—to the ballroom where workmen were breaking down the remnants of a wedding. Privacy is part of the package, she noted. There are no public boards listing the day’s conclaves, and there are separate entrances for VIPs. As a policy, the hotel doesn’t reveal who has held events or booked accommodations.

Of course, governments looking to pay tribute to the American President need not come to Washington to do it. According to his financial disclosure report, the President appears to own or control more than 500 businesses in countries ranging from India to Indonesia. “The hotel,” says Richard Painter, a University of Minnesota law professor who served as President George W. Bush’s ethics lawyer and is part of the CREW lawsuit, “is really just a tip of the iceberg.”

Some of the President’s foreign holdings are in countries that may test the lines between his business interests and his role as Commander in Chief. Trump licensed his name to a 57-story luxury residential tower in Manila, set to open later this year. The head of the company that built it has been named a special trade envoy to the U.S. by Philippine President Rodrigo Duterte. In the President’s flagship building on Manhattan’s Fifth Avenue, one of the biggest tenants is a state-owned Chinese bank, whose lease is up for renewal in 2019. Last year, after Trump made incendiary comments about Muslims on the campaign trail, Turkish President Recep Tayyip Erdogan called for Trump’s name to be stripped from a pair of towers in Istanbul’s business district. Erdogan later backed off, and Trump has since praised his counterpart despite the autocrat’s crackdown on dissidents and democratic institutions. According to his financial disclosure report, Trump earned up to $5 million from the project. “I have a little conflict of interest,” Trump told his future White House strategist Stephen Bannon during a 2015 radio interview, “ ’cause I have a major, major building in Istanbul.”

As its hotel in Washington flourishes, the Trump Organization is working to find new ways to extend the brand. On June 5, it unveiled a new midscale hotel chain, under the patriotic name of American Idea. It plans to debut it in Mississippi. The target demographic includes some of the same voters who lifted the President into the White House.

—With reporting by Tessa Berenson, Elizabeth Dias, Haley Edwards, Philip Elliott and Zeke J. Miller/­Washington

<span class="credit">Christopher Morris—VII for TIME</span><span class="caption">The Old Post Office Pavilion, now the Trump International Hotel, is the second tallest building in D.C., after the Washington Monument </span>

The heart of the hotel is a nine-story atrium under a skylight.”


LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

Posted in Uncategorized | Leave a comment

Getting Greeced

The following is an excellent excerpt from the book “THE DEVIL’S DERIVATIVES: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready To Do It Again” by Nicholas Dunbar from Chapter One: “The Bets That Made Banking Sexy” on page 18 and I quote: “Getting Greeced – On the other side of the divide, one investment bank in particular had a vision.  It went far beyond the commercial banking notion of shedding credit risk from the balance sheet, toward using derivatives as a means of seizing control of the loan market.

Around the same time that I met [Marc] Shapiro and [Peter] Hancock, I was invited to a press party on London’s Fleet Street.  It took place in the sumptuous art deco lobby of what had once been the headquarters of the United Kingdom’s Daily Express newspaper.  After the exodus of print publishing from Fleet Street, the Express building had been purchased by Goldman Sachs.  Most of the journalists present still thought of the investment bank in terms of its stellar reputation for advising companies and governments on privatizations and takeovers, but I was introduced to a man lurking on the sidelines, a rising star at the firm.  Michael Sherwood had just become European head of FICC (fixed income, currencies, and commodities), perhaps Goldman’s least understood but most profitable division. Trading–derivatives in particular–was his forte.

When credit derivatives were invented in the mid-1990s, Goldman held back.  But once the utility of the new tools had been demonstrated, Sherwood became the firm’s leading default swap visionary.  The newly invented tool was going to lead to the “derivatization of credit,” he would tell colleagues.  He believed the market approach to buying, selling, and owning corporate bonds had a massive disadvantage to the much more transparent markets in equities.  If you like the prospects of a company, say, Walmart, an equity trader only has to look at one type of security: Walmart’s stock.  In fixed income, a company might have hundreds of different bonds in the market payable in different currencies, and with myriad maturity dates and interest profiles.  Which one should you buy or sell?  You had to be a geek to figure it out.

With credit default swaps, all that detail could be stripped away.  As with equities, there was a single “reference entity” or “name,” Walmart Inc., whose potential for default drove the price of the swap contract.  Better still, the default swap distilled this crucial credit information out of the hundreds of Walmart bonds.   And for Sherwood, information was power.  He realized that by combining trading in credit default swaps and corporate bonds on the same desk, Goldman would have its finger on the pulse of the world’s biggest corporate borrowers: not only could Goldman control its own exposure, but it would control its clients’ access to the market for credit.

