Monday's Top 10: ANZ caught; Chinese liquidity; Lawsky vs insurers; an eyewatering FTT; 11 billion; rigged fx; illogical policy that works; Dilbert, and more

Here's my Top 10 links from around the Internet at 10:00 am today.

Bernard is back tomorrow with his version.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

1. Fiddling the rates
ANZ has been censured by the Singapore authorities (MAS) for its part in manipulating the SIBOR interest rate benchmark.

Although it was not fingered as one of the top offenders (these were all the usual suspects), it is still required to set aside between S$100 and S$300 million in additional reserves.

Macquarie was also on the list, but no other Aussie bank was caught up in this probe.

The sanction for this fraud is to have to set aside additional capital at 0% interest for one year. Making good losses, clawback of profits, fines, barring managers from working, jail, or any other meaty punishment was not handed down. Only, you have to keep some money at zero interest for a year - up to S$300 million = NZ$300 million. At 5% that is a loss of NZ$15 million.

The judgment is here, and the naming is here.

4   Twenty banks were found to have deficiencies in the governance, risk management, internal controls, and surveillance systems for their involvement in benchmark submissions. MAS has censured these banks and directed them to adopt measures to address their deficiencies. The banks are required to report their progress to MAS on a quarterly basis, and conduct independent reviews to ensure the robustness of their remedial measures.

5   The banks are required to set aside additional statutory reserves² with MAS at zero interest for a period of one year. The duration for which the additional statutory reserves are to be placed with MAS may be varied depending on MAS’ assessment of the adequacy of the measures put in place by each bank to address the deficiencies and risks identified.

6   MAS’ supervisory actions against the banks are calibrated according to the severity of attempts by traders in these banks to inappropriately influence financial benchmarks. 

2. The admiral's account
There's a new insiders tale of life in the fast lane - the insider-trading fast lane. This one's by Turney Duff who had a part to play in the Galleon Group hedge fund insider trading fraud. Here is the review from the Globe and Mail:

A native of Maine, Mr. Duff arrived in New York in 1994 with a degree in journalism. He talked his way into a job at Morgan Stanley and later joined the high-stakes world of hedge funds. There he became a capable trader and a champion party animal.

Some of what Mr. Duff describes in his frank and vivid memoir – drugs, prostitutes, Armani suits, Veuve Clicquot champagne, a $9,300-a-month apartment – is memorable, but not exactly unexpected.

However, the behaviour he saw and participated in at Galleon is eye opening. Years before U.S. authorities began investigating the fund, Mr. Duff recounts examples of buying and selling shares on the basis of confidential information, colluding with other traders to make winning bets ahead of market-moving orders and scoring profits at the expense of Galleon’s clients for the benefit of Mr. Rajaratnam himself (a move referred to as booking gains “in the admiral’s account”).

3. 'Liquidity is very tight. This is not sustainable.'
The government can't sell all the bonds it needs to; overnight interest rates spike to over 10%. China is in a liquidity crunch that could have destabilising effects. The WSJ has a report:

A Chinese cash crunch is laying bare weaknesses in the country's financial system, as rising borrowing costs hit banks amid worries over growth prospects in the world's No. 2 economy.

In a rare failure, China was unable to sell all of the government debt offered at auction on Friday, heightening concerns about a funding squeeze in China's money market just as struggling companies are looking for help by borrowing.

Meanwhile, new data released Friday showed global capital flows into China slowed sharply in May, as Beijing clamped down on speculative money inflows and investors worried that the economy is running out of steam.

The developments aren't signs of a European-style crisis, as China's central bank still has ample resources to boost liquidity, and government debt remains relatively low. But the sharp rise in costs for its lenders could hit customers of China's smaller banks.

4. Today's raw market data ...
A quick new-week update:

5. Getting tough on insurers
Remember Benjamin Lawsky? He is the New York regulator that put his Federal brethren to shame when he took on shamelessly corrupt Standard Chartered and 'won'.

He hadn’t gone rogue, as some critics claimed. He had done just what he was supposed to do - hold a bank that he oversees accountable for its actions.

