The U.S. and other failing economies take note: Iceland may hold the solution to financial woes

Thursday, January 31, 2013 by: Carolanne Wright


NaturalNews) When the world first learned of the economic collapse in Iceland during 2008, many felt it would be yet another exercise in corruption, bailouts and crippling debt. News reports were prolific in those early days when it looked as though this small country would be thrown into a never-ending downward spiral. But something unprecedented occurred: The people rose up in a bloodless revolution and ousted those responsible for the crash -- namely, the corrupt banking cartel. And now, the Icelandic economy is stronger than ever. Since Iceland's recovery is an exceptional model for other struggling nations, the question begs to be asked: Why is the mainstream media eerily silent about Iceland's victory?

A surprising twist

With the economic collapse in 2008, Iceland began a process which:

- Forced the resignation of their entire corrupt government

- Nationalized the banking system

- Created a referendum enabling citizens to determine their own economic system

- Actively supports on-going investigation, prosecution and incarceration of responsible parties, including top banking officials

- Created a new draft of the constitution by utilizing comments and suggestions via Facebook, Twitter and online forms

- Ceased bailouts -- defaulting on a staggering $85 billion in debt during 2008

In early 2012, Icelandic banks also forgave home loans that exceeded 110 percent of the home value. This helped alleviate the burden of crushing debt for a quarter of the Icelandic population. Additionally, the Supreme Court ruled in June 2010 "that loans indexed to foreign currencies were legal, which means that Icelandic households were no longer expected to cover krona (the Swedish currency) losses," according to the article by Madison Rupert, The Silent Revolution: Icelandic Anger, Debt Forgiveness and Activist Triumph. Rupert continues, "The Icelandic government basically left international creditors to deal with their failed loans on their own, removing all responsibility from their own people."

Incredibly, Iceland decided to put its people before the market -- the exact opposite of how other nations handle an economic crisis. According to estimates from the Organization for Economic Cooperation and Development, the Icelandic economy is set to outperform the EU and the entire developed world. A stunning lesson of how a failing country can thrive after an economic meltdown, Iceland is an example for other nations. So why the silence in American media?

International bankers and other demons

As with all powerful and unethical institutions, it is no surprise that big bankers control and manipulate mainstream media. Teddy Roosevelt observed,"These international bankers and Rockefeller-Standard Oil interests control the majority of newspapers and the columns of these papers to club into submission or drive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible government." The same is true today. Reporting on the Icelandic revolution along with the incarceration of banking executives is bad news for those in power. Indie Media sums it up accurately:

"A whole country's revolution succeeded against powers that created the current global crisis without a shot being fired. A very good reason exists for the apparent failure of television and newspapers to provide any publicity on this unprecedented event: what would happen if the rest of the EU and the United States took this as an example?"


Learn more: http://www.naturalnews.com/038894_Iceland_financial_crisis_banker_bailouts.html#ixzz2JXx3rX3y

Record withdrawals at U.S. banks as Americans lose trust in financial system

Thursday, January 31, 2013 by: Ethan A. Huff, staff writer


NaturalNews) You probably haven't heard much about it from the mainstream media, but the latest figures released by the privately-owned Federal Reserve (FED) indicate that America's largest banks saw record cash withdrawals during the first full week of January 2013. As reported by Bloomberg Businessweek and scant others, account holders withdrew a record $114 billion in just one week, which represents the largest one-week withdrawal sum made in America since the September 11, 2001, terrorist attacks.

The data, which accounts for all cash withdrawals made from the nation's 25 largest banks, has reportedly shocked many financial analysts who say they are unsure exactly what sparked this minor bank run. Some have speculated that the December 31, 2012 expiration of the Transaction Account Guarantee (TAG) insurance program, which was designed to protect smaller banks from insolvency, may have played a role in triggering what appears to have been a wave of panic withdrawals.

But since the bulk of these withdrawals were made at larger banks that were not covered by TAG, this explanation hardly suffices. Another more likely explanation is that Americans are simply unsettled with the current state of the financial system, and for all intents and purposes are trying to protect their own assets from insolvency. This is further reinforced by the fact that a similar run on "physical" gold escalated around the exact same time, suggesting that depositors are anticipating rocky times rapidly approaching.

"[W]hat surprised analysts is that the withdrawals are from larger banks that were considered safe," explains a report from AllVoices.com about the issue. "Expectations were for depositors in small and medium banks to put their deposits in the bigger banks when the insurance program ended," it adds, noting that TAG's expiration would have logically induced the opposite effect of what actually occurred.

Though many so-called experts are reluctant to admit it as a possibility, this ongoing trend of massive withdrawals of federal reserve notes and physical metal assets from banks and vaults just might be the people's way of responding to the ominous writing on the wall, which does not appear to spell any type of real recovery for America. To the contrary, a perfect storm of attempted gun control legislation, ever-increasing taxes, inflation, reduced wages, and job cuts may finally be getting the attention of a critical mass of Americans, who for too long have ignored the progressive downfall of the financial system.


Learn more: http://www.naturalnews.com/038902_fractional_reserve_banking_withdrawals_economic_collapse.html#ixzz2JXwomPWl

Recrimination all round over scandal engulfing world's oldest bank

It was founded in 1472, but the world’s oldest bank has been plunged into crisis by a scandal involving a very modern phenomenon – derivatives.

The bank was Italy's third biggest and for centuries a symbol of Siena's wealth and prestige

By Nick Squires, Rome

10:00PM GMT 27 Jan 2013

Italy’s Monte dei Paschi di Siena faces losses of up to €720m (£613m) over a series of derivatives deals, including a €220m loss for a three-year-old derivative contract with a Japanese bank, Nomura.
 

It is one of several derivatives trades that are now under internal investigation, amid reports that the bank hid the deals from regulators.

The scale of the losses has forced the bank – founded 20 years before Columbus discovered America – to step up its negotiations for a state bail-out worth €3.9bn, a request that has caused outrage among austerity-weary Italians.