Having “broken down the walls” in this way in 1999, Sherwood duly paved the way for his firm’s FICC division to power to the top, taking him to the level of vice-chairman.  But to Sherwood’s irritation, his management innovation would reveal itself early on, with a huge but highly controversial deal that stunned competitors.  The deal was hatched back in 2000 by Sherwood and his head of sales, Addy Loudiadis.  Rather than a corporate borrower, the deal involved a spendthrift nation that wanted to fiddle the membership rules of an exclusive club of high-performing countries: the Eurozone.  As Citibank discovered in the late 1980s, and Peter Hancock learned through J.P. Morgan’s Korean bank difficulties, a currency crisis can have the same impact on foreign lenders as a corporate default.  That is why weakening foreign exchange rates are a good early warning system that a country and its banking institutions might be able to repay their debts.

When the strong economies of northern Europe created a single currency in the 1990s, they threw out this market-based warning system for detecting spendthrifts.  Instead, the Maastricht Treaty that created Europe’s single currency contained strict rules designed to prevent countries that sought to enjoy the currency’s benefits from overspending.   And these benefits were substantial: the possibility of borrowing money at virtually the same cheap rate as that paragon of fiscal recitude, Germany.

Just as investors in private companies depend on accountants to verify corporate borrowing and expenditure, the European Union (EU) created Eurostat, a Brussels-based statistical agency whose job it was to check national accounts.  But for countries where deficit spending is everyday political expediency, rules are made to be broken.  And fatally for the EU, the feel-good nature of monetary union was not backed up with credible enforcement.

Visiting a government ministry in Athens can feel like a trip back in time.  Offices without air-conditioning have windows flung open to the sounds and smells of gridlocked streets below.   Chair-smoking bureaucrats are hunched behind desks, their in-boxes overflowing as they struggle with long-obsolete computers.  Even the Greeks have a hard time tracking state expenditures, as Eurostat memos plaintively acknowledged.  In 2000, Greece was in breach of the Maastricht rules, but Brussels chose to show the newest incoming member of the Eurozone a degree of indulgence if its government produced budget forecasts projecting that debt and deficit ratios would steadily decline over the next four years.  Forecasting those numbers was easy enough: hitting them was close to impossible.  It would be politically toxic for the Greek government to cut pension entitlements or raise taxes.  Fortunately, with Goldman Sach’s help, a solution presented itself.

The deal started with a quite humdrum derivative that was given a dramatic, Goldman-style tweak.  The starting point was the 30 billion euro or so in foreign currency-denominated debt that Greece had outstanding in 2000.  The humdrum derivative that Greece already was using was called a cross-currency swap.  For large national or corporate borrowers, foreign currency borrowing is a matter of finding a broader investor base for their debt and thus lowering their funding costs.  Cross-currency swaps allow them to do this without taking any foreign risk.  There is nothing particularly dramatic about this derivative.  In the same way that a bureau de change allows you to exchange a sum of foreign currency into domestic currency, the cross-currency swap lets big borrowers do the same thing for the repayments on their foreign currency bonds.  Just as owning foreign currency is risky because rates can go against you, owning foreign currency is also risky because of exchange rates.  In both cases, a transaction gets rid of the problem.

Suppose you were based in the Eurozone and borrowed $10 billion at a time when one dollar was equal to one euro.  If the dollar strengthened to the level of one dollar equaling two euros, the amount of debt in euros would double.  Fortunately, with a cross-country swap you don’t have to worry about that because everything is locked in at the one-euro-per-dollar rate.  What Sherwood and his team cooked up for the Greek government starting in December 2000 worked slightly differently.  Imagine you had a thousand dollars that you wanted to change into euros.  A bureau de change proposes a special deal.  Instead of the one-euro-per-dollar rate (before fees) displayed on the wall of the booth, the teller offers a contract paying you double that rate.  Perplexed, you ask, “Are you giving away a thousand euros?”  “Of course not,” replies the teller.  “Actually, I’m lending you the money, and you’ll have to pay it back with interest.  But that’s our little secret.  No one will know because the slip of paper I’m giving you makes it look like you’ve got ‘free’ money.”

In its deal for Greece, Goldman did something equivalent to this mythical bureau de change.  It cooked up a cross-currency swap, and in the blank space marked “exchange rate,” it wrote a wildly incorrect figure.  By using this derivative, Greece had magically reduced its debt by almost 3 billion euros, but this paper gain would have to be balanced out later by a series of swap payments to Goldman.  Over the ten or so years that the swap was to last, the value of these payments amounted to several billion euros.  In other words, Goldman was secretly lending the Greek government money and getting paid back over time.

Incredibly, Eurostat’s loophole-ridden debt-accounting rules allowed the Greek government to do exactly that, and thus “demonstrate” to Brussels that it was sticking to its budget targets.  In fairness to Greece and Goldman, they were not the first partnership of spendthrift country and bank that fiddled the system in this way: Italy is said to have used the same trick to join the single currency in 1998.  According to sources familiar with the deal, Eurostat even gave advance approval of Goldman’s contract with Greece (six years later, the agency would deny any knowledge).   Of course, transparency was precisely what the Greek government was not interested in, and Goldman was happy to oblige, for a price.