Now he has taken new and effective action against insurers he regulates. More from Jonathan Weil:

This week, after an 11-month investigation, Lawsky released a report that said 17 New York-based life-insurance companies had used $48 billion of “shadow insurance” transactions to shift liabilities for policy-holder claims onto weakly capitalized shell companies that they controlled. This is “likely to be just the tip of the iceberg nationwide,” it said. The maneuvers decreased the parent companies’ capital requirements, freeing up money for other purposes, such as paying bigger management bonuses or shareholder dividends.

In short, the insurers set up captive subsidiaries and had them reinsure existing blocks of policy claims. Often the new units were in lightly regulated jurisdictions - everywhere from Vermont to the Cayman Islands. The problem, as Lawsky explained, is that the parent company is still on the hook if the shell company can’t make good on its obligations. Sometimes the shell’s assets might only consist of a letter of credit from the parent, as opposed to liquid assets that can be sold to pay claims. If the shell can’t pay, the parent probably is in deep trouble, too.

6. Setting a FTT standard
The left loves the Financial Transaction Tax. But maybe even they would blanch at the latest version from Uganda. A new levy is to be imposed on mobile phone transactions at the rate of 10%! Looks to me like it is aimed directly at the poor. More from the BBC:

Uganda is to impose a 10% tax on cash transfers by mobile phones and other money transfer operators. International remittances from Ugandans living abroad are also affected.

Finance Minister Maria Kiwanuka said she also planned to raise $16.5m (£10.6m) by imposing a levy on incoming international phone calls. Ms Kiwanuka had to come up with ways to plug a $214m hole in the annual budget after donors cut aid over accusations of corruption.

The BBC's Catherine Byaruhanga in the capital, Kampala, says there has been criticism that the budget - presented to parliament on Thursday - will hit poorer Ugandans hardest.

7. 50% more by 2100
Demographics tell you all you need to know about the future of nations. There are 7+ billion people in the world today, and that could nearly double to 11 billion by 2100 2011 say some demographers.

Most of the increase is expected to come in Africa following continued high fertility, fast rising economic fortunes and fast falling death rates. The details are from demographers at the University of Washington in Seattle, and the UN.

New Zealand looks like the place to be to me.

The expected population changes from now to 2100 are shown in the graphic. By far the largest expected increase is in Nigeria, projected to increase by 730 million people, from 184 million now to 914 million in 2100. Eight of the top ten increases are in Africa, with India in second place. The United States is eighth, with an expected increase of 146 million, or 46 percent, from 316 million now to 462 million in 2100. The largest projected decline is in China, expected to decrease by about 300 million, from 1.4 billion now to 1.1 billion in 2100.

​

8. Rigged
Do you use currency benchmarks? You may not directly, but these benchmarks are used to set prices in funds worth trillion of dollars.

It is now clear that dealers have been manipulating the system. You lose, they win by cheating. But don't expect any sanction except a 'don't do it again'. BusinessWeek has the story:

The manipulation occurred daily in the spot foreign exchange market and has been going on for at least a decade, affecting the value of funds and derivatives. The $4.7 trillion-a-day currency market, the biggest in the financial system, is also one of the least regulated.

“The FX market is like the Wild West,” says James McGeehan, co-founder of FX Transparency, a firm that advises companies on foreign exchange trading. “It’s buyer beware.”

9. When illogical policy seems to work
Anatole Kaletsky is wondering why so many economists and financiers cannot bring themselves to acknowledge the improving outlook for the world economy. Instead they focus on the lack of logical, principled, 'sensible' integrated policy positions. He doesn't reckon the world actually works like that.

Conditions are gradually improving around the world despite government and central bank policies that seem to be incoherent or self-serving in many different ways. But that is the normal course of human affairs. So as the world pulls out of its five-year slump and gradually returns to normal economic conditions in response to limitless printing of money and unprecedented government borrowing, the sentence at the beginning of this article may be worth repeating:

It is cynical, manipulative and hypocritical – and it looks like it is going to work.

10. Today's quote
"Money is something you have to make in case you don’t die." - Max Asnas

11. Looking up
If you are a 'permanent pessimist' you might have less company these days. If you have a few minutes, this story is worth a read.

12. Snoozing on the job