Beppe Grillo, the leader of the maverick, anti-establishment Five Star Movement, which is contesting next month’s general election, said: "I don't see why we should give almost €4bn in public money to cover up a bunch of thieves."

The scandal, which has convulsed Italy in the past week, is a heavy blow for the country’s third biggest bank, which has been in trouble for years.

But it goes way beyond the stone walls of Rocca Salimbeni, the magnificent palazzo in Siena that serves as the bank’s headquarters.

 

It has prompted frantic finger-pointing between current and former managers, political parties and the technocrat government of Mario Monti, the prime minister, who is seeking re-election at the head of a centrist bloc.

The biggest share of blame has been directed at the centre-Left Democratic Party, which has traditionally run Siena and exercised enormous influence over the bank.

The Democratic Party is expected to win the Feb 24-25 elections, but has been embarrassed by the scandal over the bank’s tattered finances, thrusting the affair into the heart of national politics.

For centuries Siena has been a virtual company town, locked in a symbiotic relationship with “Babbo Monte” or “Daddy Monte” as the bank is known by the Sienese.

It is the Tuscan city’s biggest employer and has a charitable foundation which has doled out millions of pounds to cultural associations, sports clubs and other worthy causes.

Between 1995 and 2010 the foundation distributed around €2bn to a variety of causes, from the restoration of historic buildings to the sponsoring of running races.

The largesse is now being drastically cut, with many of Siena’s 55,000 inhabitants fearing the end of an era in which Monte dei Paschi acted as a giant ATM with an apparently limitless cash flow.

The bank has announced that it is likely to cut its €8m sponsorship of Siena’s Serie A football club, as well as funding of the city’s successful basket ball team.

The biggest blow of all for the proud Sienese is the bank’s withdrawal of financial help for the Palio, the famous horse race held twice each summer in which bareback riders hurtle around the city’s main piazza.

Each year the bank’s charitable foundation gave a total of €225,000 to the rival ‘contrade’ or wards of Siena which back individual horses in the race and perpetuate a fierce rivalry that goes back centuries.

That grant is also being cut.

It is not a large sum, but the fact that the bank has pulled the plug on Siena’s most famous symbol is seen as hugely significant by locals.

“We’re in a state of psychological depression,” said Fabio Pacciani, who sits on a board that represents the city’s 17 ‘contrade’.

“It’s a devastating situation. The city is stunned, shocked and heart-broken. People are worried – in just a few years a solid bank has beenimpoverished.”

The drying up of charitable funds has also hit Siena’s university – one of the most prestigious in Italy – as well as its hospital and several libraries.

“The end of the largesse could have one positive aspect – people might finally begin to understand that an era is over, forever,” wrote the Heretic of Siena, an avidly followed anonymous blogger in the walled city.

The financial mess left in the wake of the derivatives scandal has invited parallels with one of the city’s most famous artistic treasures.

The walls of Siena’s magnificent Gothic town hall are decorated with frescoes by Ambrogio Lorenzetti, a 14th century painter, including the Allegory of Good Government and the Allegory of Bad Government.

The latter shows in vivid detail what happened in the past when Siena suffered misrule – the countryside laid waste, the townsfolk reduced to poverty and the city in ruins.

The crisis has already claimed its first scalp – the resignation of Giuseppe Mussari, a former bank chairman, from his post as chief of the Italian banking association, ABI.

He denies any wrongdoing.

The bank’s shares plunged in value at one point last week by more than 8pc.

Critics said the symbiosis between the 540-year-old bank and the city was far too close. In the last 25 years, every one of Siena’s mayors has been a former bank employee. Once their term in office was over, many returned to work for the lender.

“Many aspects of the scandal remain obscure,” said Tito Boeri, an economist at Bocconi University in Milan, in a front page editorial in La Repubblica newspaper.

“But one thing is certain. This affair was born of a system of power created by the intertwining of local politics and banking institutions.”

Monte Paschi’s problems date back to 2007, when it bought from Spain’s Santander a small Italian bank, Antonveneta, for €9bn – a sum thought by many in Italy to be way over the market value.

Reuters Reports - Another Big Banking Scandal May Be On The Way

 

 posted: 20 hours ago

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And it's electronic messaging that could cause problems yet again.

Reuters reports that internal reviews by banks in Singapore have found evidence that traders colluded to manipulate rates in the offshore foreign exchange market, according to a source with knowledge of the inquiries.

The discovery widens a global lending rate scandal into new markets, as fallout from the Libor case puts banks under added scrutiny and spurs both regulators and institutions to reconsider how certain key interest and currency rates are set.

The probes found evidence showing that traders from several banks communicated with each other over electronic messaging about what rates they were going to submit for the local banking association's fixings for non-deliverable foreign exchange forwards (NDFs), aiming to benefit their trading books.

'Traders were talking to traders, saying: 'I need you to help me today, I need to fix low,'', said the bank source, who asked not to be identified due to the confidential nature of the reviews.

An Italian Bank’s Murky Scandal

By HUGO DIXON

The Monte dei Paschi di Siena story is not just an Italian affair. Revelations that complex financial transactions used by the country’s third-largest bank had the effect of hiding losses are causing a political storm in Italy.

With a general election only weeks away, Silvio Berlusconi looks like being the main winner from the political spat. The former prime minister’s camp has attacked Pierluigi Bersani’s Democratic Party, which is leading in the opinion polls, for being close to Monte dei Paschi. It has also criticized Mario Monti, the current prime minister, who agreed to increase the bank’s bailout to 3.9 billion euros.

 

The scandal will not be enough to get Mr. Berlusconi back as prime minister. But it could prevent a Bersani-Monti coalition from running the country with a solid majority in both houses of Parliament. If so, fears about Italian political risk could return to haunt the markets.