When my sources first told me about the deal in May 2003, two years after it had been completed, the price seemed shockingly high–some 500 million euros in return for concealing several billions in debt.  It was not an explicit price in the sense of a negotiated fee, but rather an implicit spread on top of the swap payments that Goldman had calculated as being necessary to balance out the off-market value of the swap.  Given that the transaction costs for standard, market-priced cross-currency swaps were a hundredth of this amount, it was not surprising that people were shocked when I published a story exposing the deal, and that Goldman and its public relations machine were anxious not to see the 500 million euro number in print.

From Goldman’s perspective, the CDS was necessary because, like the “wrong” exchange rate transaction offered by the mythical bureau de change, the swap with Greece amounted to a secret loan from Goldman.  While the likes of J.P. Morgan or Chase Manhattan may have been comfortable with putting such a loan on its balance sheet (albeit a diminishing one).  Goldman was not.   Or as Sherwood explained it to me, “We’re generally conservative on credit risk.  We like to take credit risk at a point where we can lay it off.”

Has Greece chosen to raise a billion euros of debt for twenty years by issuing bonds, it could have placed the debt with actuarially minded investors like Prudential.  The prices of Greek bonds in 2001 suggested that such investors would have been prepared to accept a spread over ultrasafe German government bonds amounting to about 60 million euros over twenty years.   But the Greek government was desperate to avoid public debt markets, because its borrowing was already well over the Maastricht limits.  By using Goldman to raise the money, Greece had to accept the bank’s subjective view of its credit risk expressed as a CDS premium–the 300 million euro price at which Sherwood thought he could “lay it off” in the market.

It took a change of Greek government for the facts of the Goldman swap to be officially acknowledged, although this revelation did not seem to harm Greece’s relationship with
Goldman, which made over $100 million from the deal.  Finding a borrower prepared to pay 30 million euros in default risk premium when a traditional actuarially driven investor would have required $60 million seemed to electrify the firm’s bankers.  Just as Sherwood had envisaged, Goldman had “derivatized” credit.

There was only one obstacle now to Goldman’s dreams of world domination: apart from the likes of Greece, for which desperation or secrecy made it willing to pay for a CDS, why would any sane borrower not stick to the actuarial system, where loans were much cheaper?   If Goldman were going to dominate credit markets as Sherwood wanted, it would have to undermine the rival system, forcing corporate and sovereign loan rates to be pegged to CDS prices.  That led Goldman to publicly campaign against the guardians of traditional lending: the big banks.

So Cheap It Hurts – In 1999, Glass-Steagall was abolished, and U.S. commercial banks were now free to offer investment bank services.  With this new, shareholder-driven philosophy, some of these banks were crowding into Goldman territory, pitching for business such as advising on takeovers.  What most enraged Goldman was how banks such as the newly merged JPMC, Citigroup, and Bank of America were poaching blue-chip clients by dangling the prospect of actuarially driven cheap loans as a sweetner.  For those that depended on traditional credit investors to lend them money, the historical pricing of default risk kept their loans cheap because they were still using accounting rules that kept the value of loans frozen at book value.  This made their loans “cheaper” than those based on the CDS market–if JPMC lent $1 billion to a big customer, and the credit derivative market implied that the loan was now worth only $800 million, then so much the worse for credit derivatives.

Without the ability to freeze the value of loans on its balance sheet, Goldman had to either sell loans at the secondary market price or buy credit derivative protection.  That meant if customers wanted to borrow money from Goldman, they would have to pay a lot more for it, as Greece had done.  So Goldman went on the offensive.  In April 2001 the firm wrote to the U.S Financial Accounting Standards Board (FASB), requesting that a type of loan facility very popular with large borrowers be treated like credit derivatives: in other words, the loans should be recorded at market value on bank balance sheets.

The commercial banks instantly saw the threat here and fought back.  Goldman’s campaign was merely sour grapes about its loss of market share, they said.  But Goldman’s argument that the market pricing of credit derivatives was more “fair” than loan pricing demanded a more substantial rebuttal.  The banks pointed out that a large percentage of their new loans were syndicated–farmed out to hate-to-lose investors, typically medium-size regional banks.  And because these investors accepted the pricing of the big banks that originated the loans, this was “fair value,” which had been established in a market.

Goldman rolled to Princeton finance professor Jose Scheinkman, who argued that his claim by commercial banks was intellectually flawed and anti-free market.  The banks then pointed to the benefits of low borrowing costs to their customers.  Dina Dublon, then CFO of JPMC told me, “If I was Goldman, I’d be careful about arguing that their clients ought to be financed at higher rates.  You can say banks are ‘dumb,’ but they have a staying power, and a market cap that, as an industry, is significantly larger than that of securities firms.”

