He Hates it Because it Works

Paul Krugman (Yeah, I know) has a very interesting look at the Trump administration's hostility toward the Brazilian digital payments system PIX.

It's cheaper, more reliable, and more secure than anything that US payment providers offer, and so the White House is threatening sanctions.

Brazil introduced Pix, a digital payment system, almost 6 years ago. The system — which allows people to make payments on their phones, not very differently from Apple Pay or Google Pay, except that Pix payments are official currency rather than transfers from private companies — has been highly successful. The vast majority of Brazilians use it regularly, and by all accounts Pix — which is free for individuals, and cheap for businesses — is hugely popular.

On Wednesday — as it happens, on the first anniversary of an article I posted praising Pix and suggesting that it may represent the future of money — the Trump administration will try to punish Brazil for this success. It will do so by imposing tariffs on Brazilian exports under Section 301 of the 1974 Trade Act, which permits such tariffs to counter “unfair trade practices.”

………

Trump’s hostility towards Brazil’s Pix system is also an illustration of the same phenomenon we see in his energy policy: this administration is hostile to progress whenever that progress works against the interests and ideology of the oligarchs who have poured money into Trump’s campaigns and his pockets.

Krugman is wrong here when he characterizes this behavior as being unique to the Trump administration though, the Biden USTR was expressing "concerns" about PIX in 2022. (PDF).

This knee jerk support of predatory US financial institutions is something that widely supported by the US Polity, whether conservative or liberal.

 

Neither Eric Arthur Blair nor Franz Kafka Would Be Surprised

What can you say about the fact that Halliburton filing an ISDS (Investor–State Dispute Settlement) complaint against Venezuela to revover their damage from US sanctions.

As Anna Russel would say, "I'm not making this up, you know." 

This is functionally identical to murdering one's parent and then asking for mercy as an orphan. 

The ISDS is an administrative secret court that allows for private investors to sue governments for engaging actions that might negatively effect their profits.

In this case Halliburton is suing because the Venezuelan Bolívar was devalued and they had to leave the country because of US sanctions.

On December 11, as the Trump administration was escalating its military campaign against Venezuela by trying to impose a total siege on the country’s oil and gas sector, the US oilfield services company Halliburton quietly filed a suit against Venezuela at the World Bank’s international arbitration court, ICSID.

Long-standing readers are well-versed on investor-state dispute settlements (ISDS), a topic we’ve covered in depth over the past decade or so. As Yves pointed out in a recent post on Russia’s decision to use ISDS to go after the EU’s attempts to permanently confiscate Russian assets, the judgments made in these dispute settlements overwhelmingly benefit investors:

These treaties, designed to override the laws and regulations of states in order to give protected status to investors, make a mockery of national sovereignity. ISDS disputes draw on a small community of arbitrators, many of whom were involved in drafting ISDS treaty provisions, with hearing held in secret and typically not appealable. The rising (and correct) perception that the rules were gutting labor rights and environmental protection was instrumental to stopping their reach being extended further in the US. But it seems no existing ISDS provisions have been unwound.

What makes this case particularly pernicious is that a large part of the losses and foregone profits Halliburton is seeking to claw back stems from Washington’s economic sanctions on Venezuela. What’s more, the case was filed at the World Bank’s International Centre for Settlement of Investment Disputes, to which Venezuela has not even been party since 2012.

To say that this is Orwellian or Kafkaesque would be an understatement.

………

There is currently very little information available on the ISDS case filed by Halliburton. The following is an excerpt of a firewalled article published by the Global Arbitration Review that was translated into Spanish and posted by the Madrid-based legal firm Bullard Falla Excurra on its LinkedIn page (translated back into English by yours truly, emphasis also my own):

On December 11, 2025, Halliburton filed a claim against Venezuela with the International Centre for Settlement of Investment Disputes (ICSID) under the Barbados-Venezuela Bilateral Investment Treaty. The case will be processed under the Additional Facility Rules, given that Venezuela withdrew from the ICSID Convention in 2012. The dispute stems from Halliburton’s gradual withdrawal from the Venezuelan market between 2016 and 2020, after reporting losses of approximately US$199 million. These losses were attributed to the devaluation of the Venezuelan bolívar and the deteriorating economic and political conditions in Venezuela, which affected its ability to meet payments to its clients, including PDVSA, the state-owned oil company. Halliburton also notes that changes in the Venezuelan government’s exchange rate and US sanctions further complicated the viability of its operations in the country. Halliburton, which had operated in Venezuela since 1940, was forced to cease operations in 2020 [by US sanctions], although it maintained local assets and equipment in the country.