The still-murky story has also put Mario Draghi under the spotlight because the European Central Bank president ran the Bank of Italy when Monte dei Paschi was getting into such a mess. Giulio Tremonti, who was finance minister in Mr. Berlusconi’s last government, said in a Twitter message that it was “stupefying” that Mr. Draghi had failed to discover or prevent the complex transactions.

The Italian central bank’s defense is that, while some of its supervisors knew about the transactions, it did not know that they were linked to other unprofitable operations because crucial documents were hidden from it. What is more, even though it was worried about Monte dei Paschi’s weak risk management, it did not have the power to fire bank directors, despite Mr. Draghi requesting such authority from the last Berlusconi government. Its moral suasion did, though, eventually help remove the old Monte dei Paschi management last year.

The Sienese bank’s troubles began in November 2007 when it bought Antonveneta, another Italian bank, from Santander of Spain for 9 billion euros. This was a crazy price. The subprime crisis had already burst into the open and the price was 60 percent more than what Santander had itself paid only a few months earlier when it helped carve up ABN Amro, the Dutch banking group, with the Royal Bank of Scotland and Fortis of Belgium. Italian prosecutors are now investigating why Monte dei Paschi paid so much.

Some people think the Bank of Italy should have stopped Monte dei Paschi from buying Antonveneta. But its defense is that it did not have the power to say a deal was overpriced. All it could do was insist on the bank raising more capital, which it did.

Even so, the Antonveneta deal left Monte dei Paschi with a weak balance sheet just as the financial crisis was about to go into overdrive. That is when two other investments, which have set off the current turmoil, went bad: one nicknamed Santorini and the other called Alexandria.

The original Santorini deal was done with Deutsche Bank in 2002 to warehouse Monte dei Paschi’s shares in yet another Italian bank, San Paolo di Torino. That transaction allowed Monte dei Paschi not to report losses on the stake, provided it did not fall below a certain level. In 2008, however, the value of the stake plummeted, meaning that Monte dei Paschi was staring at a loss of about 360 million euros. That was unfortunate given that its balance sheet was already stretched after the Antonveneta deal.

Monte dei Paschi engaged in two more transactions with Deutsche Bank that had the effect of mitigating its Santorini loss. One was structured so it was likely to generate a profit for Monte dei Paschi; the other so it was likely to generate a profit for the German bank. Monte dei Paschi rapidly unwound the first transaction, helping it counter the loss on the original Santorini deal. But it hung onto the second investment and did not report any immediate loss.

Deutsche Bank’s defense for being involved in the transaction is that it asked for and received representations from Monte dei Paschi’s senior management that its auditors and regulators had been informed of the transaction’s details.

The Alexandria transaction was somewhat similar. In this case, Monte dei Paschi’s original bet was on risky credit derivatives called C.D.O. squareds, which, by 2009, were threatening it with a loss of about 220 million euros.

That is when Monte dei Paschi embarked on another series of side deals, this time with Nomura. One transaction involved the Japanese investment bank buying the C.D.O. squareds from Monte dei Paschi at above their market price, with the result that the Italian bank avoided booking a loss. The other was structured so Nomura would make a profit, but Monte dei Paschi did not acknowledge the countervailing losses upfront.

Nomura says the deal was approved by the Italian bank’s board and its then-chairman, Giuseppe Mussari, as well as being reviewed by the bank’s auditors, KPMG. The Italian bank denies that its board approved the deal. KPMG says it never received the Alexandria documentation. Mr. Mussari denies any wrongdoing.

These complex transactions only came to light when an exchange of letters from Nomura to Monte dei Paschi was found in a hidden safe by the Italian bank’s new management last October. It immediately told the Bank of Italy and the judicial authorities. Snippets of what happened have started to seep out into the press in the last two weeks, forcing Monte dei Paschi to acknowledge that it was sitting on huge losses and prompting the political storm.

But the full facts have not come out. Until they do, it will be impossible to know for sure whether the Bank of Italy, Deutsche Bank and Nomura could have been more vigorous in pursuing hints that things were not quite right or whether they were well and truly hoodwinked by Monte dei Paschi.

Hugo Dixon is co-founder of Breakingviews and editor-at-large at Reuters News. For more independent commentary and analysis, visit breakingviews.com.

Why You Can’t Pay Off Your Credit Card Even When You Have Enough Cash

Written by: Theresa Kuchler

 

Some basic facts about the human psyche that credit card companies manipulate mean that you carry over a balance every month. But there are easy ways to get your debt down to nothing.

Editor’s Note

Theresa Kuchler, a PhD student in Economics at Stanford University has uncovered some interesting findings after researching the question “Why do people carry credit card debt when it  so expensive to do so?”

 Her findings may help us all understand consumer spending behavior and give us insights for how governments, nonprofits, and companies can help people get out of debt and achieve some measure of financial stability. To assist with her research, ReadyForZero--a website designed to help people eliminate their credit card debt--allowed her to view anonymous data from their database. Below, she describes her research and the implications it has for people who are working to pay off their debt. To see more of her work, including the full-length research paper described here, see her website.

Credit card debt is a serious issue that affects the lives of millions of Americans. While we all have an idea in our head of why people carry credit card debt, the reality is that we need more answers as to what prevents people from paying off credit card debt even when they have enough income to do so in the long run--and how we can help people make the decisions that will lead them to pay off their credit card debt.
That’s why I was so excited when I found the opportunity to work with the team at ReadyForZero. With ReadyForZero’s focus on creating better tools for paying off debt (designed specifically with the user experience in mind) and with their extensive anonymized data, they were a perfect partner for this research.