Goldman lost the argument, and the FASB ruled against its proposal.  JPMC was allowed to keep its actuarial measuring stick (based on the evidence of syndication to other banks).  But Goldman didn’t give up on the “cheap-loan” war, because time was on its side.  With shareholders continuing to demand that commercial banks improve returns on capital, the need for places to dump credit risk off the balance sheet was greater than the loan syndication market could support.  And by the start of 2002, it was clear that the credit default swap was the best tool for the job.

The Sad, Strange Death of Hate-to-Lose Banking – The takeover of J.P. Morgan by Chase had one ironic twist: it turned out that Peter Hancock was a much better risk manager than his successors at the top of the firm, such as Chase’s head of risk, Marc Spapiro.  Recall that Chase preferred the actuarial method to offset credit risk, and now deployed it for its biggest and most lucrative client: the fast-growing energy company, Enron.  Shapiro had known Enron’s chairman Ken Lay since his old Texas banking days, and the company paid Chase tens of millions annually in fees.   Enron could only sustain itself by fraudulent borrowing and was enabled by banks bending over backward to skirt the boundaries of legality.

What Enron’s CFO Andy Fastow invited Chase to do in the late 1990s was typical of the complex secret borrowing that would eventually land him and Enron CEO Jeff Skilling in jail and get Chase slapped down by the Securities and Exchange Commission (SEC) with a $135 million fine.  Like Goldman and Greece, Chase and Enron started out doing something that appeared routine, trading “prepay” forward contracts, a kind of derivative based on natural gas.  However, the derivatives were a red herring.  As with Goldman’s deal in Greece, the derivatives were set up to carefully balance out leaving behind a $2.6 billion loan from Chase to Enron.  As a condition for extending this secret loan, Chase bought default protection.  Rather than using a default swap as Goldman did, it bought traditional-style protection from ten insurance companies, including Allianz, Travelers, and The Hartford, that provided $950 million in protection using surety bonds.  A remaining $165 million in protection came as a letter of credit from the German bank WestLB.  To keep things secret, they did this through a shell company called Mahonia, which Chase controlled.

The last bit of credit insurance was bought in September 2001.  A month later, Enron’s fraud was finally coming to light, and Chase’s bankers learned that their favorite client had borrowed much more than they realized.  “$5 B in prepays!!!!” emailed one Chase banker to another when he heard the news: “shutup and delete this email [sic],” came the immediate reply.

In December 2001, Enron filed for bankruptcy.  The ten insurers and WestLB argued that they had signed up to insure the credit risk of bona fide natural gas payments, not secret loans, and the discovery of fraud at Enron meant that they didn’t have to pay.

Early in 2002, I visited Enron’s bankruptcy auction in London.  There was a palpable sense of shock at Chase that its risk neutralization hadn’t worked out as planned.  The stress of dealing with the recalcitrant insurers was enough to give one of Shapiro’s minions, a credit officer named Jim Biello, a heart attack.  He was invalided out of the bank into early retirement.  The man who replaced Biello, David Pflug, paid tribute to him in what would serve as an epitaph of the hate-to-lose banker: “They killed themselves trying to save it and then they killed themselves trying to collect it.”

A couple of years later, Chase managed to secure in court about 60 percent of the $1 billion pledged by the insurers but by then was facing prosecution for abetting Enron’s fraud.  It settled those charges by paying that $135 million SEC fine, and Shapiro apologized to Manhattan District Attorney Robert Morgenthau: “We have made mistakes,” he said in 2004.  “We cannot undo what has been done but we can express genuine regret and learn from the past.”

One of the many things Shairo no doubt regretted was depending on a flawed risk management strategy.  Using insurance policies to protect against default was obviously a risky move.  But that was a problem with the strategy, based as it was on the insurance tradition of demonstrating loss ex post and checking for fraud.  Meanwhile, the market approach to hedging credit risk passed the Enron test with ease.  Unlike with surety bonds or letters of credit, it was hard to argue with the ISDA’s definitions of the events that triggered credit default swaps.  You couldn’t argue, as Chase’s surety bond counterparties did, that fraud somehow voided the contracts.  Even insurance companies on the other side of default swap contracts had to pay up.  Federal Reserve chairman Alan Greenspan spoke warmly about how default swaps made banking safer as a result.

With this apparent certainty that providers of credit protection would have to pay up, traditional loan-based banking was now a love-to-win game.  The only remaining obstacle was price.  If the price of credit derivative protection was higher than what borrowers expected to pay on a loan, the big dealers resolved to find some other way to get that protection at a lower price.  After all, actuarially driven credit investors still were willing to accept a lower return on bonds that passed the ratings agency health check.  Using tricks developed at J.P. Morgan and elsewhere, the market-based world would soon figure out how to play these gatekeepers to get money at the price they wanted . . . and then use that to reap astounding profits.  And in the process, they used credit default swaps to subvert–and nearly destroy–the financial system.”


LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

Posted in Uncategorized | Leave a comment

The Bets That Made Banking Sexy

The following is an excellent excerpt from the book “THE DEVIL’S DERIVATIVES: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . and Are Ready to Do It Again” by Nicholas Dunbar from Chapter One “The Bets That Made Banking Sexy” on page 1 and I quote:

Starting in the late 1980s, a new emphasis on shareholder value forced large banks to improve their return on capital and start acting more like traders.  This sparked an innovation race between two ways of transferring credit risk: the old-fashioned “Letter of credit” versus a recent invention, the credit default swap (CDS).  Behind this race were two ways of looking at credit: the long -term actuarial approach versus the market approach.  The champion of the market approach, Goldman Sachs, quickly moved to exploit the CDS approach and was richly rewarded for its ambition–and ruthlessness.”

“Something Derived from Nothing – There was a burst of tropical thunder in Singapore on the autumn night in 1997 when I met my first credit derivative traders.  Earlier that day, there had been a lot of buzz in my hotel’s lobby about an imminent Asian currency crisis.  People were muttering about the plummeting Thai baht, Malaysian ringgit, and Korean won.  Suharto’s Indonesian dictatorship–only a thirty-minute boat trip away across the Singapore Strait–was lurching toward default and oblivion.

But there were also people who were planning ahead.  They were the attendees of the finance conference I had come here to write about, and they were sequestered away from the tropical humidity, in the air-conditioned, windowless suites of the conference’s main hotel.  They wore tags and listened attentively to presentations on managing risk. Many of them worked for companies that imported and exported to the region, or had built factories there.  You could see evidence of this globalization in the fleets of freight ships endlessly passing through the nearby Singapore Strait.  As the writer Thomas Friedman put it, the people at this conference had figured out that the world was flat, and there was money to be made everywhere.

Well, maybe not quite.   There were still a few bumps to pound smooth.  The troubles in Thailand, Korea, and Indonesia had just injected a big dose of uncertainty into the world’s markets, which the acolytes of globalization at this conference didn’t want.  For companies that become big and global, financial uncertainties inevitably creep in: uncertainty in foreign exchanges, the interest rate paid on debts or earned on deposits, inflation, and commodity prices of raw materials.  One might accept that betting on these uncertainties is an unavoidable cost of doing business.  On that day in Singapore, however, the looming Asian crisis had heightened fears to the point where most people wanted to get rid of the problem.  Delivering presentations and sponsoring the exhibition booths nearby were the providers of a solution: financial products aimed at shaping, reducing, or perhaps even increasing the different flavors of financial uncertainty.  These products went under the catchall name of derivatives.

They were called derivatives because they piggybacked on–or “derived” from–those humdrum activities that involved exchanging currencies, trading stocks and commodities, and lending money.  They weren’t new–in fact, they were centuries old–and they were already routine tools in many financial markets.  For example, imagine trying to buy a million barrels of oil, right now, in the so-called spot market.   Leaving aside the financing, a deal (and hence a price) is only feasible if you have a place to store the commodity you buy, and there is a seller storing the commodity nearby waiting to sell it to you.  A forward contract specifying delivery in, say, a month from now, gives both sides a chance to square up the logistics.

The important thing about these contracts is not that they refer to transactions in the future–after all, contracts do that–but that they put a price on the transaction today.  The derivative doesn’t tell you what those barrels of oil will actually cost on the spot market in a month’s time, but the price that someone is willing to commit to today is useful information.  And with hundreds of people trading that derivative, discovering the forward price using a market mechanism, then the value of the contracts becomes a substitute for the commodity itself:  a powerful way of reducing the uncertainty faced by individual decision makers.

Thus, while bureaux de charge might offer spot currency transactions (for exorbitant fees), big wholesale users of foreign exchange markets prefer to buy and sell their millions in the forward market.  Because these buyers and sellers are willing to do that, many analysts believe the rate of sterling in dollars or of yen in euro next week is a more meaningful number than its price today.   Gradually, banks offering foreign exchange and commodity trading services extended the timescale of forward contracts out to several years.

For example, German airline Lufthansa might forecast its next two years’ ticket revenues in different countries and the cost in dollars of buying new planes and fuel.  Lufthansa, which works in euros, then uses forward contracts to strip out currency and commodity risk.   The attraction of controlling uncertainty in this way created an efficient, trillion-dollar market.  The derivatives market.

Yet for that audience in Singapore, forward contracts weren’t quite enough to control financial uncertainty in all the ways they wanted to control it.  There were presentations on options, which, in return for an up-front premium, gave the right, but not the obligation, to sell or buy when one needed to–a bit like an insurance policy on financial risk.   And there were swaps, which allowed companies to exchange one type of payment for another.  This last derivative, in addition to providing a price information window into the future, had a potent transformational property: the ability to synthesize new financial assets or exposures to uncertainty out of nothing.