It seems to me that filing an action in a court that has no jurisdiction in response to actions that were taken by a party not a party to the action is fraud, and perhaps attempted extortion.

While Venezuela does not have much in the way of foreign reserves, it seems to me that they do have a court system to charge the people involved, including the members sitting on the ISDS panel with fraud and extortion, and then offer rewards in the low 6 figures for their delivery to Caracas.

About Those Tariffs

The Producer Price Index rose by 0.9% in July.

That annualizes out to about an 11% inflation rate, though it should be noted that this is only 1 month of data.

I'm more pro tariff than a lot of people, I believe that friction in international commerce and international finance is a good thing because it provides stability and prevents destructive capital flows. (I take the term "Destructive Capital Flows," from Keynes.) 

That being said, tariffs drive up costs.  That's as close to a fact as you can find in economics.

The question is, or should be, whether the additional costs create any societal benefit, and if so, is the benefit worth the cost.

Wholesale prices rose far more than expected in July, providing a potential sign that inflation is still a threat to the U.S. economy, a Bureau of Labor Statistics report Thursday showed.

The producer price index, which measures final demand goods and services prices, jumped 0.9% on the month, compared with the Dow Jones estimate for a 0.2% gain. It was the biggest monthly increase since June 2022.

Excluding food and energy prices, core PPI rose 0.9% against the forecast for 0.3%. Excluding food, energy and trade services, the index was up 0.6%, the biggest gain since March 2022.

To quote Bette Davis, "Fasten your seat-belts; it's going to be a bumpy night." 

An Ignored Truth

In the discussions of tariffs and international trade, something that is frequently ignored is that the trade regime of the 80s, 90s, and particularly the 2000s did actually result in large numbers oi job losses.

When one looks at things like the GATT, later the WTO, and to an even greater extant WIPO, it becomes clear that the so-called "Free Trade" deals of that era were neither about freedom nor trade.

Instead, they were orgies of self-dealing and political lobbying, with the interests of labor ignored for the benefit for the interests of international finance. 

It's all about one countries negotiating deals that benefit their particular brand or rent-seekers. 

The goal was to create greater inequality through labor arbitrage.

There are claims that it was all due to productivity increases, but this growth was pitiful compared to earlier times.

I had a couple of people ask me what I thought of this NYT piece on trade and manufacturing from last week. The piece makes some valid points, but it continues to push the elites’ big lie, that trade was not the major factor in the collapse of manufacturing employment in the 00s.

It makes this point explicitly:

Take manufacturing. Of the six million factory jobs erased during the 2000s, Chinese imports accounted for about one-sixth of the losses, or a million jobs. But the other five million were killed off by other forces. 

The other forces are supposed to be productivity growth and the shift from goods consumption to service consumption. There is a big problem with these alternative explanations. We had productivity growth forever. We also have been seeing people shift from goods consumption to service for a long time. It did not just begin in the 00s, or end there. But the job loss in manufacturing did.

As can be seen, there are cyclical ups and downs throughout the whole period, but the only time we saw widespread job loss outside of a recession was in the 00s. It seems a bit fantastical to think that productivity growth and a shift to service consumption cost us 40 percent of manufacturing jobs in this decade when the trade deficit exploded, but not in the decades before or in the last fifteen years, when employment in the sector has been on a modest upward trend.

You can read the rest. 

The reason that our economy, and our society, feel so out of whack is because the haves have increasingly crafted a system which is designed to allow them to loot the have nots.

A lot of this is the outgrowth of the DMCA, signed into law in the 1990s, not the safe harbor provisions, but the anti-circumvention provisions, which created an orgy of rent seeking and speculation that drove out building and investment.

Trump is a symptom of this, not the disease. 

 

The New MAGA Hat

Just the thing for caving

So it appears that Trump has backed down on tariffs, probably because the US Treasury markets were freaking out.

Or because it was all a scam to allow Trump and his Evil Minions™ to trade with the knowledge that the aforementioned import taxes would not actually go into effect. (Why not both?)

I am not sure if this is a humiliating back-down, but if anyone in the Democratic Party establishment (There is no Democratic Party establishment) have any political acumen (they don't), they should be calling it such.

It does not matter if it is true or false, they should be calling Trump a wuss who caved to China.

President Trump finally blinked.

It took a week for the plunge in the stock and bond markets—along with a sustained campaign by executives, lawmakers, lobbyists and foreign leaders—to prompt Trump to roll back for 90 days a major element of his sweeping tariff plan.