Credit card debt: a pernicious problem

The principal question I wanted to address with my research was as follows: What prevents people from paying off credit card balances even when they have an income that would make it possible to pay off the balances over time? In addition to standard motives for borrowing, such as liquidity shortages or a lack of resources to reduce debt levels, economists have suspected that another factor may contribute to these substantial balances held by households: Some households may be “present biased.”
The idea of “present bias” means that people are overly impatient in the short-run and value immediate gratification even if not in their long-term interest. Bluntly speaking this means that many of us like to go out for dinner, buy a new pair of winter boots or spend a weekend skiing, even though in the long-term we would prefer to have saved the money for a more long-term goal, such as paying off credit card debt or saving for the down payment for an apartment. Moreover, we often tell ourselves that we can make up for our indulgences by not going out and saving the next week, weekend, or month. But really: How often does that happen?
The idea that such present bias may also explain why some consumers struggle to pay off their credit card debt despite earlier plans to do so is intriguing, but there has been very little evidence for it in social science research so far. Of course, as a researcher, I want actual evidence before I believe a theory; after all, there are many plausible theories, but only looking at real data can tell which ones help us understand best what’s going on in real life.
So that is what we did.

Examining the roots of credit card debt

We looked at some anonymous data from the ReadyForZero database. It’s important to emphasize that at no point in this research was any identifying information attached to the data. That means we don’t know who the users in our sample are. We also made sure that we only looked at aggregated output results. This means, for instance, that we estimated and looked at whether users spend more in weeks they received a paycheck than in non-paycheck weeks. But this aggregated information does not allow us to look into how much or on what someone spent in any given week.
To test whether present bias could help us understand better why some users struggle to reduce their debt, we first classified all users in the sample along two dimensions: First, we estimated for each user how present biased he or she appeared. The idea is that individuals with a stronger present bias spend more on consumption goods--such as going out to dinner or to a bar or club--when they have just received their paycheck. A user who consistently spends more in payweeks than in non-payweeks is likely to be more present biased than another user whose spending depends less on his payday. After all, the best parties don’t always happen the weekend you get paid, so it is often a good idea to save your money for special events rather than blowing it immediately.

Second, we wanted to know whether a user was aware of his or her own tendency to repeatedly spend on consumption goods rather than save for a long-term goal. To get at this, we used the fact that users who are aware of this behavior adapt their spending depending on how much money they have left.
For instance, imagine you get a bonus payment with your paycheck so that you can finally pay off one of your credit cards. If you think you won’t overspend in the following weeks, you may use some of the extra money to go out and celebrate the bonus payment this weekend.
However, if you know about your own tendency to overspend, you may rethink that decision and save some of the money to make sure you’ll have enough to pay off that card even if you inevitably end up overspending a little in the next weeks. In this case, the extra money is an additional motivation to save a little extra instead of spending immediately today. We therefore divided users into two groups: those users who save a little extra and spend less when they have additional resources (who we thought were more aware of their own tendency to overspend) and those who didn’t adjust their behavior this way.
Once we had these two characteristics for each user, we checked how they did with reducing their debt relative to what they had planned to do.

Present bias exists but self-awareness helps

In line with the theoretical predictions of present bias we found that users who exhibited a stronger present bias reduced their debt less than users with a less strong bias. Moreover, users who appeared to be aware of their own behavior managed to stick with their original plans much better than those who appeared to repeatedly tell themselves they would save more for debt paydown in the future.
The findings therefore support the notion that present bias plays a substantial role in explaining why some consumers have trouble sticking with their debt repayment plan. We also checked some other possible explanation, such as credit constraints, but found that each only explains part of the data, not the whole picture we observe.

So, why does this research matter?

First, our results have important policy implications for the regulation of credit markets. Common features in credit card contracts, such as teaser rates or the backloading of fees in subprime credit cards, disproportionately hurt consumers with present bias. Our results therefore provide additional evidence to convince policy makers that they should continue pursuing regulation like the Credit CARD Act of 2009 which, amongst other things, restricts the backloading of fees.
Finally, these findings have important implications for how we can help consumers avoid the debt trap. If we can help people understand how this bias toward their short-term desires keeps them in debt, and give them tools to fight their own present bias, we should be able to increase their likelihood of achieving financial stability.
Further innovation should therefore focus on new and creative ways to inform and persuade consumers of their short-term bias and help them combat it. One way of doing this, for example, are technologies which allow people to willingly “lock themselves” into their own debt payoff plan to avoid later temptation.

Ohio State study says credit card debt becoming tougher to pay off

By Alexandria Chapin 

Published: Wednesday, January 23, 2013

 

Many college students think opening a credit card is the only way to start building a good credit score, but some experts said snow-balling debt will leave some young people with bills they’ll never pay off.

Ohio State economics professor Lucia Dunn conducted a research study that concluded younger Americas are accumulating more credit card debt and taking longer to pay it off than generations before them.

“It is true that when you go to buy a car or get a mortgage they do want to look at a credit report on you,” Dunn said. “But you don’t have to get a credit card.”

Dunn said paying rent and utilities regularly can figure into a good credit record, without the need for a credit card or the temptation to spend on frivolous items.

According to Dunn’s research published in the January edition of the journal “Economic Inquiry,” those born between 1980 and 1984 are estimated to have roughly $5,500 more in credit card debt than their parent’s generation and about $8,000 more credit card debt than their grandparent’s generation.

While that age group doesn’t fit the average undergraduate college student, Dunn said she predicts this trend will create future financial problems if the cycle continues.

Josh Goldfarb, a fourth-year in communication, said he sees the negative consequences that credit cards can bring to students, as well as the benefits.

“Students can be irresponsible, so there’s always a risk associated with that,” Goldfarb said.

Goldfarb said he’s never had a credit card but understands why other students do.

“If you’re a responsible student, I don’t see why starting your credit card history early is a bad thing,” he said.

Dunn agreed that a credit card is great to have for emergencies but suggested users pay it off every month.

“Just get in the habit of paying it off,” Dunn said. “You should aim at paying more than the minimum.”

Doubling the minimum payment to establish good habits and avoid the stress that credit cards can bring to students was one of Dunn’s suggestions for students.

Brittanie Russell, a second-year in biology, said she knows people “who have credit cards just to blow money and the interest builds up.”