Consider the uncertainty in how companies borrow and invest cash.  A treasurer might tap short-term money markets in three-month stints, facing the uncertainty of central bank rates spiking up.  Or they could use longer-term loans that tracked the interest rates paid by governments of their bonds, perhaps getting locked into a disadvantageous rate.  Imagine that once you had committed yourself to one of these two financing routes, an invisible toggle switch allowed you to change your mind canceling out the interest payments you didn’t want to make in return for making the payments that you did.  Thus was the interest rate swap, the world’s most popular derivative, born.

Swaps first proved their value in the 1980s, when the U.S. Federal Reserve jacked up short-term interest rates to fight inflation.  With swaps, you could transform this short-term risk into something less volatile by paying a longer-term rate.  Swaps again proved useful in 1997, when Asian central banks used high short-term interest rates to fight currency crises.   Just how heavily traded these contracts became can be gauged from the total “notional” amount of debt that was supposed to be transformed by the swaps (which is not the same as their value): by June, a staggering $356 trillion of interest rate swaps had been written, according to the Bank for International Settlements.  As with forward contracts on currencies and commodities, the rates quoted on these swaps are considered to be a more informative way of comparing different borrowing timescales (the so-called yield curve) than the underlying government bonds or deposit rates themselves.

Derivatives–at least the simplest, most popular forms of them–functioned best by being completely neutral in purpose.  The contracts don’t say how you feel about the derivative and its underlying quantity.  They don’t specify that you are a hate-to-lose-money corporate treasurer looking to reduce uncertainty in foreign exchange or commodities.  A treasurer based in Europe might have millions in forecast revenues in Thailand that wants to hedge against a devaluation of the Thai currency.   A decline in those revenues would be “hedged” by a gain on the derivative.  But if there weren’t any revenues (after all, forecasts are sometimes wrong), the derivative didn’t care.  In that case, it became a very speculative bet that would hit the jackpot if Thailand got into trouble, and would lose money if the country rebounded.

Saying a derivative is “completely neutral” in purpose is true, but misleading.  The derivative doesn’t care which side of the bet wins, but a person who sold the derivative certainly cares about making a profit.  In the Singapore conference room that week, there were many people who didn’t work for corporations but instead were employed by hedge funds engaged in currency speculation.  For the community of secretive hedge fund traders, which included people like George Soros, financial uncertainty was a great moneymaking opportunity.  Governments–Malaysia’s in particular–were already railing and legislating against currency speculation, but derivatives invisibly provided routes around the restrictions.  A derivative didn’t care whether you were a treasurer with something to hedge but then decided to use derivatives not as insurance but rather to do some unauthorized speculation.  Right from the start, derivatives carried this potential for mischief.

That’s why some people felt they needed to be regulated.  One answer was to quarantine derivatives in a special public venue called an exchange, a centuries-old innovation to ensure that markets work fairly and safely.  But it was too late to box derivatives in that way–by the time I attended that conference in 1997, a fast-growing alternative was already eclipsing exchange-traded derivatives.  These were over-the-counter (OTC) derivatives traded directly and privately with large investment banks, with the interest rate swap being the most obvious example.  The banks that created and traded OTC derivatives did not want to take only one side of the market, such as only buying yen or only lending money at a five-year interest rate.  The derivative-dealing banks set themselves up as secretive mini-exchanges.  They would seek out customers with opposing views and line them up without the other’s knowledge.  The bank sitting between them would not be exposed to the market’s going up or down and could simply skim off a percentage from both sides, dominating the all-important pricing mechanism that was the derivatives market’s big selling point.   There was so much to be skimmed in this way, and so many ways to do it.  But perhaps the most lucrative way of all was to invent new derivatives.

In Singapore on the night after the conference, I joined a group of conference delegates on a tour of some of the city’s famed nightspots.  With me were a pair of English expat bankers who worked on the emerging market bond trading desk of a Japanese bank.  They told me about a derivative that had been invented two years earlier.  It was called a credit default swap.  Rather than being linked to currency markets, interest rates, stocks, or commodities, these derivatives were linked to unmitigated financial disaster: the default of loans or bonds.  I found it hard that night to imagine who might be interested in buying such a derivative from a bank.  The nonfinancial companies whose activities in the globalized economy exposed them to financial uncertainty didn’t seem interested.  The derivatives that were useful to them–futures, options, and swaps linked to commodities, currencies, and interest rates–had already been invented.  It seemed to me as if the credit default swap was an invention searching for a real purpose.  As it happened, the kind of companies that found credit default swaps most relevant were those that had lots of default risk on their books: the banks.