The president said that the reaction to the tariffs was getting a bit “yippy”—like a nervous athlete unable to perform—and he relied on his instincts to change course as he watched the bond market tank and listened to business leaders including JPMorgan Chase CEO Jamie Dimon express fears of a recession. The episode was classic Trump: He took a drastic action, closely tracked the reaction, kept advisers and allies guessing and then changed course.

In this case, the extraordinary reversal was announced via Trump’s social-media platform just hours after so-called reciprocal tariffs officially went into effect. He tapped out the post in the Oval Office as he sat with Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick. Trump also significantly raised tariffs on China.

Shortly after Trump published his post, as markets rose, Bessent stood outside the entrance to the West Wing and explained that the move to pause some of the tariffs was discussed Sunday when the two men met. “He and I had a long talk,” Bessent said before a crowd of reporters. “This was his strategy all along.”

 Yeah, sure.  He was always planning to do this.

Also, I have this bridge in Brooklyn to sell you.

This Sounds Very Familiar

It appears that there is yet another complex financial instrument finding favor in international finance, the "Synthetic Risk Transfer" , which sounds a lot like the Credit Default Swap (CDS) that was described by Warren Buffet as a, "Financial weapon of mass destruction."

When Wirecard went belly up a few years ago, Deutsche Bank ended up with a loss of just €18mn — miraculously little for a bank that had up until then made a habit of ambling into nearly every major financial cow pie in the world.

And this had been a giant pile of manure right on its own doorstep. Deutsche had previously underwritten Wirecard bonds, arranged loans for the company, and handed its chief executive a giant margin loan. Fellow German lender Commerzbank took a €175mn hit.

How did Deutsche manage to avoid this doo-doo? FT Alphaville gathers that it was probably at least partly thanks to something known as a “synthetic risk transfer” — one of the hottest bits of high-octane financial engineering these days. Deutsche Bank declined to comment.

In SRTs, a bank offloads some or all of the risks of some of its loans to ease how much capital it has to set aside for regulatory purposes. The loans remain on the bank’s balance sheet, but the buyer of an SRT typically promises to cover a chunk of the losses if the loans go bad. The buyers are investors such as insurance companies, hedge funds and (increasingly) private credit funds, which take on the risk in exchange for a fee.

Come to think of it, this sounds exactly like a CDS, only skeevier.

And they manage to invoke, "Saroff's Rule," "If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive." (With The Simpsons no less)

………

The advantage for GGG Capital is that it can harvest returns of typically 10 to 15 per cent without much work (beyond the initial due diligence on the loan pool) The loans remain on the Banque Alphaville balance sheet, so it does the ongoing work of monitoring the borrowers. And if they go bad, Banque Alphaville has to handle the actual clean-up, since they’re still on its balance sheet. GGG Capital is just there to reimburse the bank for losses (up to a point).

For Banque Alphaville, the advantage is (if the structure passes muster as a “true” risk transfer) that regulators will then require less capital to be set aside for the loans.

So basically, by papering over risk by paying a fee to an insurer (who is not actually an insurer), and who, if the whole things goes titsup, might not be able to make good on their promise, you can boost returns, and generate more bonuses for senior management.

All you have to do is set everything up for an economic crisis.

This sounds a f%$#-tonne like the sh%$ that f%$#ed us in 2008.

Just Jumped Out of a Floor 20 Window

And at floor 12, so far, so good.

A note to my reader(s) it was not me wot jumped out of a 20th floor window, it's the world's banking system.

Since Credit Suisse went tits up, we have not had any bank failures of note, though there are some rumblings about concerns with some European and US banks.

I really hope that there is an air bag on floor 1.

Softbank, AGAIN!

We have internet finance company Clearco is imploding.  Rather unsurprisingly, it has backing from Softbank, whose investment model appears to be to dump tons of money on an unlikely business plan, create a, "Unicorn," and then get cash out in an IPO before the whole rotten edifice collapses. (See WeWork, Uber, FTX, DoorDash, etc.)

Clearco's model was to serve as a loan shark to nascent online businesses.  Their thing was to , "The platform uses an AI system to connect to a potential client's payment, ad and e-commerce platforms to analyze their business' financial health and revenue. The platform then reviews the data and automates the diligence process, effectuating funding decisions within minutes," which is a good candidate for bullshit bingo winner of the week:

Clearco and Thinkific Labs are very different Canadian technology companies: one advances cash online to e-commerce operators. The latter sells a platform used to create and run online courses.

But they share one thing in common. Both were among the earlier companies last year to enact deep job cuts after tech valuations crashed and interest rates rose: Vancouver’s Thinkific cut 100 jobs, or 20 per cent of staff in March. Clearco (officially CFT Clear Finance Technology Corp.), based in Toronto, cut 125 jobs, or 25 per cent in July. Tech companies eventually laid off 154,000-plus workers globally in 2021.