Russell said she does not want to get into the same situation and has avoided applying for a credit card.

Sarah Hackshaw, a second-year in communication psychology, said she would advise her peers against credit cards if they do no understand the long-term effects.

“I think people should be educated if they want a credit card,” Hackshaw said. “College students aren’t fully educated about the responsibilities of having a credit card.”

After Dunn’s research, she has advice for students who already have or are considering opening a credit card.

“Use credit very cautiously, if it’s something that enhances your future well-being, if it’s an investment in your own human capital, go ahead and use it,” Dunn said. “Don’t carry a balance for something that’s purely entertainment.”

World's oldest bank hit by scandal

• by: From correspondents in Milan
• From: AFP
• January 24, 20138:15AM

 

A DERIVATIVES scandal engulfing Italy's Banca Monte dei Paschi di Siena (BMPS) has shaken the Italian finance sector and cast a shadow over the government's efforts to save the world's oldest bank. 
  

A media report yesterday that said BMPS would book a 220 million euros ($279.28 million) loss on a three-year-old derivative contract was a heavy blow for the floundering bank, which is concluding a deal with the government for 3.9 billion euros ($4.95 billion) in state aid.

BMPS was forced to reveal the 2009 derivative deal with Japanese bank Nomura - nicknamed "Alexandria" - and the resultant loss expected in its 2012 results.

The stock market immediately reacted to the news, with shares in the 15th century institution plunging by 5.68 per cent yesterday and by another 8.43 per cent overnight.

BMPS said that the derivative contract was one of several under internal investigation, and underscored that with the state aid it was "in a position to absorb consequences from the operations in question".

Two other derivative deals, "Santorini" and "Nota Italia" have been scrutinised since October, and some elements might have to be renegotiated, BMPS said, while pledging to provide more information by mid February.

Derivatives are financial instruments based on the value of a specific security or asset.

They are widely used by companies and financial institutions to hedge risks from price changes, but if not used carefully can result in huge losses.

The Italian central bank today said that "the true nature of some of the transactions reported by the press involving Monte dei Paschi di Siena emerged only recently" following revelations by the bank's new management.

"The transactions are now being examined by both the supervisory and the judicial authorities, in close collaboration," the central bank said.

Italy's financial newspaper Il Sole 24 Ore said it expected the bank to face a 2012 loss of "well over two billion euros" with "Alexandria" to account for at least 220 million euros ($279.28 million).

Last week, Bloomberg financial news agency reported that the "Santorini" contract, signed with Germany's Deutsche Bank in 2008, helped BMPS cover up 367 million euros ($465.88 million) worth of losses.

The scandal, which appears far from over, has already claimed one victim.

Giuseppe Mussari, former chairman of the Monte dei Paschi di Siena Foundation, resigned from his post as head of Italy's banking lobby ABI yesterday after it emerged he had personally signed off on the "Alexandria" deal.

Mr Mussari also oversaw the purchase in 2007 of Banca Antonveneta from Santander for nine billion euros ($11.42 billion) - a deal now under investigation after questions were raised over the apparently excessive amount paid for the north Italian bank.

The derivatives scandal has also hit the bank's chairman, Alessandro Profumo - former chief executive of Italian banking giant UniCredit - and BMPS chief executive Fabrizio Viola.

Appointed at the start of 2012, the pair have struggled to refloat a bank suffering from exposure to the Italian sovereign debt crisis and losses on contracts linked to government bonds.

The troubled institution is now grasping for a 3.9 billion euros ($4.95 billion) life-buoy in the form of so-called "Monti" bonds.

Under a deal proposed by outgoing Prime Minister Mario Monti, the government would buy debt issued by the bank. The "Monti" bonds would replace 1.9 billion euros ($2.41 billion) in aid given to the bank in 2009.

Saturday's general assembly in Siena will address the issue of raising 4.5 billion euros ($5.71 billion) in fresh capital.

The government has said the new bonds would be converted into equity should the bank fail to return to profit, but Viola, among others, has dismissed the situation as unlikely.

The Foundation told Italian news agency Ansa meanwhile that it might take legal action against former bank managers.

Several political figures have also used the scandal to criticise "favours" granted by Monti to BMPS, and to attack the Democratic Party of Pier Luigi Bersani, tipped to win upcoming Italian polls and considered to have close relations with the bank.

Obama's Failure to Punish Banks Should Be Causing Serious Social Unrest

A new PBS Frontline report examines outrageous steps Obama's administration took to protect Wall St. Wall Street from prosecutions.

January 23, 2013 |

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PBS' Frontline program on Tuesday night broadcast a new one-hour report on one of the greatest and most shameful failings of the Obama administration: the lack of even a single arrest or prosecution of any senior Wall Street banker for the systemic fraud that precipitated the 2008 financial crisis: a crisis from which millions of people around the world are still suffering. What this program particularly demonstrated was that the Obama justice department, in particular the Chief of its Criminal Division, Lanny Breuer, never even tried to hold the high-level criminals accountable.

What Obama justice officials did instead is exactly what they did in the face of high-level Bush era crimes of torture and warrantless eavesdropping: namely, acted to protect the most powerful factions in the society in the face of overwhelming evidence of serious criminality.

Indeed, financial elites were not only vested with impunity for their fraud, butthrived as a result of it, even as ordinary Americans continue to suffer the effects of that crisis.

Worst of all, Obama justice officials both shielded and feted these Wall Street oligarchs (who, just by the way, overwhelmingly supported Obama's 2008 presidential campaign) as they simultaneously prosecuted and imprisoned powerless Americans for far more trivial transgressions. As Harvard law professor Larry Lessig put it two weeks ago when expressing anger over the DOJ's persecution of Aaron Swartz: "we live in a world where the architects of the financial crisis regularly dine at the White House." (Indeed, as "The Untouchables" put it: while no senior Wall Street executives have been prosecuted, "many small mortgage brokers, loan appraisers and even home buyers" have been).