Losing That Hate-to-Lose-Money Mind-Set – Back in the early 1990s, the world’s biggest banks were still firmly rooted in an old lending culture where the priority above all else was to loan money and get paid back with interest.  Like the small banks on Main Street, USA, these Wall Street banks were run by men who hated to lose money.  There was just one problem with that fine sentiment: despite the vaunted conservatism of the traditional banker, money had a habit of getting lost anyway.  In the 1980s, Walter Wriston, the chairman of Citibank, declared that “sovereign nations don’t go bankrupt.”  A few years later, Mexico and a host of Latin American nations defaulted on their loans and put Citibank on its knees.  By the time I flew to Singapore for that conference in 1997, the big bankers knew all too well about the dangers of emerging market lending and were looking for ways to cut their risks.

By then, the traditional banker had already become a mocked cliche on Wall Street, the cranky grandfather ranting at the Thanksgiving dinner table about “those damn kids today . . . !”  And in the same way that only the neoclassical facade of an old building is saved from demolition, commercial banks like Chase or J.P. Morgan studiously gave the appearance of being powerful and prudent lenders.  But behind that crumbling facade, the real business of banking was rapidly changing.

One way around the problem was to make more loans but then immediately distribute them to investors in the form of bonds.  As long as the bonds didn’t go bad immediately, the credit risk was now the investors’ problem, not the bank’s.  This was the world of the securities firms: Goldman Sachs, Morgan Stanley and Lehman Brothers.   The Glass-Steagall Act, which kept commercial banks out of securities, was about to be demolished in 1999 and was increasingly irrelevant anyway: by using new products like derivatives, or by basing subsidiaries outside the United States, American banks could do as much underwriting and trading as they liked.

And yet, the Goldman Sachs model of underwriting securities and selling them to investors was no panacea: market appetite for bonds could dry up, and in some areas, like Europe, companies preferred to borrow from banks rather than use the bond market.  So as the new breed of multinational bank took shape and branched out into new businesses, the credit losses kept coming.  In early 1999, I flew from London to New York City to interview Marc Shapiro, the vice chairman at Chase Manhattan.  He was a lanky Texan whose off-the-rack suits and home-spun manner personified the hate-to-lose commercial banker.  After we’d talked, I was taken to meet the bank’s chief credit officer, Robert Strong, who talked about his memories of the1970s recession and how cautious he was about lending.  I knew why Chase was selling me this line so hard.   A few months earlier, it had lent about $500 million to the massive hedge fund Long-Term Capital Management (LTCM), which was on the brink of bankruptcy and threatened to bring much of Wall Street down with it until a consortium of banks (including Chase) bailed it out.  At the time, Chase was mocked for being so careless with its money, and Shapiro was keen to signal that this had been a one-off.

That same trip, I went to J.P. Morgan’s headquarters on Wall Street, where it had been based for a century.  The tall Englishman with a high forehead who greeted me in a mahogany-paneled room reminded me of the head of a university science department.  Peter Hancock was the chief financial officer (CFO) of J.P. Morgan but his aura of sophistication and analytical intelligence was the complete opposite of Shapiro’s.  Despite the sharp contrast in styles, Hancock’s bank had also embarrassed itself with imprudent lending.  The difference was that the lending took place through the fast-growing OTC derivative markets.  A Korean bank has signed a swap contract with J.P. Morgan that, on the face of it, looked like a reasonable exchange of cash flows intended to reduce uncertainty.   But it also amounted to a bet that a local-currency devaluation wouldn’t take place.  When the Korean won was devalued against the dollar at the end of 1997, the Korean bank suddenly owed J.P. Morgan hundreds of millions of dollars, and it was unable to pay.   J.P. Morgan had to write that off as a bad loan and was now suing to recover the money.  This was embarrassing, not because the contract didn’t say the money was owed (it did, and this was confirmed by a court), but because J.P. Morgan had not anticipated the amount’s becoming so large and had not checked to see whether its Korean client was good for the money.

Although the nature of the losses was different, the challenge for Chase Manhattan and J.P. Morgan was the same: they had had to ratchet up credit exposure in order to compete, and now they had to find ways of cutting it back again without jeopardizing revenues.  Shapiro explained that this pressure came from the fashionable doctrine of shareholder value added (SVA).  Invented in the 1980s and associated with General Electric CEO Jack Welch, SVA argued that nonfinancial companies should ditch low-growth businesses that tied up shareholder capital, and produce a bigger return for shareholders.

The problem with bank lending as a profit generator is simple: no business is hungrier for capital than the one that hands out money to borrowers and then waits to get paid back.  Add in the capital reserve for bad loans and the regulatory cushion to protect depositors, and the income for shareholders is modest.  That is the price shareholders once paid–happily–for investing in a boring but safe business.   However, SVA made traditional bank lending look unattractive compared with other kinds of banking that didn’t tie up all that expensive capital.  Chase and J.P. Morgan attacked the problem in fundamentally different ways: one embracing the new innovation of credit derivatives, and the other following a more traditional approach.  The success and pitfalls of these two routes would reveal just how subversive the new innovation was to the way banking worked.”