As I documented at length in my 2011 book on America's two-tiered justice system, With Liberty and Justice for Some, the evidence that felonies were committed by Wall Street is overwhelming. That evidence directly negates the primary excuse by Breuer(previouslyoffered by Obama himself) that the bad acts of Wall Street were not criminal.

Numerous documents prove that executives at leading banks, credit agencies, and mortgage brokers were falsely touting assets as sound that knew were junk: the very definition of fraud. As former Wall Street analyst Yves Smith wrote in her book ECONned: "What went on at Lehman and AIG, as well as the chicanery in the CDO [collateralized debt obligation] business, by any sensible standard is criminal." Even lifelong Wall Street defender Alan Greenspan, the former Federal Reserve Chair, said in Congressional testimony that "a lot of that stuff was just plain fraud."

A New York Times editorial in August explained that the DOJ's excuse for failing to prosecute Wall Street executives - that it was too hard to obtain convictions - "has always defied common sense - and all the more so now that a fuller picture is emerging of the range of banks' reckless and lawless activities, including interest-rate rigging, money laundering, securities fraud and excessive speculation." The Frontline program interviewed former prosecutors, Senate staffers and regulators who unequivocally said the same: it is inconceivable that the DOJ could not have successfully prosecuted at least some high-level Wall Street executives - had they tried.

What's most remarkable about all of this is not even Wall Street had the audacity to expect the generosity of largesse they ended up receiving. "The Untouchables" begins by recounting the massive financial devastation the 2008 crisis wrought - "the economy was in ruins and bankers were being blamed" - and recounts:

"In 2009, Wall Street bankers were on the defensive, worried they could be held criminally liable for fraud. With a new administration, bankers and their attorneys expected investigations and at least some prosecutions."

Indeed, the show recalls that both in Washington and the country generally, "there was broad support for prosecuting Wall Street." Nonetheless: "four years later, there have been no arrests of any senior Wall Street executives."

In response to the DOJ's excuse-making that these criminal cases are too hard to win, numerous experts - Senators, top Hill staffers, former DOJ prosecutors - emphasized the key point: Obama officials never even tried. One of the heroes of "The Untouchables", former Democratic Sen. Ted Kaufman, worked tirelessly to provide the DOJ with all the funds it needed to ensure probing criminal investigations and even to pressure and compel them to do so. Yet when he and his staff would meet with Breuer and other top DOJ officials, they would proudly tout the small mortgage brokers they were pursuing, in response to which Kafuman and his staff said: "No. Don't show me small-time mortgage guys in California.

This is totally about what went on in Wall Street. . . . We are talking about investigating senior level Wall Street executives, even at the Board level". (The same Lanny Breuer was recently seen announcing that the banking giant HSBC would face no criminal prosecution for its money laundering of funds for designated terrorist groups and drug networks on the ground that the bank was too big to risk prosecuting).

As Kaufman and his staffers make clear, Obama officials were plainly uninterested in pursuing criminal accountability for Wall Street. One former staffer to both Biden and Kaufman, Jeff Connaughton, wrote a book in 2011 - "The Payoff: Why Wall Street Always Wins" - devoted to alerting the nation that the Obama DOJ refused even to try to find criminal culprits on Wall Street. In the book, this career-Democratic-aide-turned-whistleblower details how the levers of Washington power are used to shield and protect high-level Wall Street executives, many of whom have close ties to the leaders of both parties and themselves are former high-level government officials. This is a system, he makes clear, that is constituted to ensure that those executives never face real accountability even for their most egregious and destructive crimes.

The reason there have been no efforts made to criminally investigate is obvious. Former banking regulator and current securities Professor Bill Black told Bill Moyers in 2009 that "Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong." In the documentary "Inside Job", the economist Nouriel Roubini, when asked why there have been no such investigations, replied: "Because then you'd find the culprits." Underlying all of that is what the Senate's second-highest ranking Democrat, Dick Durbin, admitted in 2009: the banks "frankly own the place".

The harms from this refusal to hold Wall Street accountable are the same generated by the general legal immunity the US political culture has vested in its elites. Just as was true for the protection of torturers and illegal eavesdroppers, it ensures that there are no incentives to avoid similar crimes in the future. It is an injustice in its own right to allow those with power and wealth to commit destructive crimes with impunity. It subverts democracy and warps the justice system when a person's treatment under the law is determined not by their acts but by their power, position, and prestige. And it exposes just how shameful is the American penal state by contrasting the immunity given to the nation's most powerful with the merciless and brutal punishment meted out to its most marginalized.

The real mystery from all of this is that it has not led to greater social unrest. To some extent, both the early version of the Tea Party and the Occupy movements were spurred by the government's protection of Wall Street at the expense of everyone else. Still, Americans continue to be plagued by massive unemployment, foreclosures, the threat of austerity and economic insecurity while those who caused those problems have more power and profit than ever. And they watch millions of their fellow citizens be put in cages for relatively minor offenses while the most powerful are free to commit far more serious crimes with complete impunity. Far less injustice than this has spurred serious unrest in other societies.
[The one-hour Frontline program can be viewed in its entirety here.]

The Next Great Banking Scandal

Published: Friday, 18 Jan 2013 | 11:42 AM ET

By: John Carney Senior Editor, CNBC.com

iStock

If you've been busy this week doing, well, anything, you've probably missed the fantastically wonkish, dorky debate about the future of monetary policy, fiscal policy and the declining distinction between them carried on by Steven Randy Waldman of Interfluidity and Paul Krugman of the New York Times.
 

A good entry point right now is Tim Duy's post at Economist's View, where he explains what Waldman and Krugman are discussing.

One thing that is clear from the discussion is that the Federal Reserve's ability to pay interest on reserves is very likely to become a potent and important tool in the future. For most of the history of the Fed, reserves earned no interest at all. But starting in 2008, the Fed began paying interest on reserves. Which is to say, a bank formerly had to lend money to earn interest income; now a bank can earn interest income from the Fed for its reserves.
This isn't a big deal right now because the interest rate on reserves is very, very low—just above the Fed Funds target rate. What's more, the demand for credit is low as well, so this isn't widely seen as something that is denying people loans.
But we will probably not always have ZIRP. When the Fed decides that it wants to raise rates, it will very likely raise the interest it pays on reserves. Waldman forecasts that the interest on reserves will likely be very close to the Fed Funds rate. This is a powerful tool for monetary policy because it raises the costs for banks to borrow reserves, which means that they'll charge more for loans, which puts the breaks on economic expansion and inflationary pressure.
From a technocratic perspective, this all works out just fine. But look at it from a political perspective. When the Fed is paying banks tens of billions of dollars not to lend out money—at a time when the public's demand for loans has risen—this is going to be explosive. Think about all the times you hear about "free money from the Fed." That will literally be true when the rates on reserves grow.
What's more, this will actually be "taxpayer money." The payments on reserves will diminish the Fed's payments to the Treasury, which will mean that the government will have to tax more or borrow more than it otherwise would. A populist who described this as a permanent TARP really wouldn't be that far off.
It's hard to predict how this dynamic will play out. It could threaten the independence of the Fed. It could also threaten the independence of banks. If they are getting billions of taxpayer money, shouldn't they be directed by elected officials to serve public purposes? If there's one rule in politics it is this: all money comes with strings attached. I doubt interest on reserves will be the first unstrung money ever to arise in the history of governments.

‘To hell and back’: Belfast man’s journey through credit card sales, bankruptcy and hauling himself back up by his bootstraps

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Abigail Curtis | BDN

Eric Leppanen displays a shoe box with "at least 100" expired credit cards that he had obtained during a long career with MBNA and Bank of America. After being laid off and then declaring bankruptcy, the Belfast house cleaner and artist is hoping that his experiences can help others stay out of credit card debt.

By Abigail Curtis, BDN Staff

Posted Jan. 18, 2013, at 4:40 p.m.

 

Eric Leppanen

Artist Eric Leppanen made the "Indebted States of America" with some of the hundreds of credit cards he had signed up for during his long career in the credit card industry.

 

BELFAST, Maine — When Eric Leppanen graduated from college in 1993, he jumped feet-first into the corporate lifestyle as one of the first 25 people MBNA hired when the credit card giant first expanded into Maine.

He wore a suit, climbed the corporate ladder and was a cheerleader for credit card sales.

“What was our goal? To put the world into debt,” Leppanen, now 42 and a Belfast resident, said this week.

He didn’t leave his passion for credit behind when he left work for the day. Leppanen signed up for scores of credit cards for himself, in part with the thought of doing market research for the company and in part because his credit was “amazing.” He used those credit cards to do work on his Northport house, to finance vehicles and to obtain cash advances that he invested in the stock market.

“I always paid my bills, but I was heavily in debt,” he said. “It seemed like free money at the time … You always convince yourself you’ll get out of this debt.”

But when Bank of America, which bought MBNA in 2005, laid him off in early 2009 at the beginning of the Great Recession, he knew he was in trouble.

Leppanen, who had a wife, Linda, and two children, totaled up the figures and realized he was more than $50,000 in debt. The more than $25,000 he had invested in the stock market had declined in value to almost nothing. He took $50,000 from his 401(k) retirement account to live on and pay the bills. By the time the Leppanens saw a financial advisor later that year, they discovered their only option was filing for bankruptcy.

“The last thing I ever wanted to do in my life was admit failure,” Leppanen said. “Especially when you work in the finance world.”

The average credit card debt of a U.S. household in November was $7,194, according to the Federal Reserve. When only U.S. households with debt are considered, the average debt load increases to $15,422.

Jennifer Hayden, a partner with Molleur Law Office in Biddeford, focuses on bankruptcy. Her office, which primarily represents debtors, has been staying busy, she said Friday.

“Playing the bankruptcy card is a sacred legal right that should be reserved for the worst of times because it has so much power to [change] someone’s life,” she said. “It’s often that filing for bankruptcy, as long as all the ducks are in order, can help folks… I see people all the time and they always feel badly about filing. Filing has nothing to do with not wanting to pay.”

Leppanen was one of those people who didn’t take bankruptcy lightly. He worried about the judgement of his family, friends and neighbors as the family had to sell their home and investment property. They downsized, rented a home in Belfast and embarked on a very different lifestyle.

But then Leppanen started to feel something unusual: freedom, as the weight of all that debt and worry was taken off his shoulders.

“Everything changed, my whole outlook on life,” he said. “It’s like going to hell and back again.”

‘Indebted States of America’

Leppanen and his wife cooked up a plan when Bank of America began laying people off. They figured they could start a cleaning business with just $500, and did.

They called it “ aNeatNook: home cleaning and property care,” set up a website and began to find clients, beginning in 2009.

In each of the last three years, the business has grown by 20 percent, and he and his wife are now at “max capacity.” They travel as far as an hour for work, but try to keep their base of clients close to Belfast.

“We can’t take on tons of new work,” he said. “But we can be more selective about what we do.”

The Leppanens earn $30 an hour cleaning the homes of local artists, retirees and summer folk. It’s not a fancy career, but that’s okay, he said.

“It’s how we support our family,” he said. “I couldn’t be more thankful.”

That wasn’t the only benefit of being laid off. When Leppanen lost his job, he was inspired to pursue art, a longtime passion of his.

Using old paint his cleaning clients give him, Leppanen makes works of abstract impressionism. It has become more than a hobby — he calls it a second full-time job. He paints at night, with his finished work displayed at a Rockland gallery, Asymmetrick Arts.