NICHOLAS DUNBAR grew up in London and trained as a physicist at Manchester, Cambridge, and Harvard universities.  He was inspired to become a financial journalist by university friends who took their mathematical skills from academia onto the trading floors of investment banks.

From 1998 to 2009, Dunbar was technical editor of Risk magazine, a specialist derivatives publication.  In 2005, he launched Life & Pensions, a sister publication to Risk aimed at the insurance and pensions industry.

During this time, Dunbar wrote a series of exclusive stories on derivatives blowups, which cemented his reputation as an investigative journalist, and in 2007 he won the State Street award for institutional financial journalism.  He has also written a column called Risky Finance for the authoritative financial commentary service Reuters Breakingviews.

In 1999, Dunbar wrote his first book, Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It (Wiley, 2000).  The Devil’s Derivatives is his second book.  For further information visit”


LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

Posted in Uncategorized | Leave a comment

Chicago Tribune: Donald Trump is a Profoundly Incompetent President

The following is an excellent article written by Steve Chapman on the Chicago Tribune website on June 7, 2017 titled “Donald Trump is a Profoundly Incompetent President” and I quote:

“Donald Trump is a profoundly incompetent president”

What do the directors of the Transportation Security Administration, the Drug Enforcement Administration, the Bureau of Alcohol, Tobacco, Firearms and Explosives and the FBI have in common?

Easy question, you may think: They are all important law enforcement officials with roles in combating terrorism. But at the moment, they have nothing in common. Why? Because they don’t exist.

The jobs, you see, are vacant. Each has to be filled by presidential appointment, and Donald Trump has felt no urgency in filling them. Only this week did he even offer names for the TSA and FBI.

That is not his only lapse when it comes to protecting Americans from danger. In January, 47 U.S. attorneys resigned, and in March, he fired the remaining 46 federal prosecutors. So far, the president has yet to submit a nomination for any of the vacancies.

The people who voted for Trump knew they would be getting a disrupter, a critic of business-as-usual and an enemy of political correctness. Many also realized they were electing a bully and a braggart. But they may not have known what they were getting above all else: an incompetent.

There is no other way to explain most of what he has done in the White House. His most formidable opponent couldn’t do half as much to foil Trump as Trump himself has done.

His travel policy was rushed out, blocked by courts, withdrawn, revised and blocked again. Administration lawyers, who hope to convince the Supreme Court it had no unconstitutional anti-Muslim motives, have been undercut by his tweets, which convey the opposite.

So flagrant is the contradiction that some analysts suspect he has a hidden logic. They speculate that Trump might prefer to lose his ban so he could blame the courts if there were a U.S. terrorist attack carried out by foreigners.

Let me suggest that they are overthinking this. Trump has no record of being deviously clever. He has a record of acting rashly out of ignorance, fury and hubris. He makes needless statements that harm his legal case because he’s a self-destructive oaf.

His dismissal of FBI Director James Comey followed that pattern. The White House claimed that Trump fired him at the recommendation of the Justice Department because he botched the investigation of Hillary Clinton’s emails.

But Trump then admitted making the decision before he got the Justice memo, saying he objected to Comey’s probe of connections between his presidential campaign and the Kremlin. He thus helped bring on a special prosecutor, which could be fatal to his presidency.

Nothing about his performance suggests he has any idea how to handle his office. Trump complains that the Senate is obstructing his nominations. But at last count, he has yet to pick anyone for nearly 80 percent of the positions that require Senate confirmation.

On one issue after another, he has had to flee from ill-considered positions. He said the U.S. might junk its “One China” policy — only to be forced to back down by Chinese President Xi Jinping. He lambasted President Barack Obama’s “dumb deal” to take refugees from Australia but eventually decided to honor it.

In April, Trump announced that the following week, he would unveil his tax reform plan. This promise, reported Politico, “startled no one more than Gary Cohn, his chief economic adviser writing the plan. Not a single word of a plan was on paper, several administration officials said.” The “plan” the White House released was one page long.

Trump promised to repeal and replace Obamacare but had great trouble getting a bill through the House, partly because he didn’t know enough about the substance to negotiate with any skill. The legislation finally approved by the House was pronounced dead on arrival in the Senate. Senate Majority Leader Mitch McConnell said recently he doesn’t know how a repeal bill would get enough votes to pass.

Trump’s incompetence is self-perpetuating. A clueless executive is forced to rely on aides who are mediocre — or worse — because better people are repelled. Vacant jobs and poor staff work, aggravated by bad management, lead to more failure, which makes it even harder to attract strong hires — and easier for opponents to get their way.

Expect more of the same. Trump came to office uninformed, unprepared and oblivious to his shortcomings, with no capacity to recognize or overcome them. He is in way over his head, and not waving but drowning.

Steve Chapman, a member of the Tribune Editorial Board, blogs at”


LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

Posted in Uncategorized | Leave a comment