Recently, a shoebox packed with nearly 300 of his expired credit cards — a legacy from his former life — inspired him to make a different kind of art. In one frenzied night of painting and assembling, he turned about half the collection into a version of the American flag he calls “The Indebted States of America.”

He painted the plastic cards red, white and blue, adding stars with the fifty state quarters he ordered from the Franklin Mint. He traded his cleaning services for the frame, which is made with gold leaf.

The piece was on display in the Rockland gallery when it caught the eye of Trevor Hughes, president and CEO of the New Hampshire-based International Association of Privacy Professionals. Hughes decided he wanted to use the artwork in his discussions about privacy issues.

“I have always found it difficult to convey some of the more complex ideas in the field to audiences and students,” Hughes wrote Friday in an email to the BDN. “‘The Indebted States of America’ does something that mere words struggle to convey — it suggests, in a very personal and understandable way, the feeling of being overwhelmed by the aggregation of data. This is clearly a privacy concept, and Eric’s piece gives clarity to the issue.”

Hughes said the piece of art forces students to think about the places their personal data exists in today’s information economy.

“Consumer credit is certainly a flash point, and we increasingly see our credit information as a source of vulnerability,” he wrote. “But at the same time, we rely heavily on the ease and power provided by the credit made available to us. Privacy exists in that balance — between the legitimate use of data and the concerns over misuse of our information.”

Leppanen said he is glad to have his art and experience used to help educate others. As for his own journey, although it wasn’t the one he thought he was embarking on when he signed up for his first credit card in college “in exchange for a beer koozie,” it has taught him lessons he wouldn’t give up.

In exchange for a corporate hamster wheel, he now is his own master.

His family lives debt-free. They do have two credit cards in order to re-establish credit, but those cards have $500 debt limits, and the Leppanens pay them off in full every month.

“I want to teach my children that you can do more with less. I shop at Goodwill. Things are handed down. And yet, I think I have an abundance in my life,” Leppanen said. “I hate to go to hell and back — but now, I’m in heaven.”

Debt Reduction Shortcuts to Handle With Care

By Ben Edwards

January 17, 2013  

Ben Edwards
 

When you’re in debt, there are shortcuts you can take to reduce the amount of interest you’re paying or even the amount of money you owe. They can be tempting but be aware that each of these shortcuts comes with a risk. If you don’t pay attention to these details, you may wind up losing money to interest and fees that could have been spent paying off your debt.

1. Balance transfer cards. Balance transfer credit cards are frequently used to move unsecured, high-interest debt to a credit card with a zero percent interest promotional period.
Depending on the card, the zero percent interest period typically lasts anywhere from 6 to 18 months. During that time, the money you save on interest can be put towards your balance.

This shortcut can help you eliminate debt faster if you’re consistent about paying your interest savings towards your debt. One caveat: most cards charge a balance transfer fee of 3 percent.

The risk of balance transfer cards is that you treat the promotional period as a time to ignore your debt instead of paying it down. If you don’t pay down your balance then all the transfer did was delay your debt problems. Additionally, you’ll make matters worse if you continue to add charges to the card during that time.

The good news? This risk is purely behavioral—meaning there are no terms and conditions stopping you from using this shortcut to your advantage. The key to using balance transfer cards appropriately is to stay disciplined about paying off the balance. Occasionally you’ll find cards that don’t carry or waive the balance transfer fee, which can save you even more money.

2. Debt consolidation.
Loan consolidation
When credit was easier to come by, a common way to consolidate debt was taking out a home equity loan and using it to pay down higher interest credit card debt. The big risk there is you’re taking unsecured debt and turning it into secured debt. Consequently, if you default on the loan, you could be putting your home at risk.

Payment consolidation
There are non-profit organizations and for-profit debt relief companies that will negotiate with your creditors the terms of your debt, such as interest rates and monthly payments. Typically, you make one consolidated payment to the debt relief service and they pay your creditors.

After you’ve made a certain number of payments, the debt relief service may try to convince your creditors to lower your interest rate and potentially your monthly payments. One thing to be aware of is that lowering your monthly payments by simply extending the term of a loan is going to keep you in debt longer and cost you more in interest.

While there are legitimate companies that provide this service, unfortunately there are many that have a long list of complaints at the Better Business Bureau—many of which take advantage of people trying to get out of debt.

Some of the deceptive business practices to watch out for are charging higher than advertised fees, enrolling you in a program without your consent, failure to provide promised services, or charging fees before getting any results. Check www.BBB.org and do your research when shopping for debt relief services.

3. Debt settlement. Some of the companies that offer debt consolidation services also provide debt settlement. They not only try to lower your interest rates but also attempt to reduce the amount of debt you owe.

Reducing your debt balance is enticing but you should be wary about which company you work with. It’s important to take the same care as when you’re looking for a reputable debt consolidation company.

When you trust a debt settlement company as an intermediary between you and your creditors, there’s a risk they could keep you out of the loop. If you’re not making payments to your creditors, they’ll come after you—even if the debt settlement company is to blame for the accidental or intentional miscommunication.

Some debt settlement companies will actually hold off making payments to your creditors so that the creditors become more willing to negotiate. While this may be effective as leverage for lowering the amount you owe, it can hurt your credit score. It doesn’t nearly have the same negative impact as declaring bankruptcy but the missed payments will show up on your credit history for several years.

If you don’t trust a company to work on your behalf, there are tools you can use to help negotiate your debt on your own. Whether you negotiate it yourself or use a third party, the IRS considers forgiven debt to be taxable income.

Reduce your risks. If you do your research and read the fine print, these shortcuts can help you climb out of debt faster while avoiding the risks of more fees and damaging your credit. Even more important than minimizing the fees you’ll pay is making a plan to stop adding to your balance, so you’re not fighting a never-ending battle against debt.

How did 21 ordinary people collectively pay off more than $1.7 million in debt? Ben Edwards shows you how in his upcoming book Get Out of Debt Like a Debt Hero, his contribution to the DebtMovement.