Now, the two have cut deeply again – putting them at the vanguard of tech companies enacting a second sweeping reduction. Thinkific last week cut 21 per cent of staff, or 76 jobs. On Monday, Clearco said 50 people, or 26 per cent, were laid off and chief executive officer Michele Romanow had resigned to become co-executive chair. Other tech companies that have already done a big layoff are expected to follow their leads.

………

“We hired too quickly last year,” Ms. Romanow said in an interview. “We grew in too many markets, we were trying to build too many products.” Clearco’s job cuts this week affect all areas and levels and bring Clearco’s ranks to 140 people, from 500 last July.

Ms. Romanow, a star of TV’s Dragons’ Den, said the decision to step down was hers, 11 months after she had replaced co-founder Andrew D’Souza as CEO. “I told the board, ‘I think it’s time we have someone that knows and has operated in these economic conditions and has a wealth of experience in finance and capital markets so we do not make mistakes there.’ "

"Dragon's Den" is a Canadian version of Shark Tank, which kind of dots the "I"s and crosses the "T"s for a business model of pure puffery.

………

Clearco was a high flier early in the pandemic, reaching “unicorn” status in 2021 by achieving a valuation around US$2-billion. Japanese giant Softbank Group’s Vision 2 Fund led a US$215-million financing that year.

(Emphasis Mine)

But Clearco has been challenged since early 2022, starting with a slew of senior departures. Last summer, Clearco briefly stopped originating cash advances to increase pricing and tighten underwriting, enacted its first layoffs, and retreated from markets outside Canada and the U.S. It hired U.S. investment bank Financial Technology Partners to explore strategic options, a process that is continuing, and raised US$60-million in 2021. It is now raising US$30-million more.

………

Most of its advances came from off-balance-sheet facilities backed by alternative or specialty asset managers. Prospective customers didn’t have to provide personal guarantees, give up equity or submit to credit checks, but did have to give access to their business accounts to Clearco, which assessed their economics and made automated financing offers. Last fall, Clearco simplified and increasingly automated its product; it now funds specific expenditures based on uploaded invoices, and clients commit to fixed repayment periods.

"Off balance sheet facilities?" sounds like a little Enron.

Why is Masayoshi Son not in prison?

No

Is the IMF fit for purpose?

—Harvard Professor Jamie Martin, writing in The Guardian

Simple question, simple answer.

More generally, the IMF, which nominally is supposed to help countries in time of travail, actually serves as an enforcer for transnational finance, primarily in Wall Street and the City of London.

Additionally, they have reducing corruption as a significant part of their remit, though it is now clear, given their behavior in the Ukraine, where they are studiously ignoring rampant corruption involving their aid to that former Soviet republic, that this remit only applies to non-European, and more generally non-white countries.

Abolish the IMF, and forgive all the debts that they hold.

The RMS Titanic Could Have Told You, the Icebert (lettuce) Always Wins

The Daily Star lettuce has come out victorious in the battle of the year - to see whether it could outlast Prime Minister Liz Truss in #LizVsLettuce

[THREAD] pic.twitter.com/sP7QDgqcfr

— Daily Star (@dailystar) October 20, 2022

Harsh

So, Liz Truss has tendered her resignation to King Charles after showing herself to be even more hapless than Boris Johnson, who is considering another run at being Prime Minister:

A wilting 60p iceberg lettuce from Tesco in a blond wig has been crowned the winner of a bizarre competition after outlasting Liz Truss’s tenuous grip on power.

Seven days ago the Daily Star set up a webcam on the lettuce to see if it would have a longer shelf-life than the prime minister. To add to Truss’s humiliating resignation, the lettuce won.

As Truss made her resignation statement, those viewing the video on YouTube soared to more than 20,000.

When the prime minister confirmed her departure on Thursday lunchtime, a plastic gold crown was placed on the now browning leafy vegetable. The caption changed from “Day Seven: Will Liz Truss outlast his lettuce?” to “The Lettuce Outlasted Liz Truss”. The national anthem was played to mark the lettuce’s triumph, and champagne was poured.

The lettuce was inundated with messages of congratulations, in a chat box beside the video. They included: “Lettuce Rejoice”, “Lettuce being having you”, “Lettuce for PM”, “Lettuce 1 Truss 0”, “Truss sunk by an iceberg”.

When I joked that the Tories had replaced Boris Johnson with something even more bizarrely inexplicable, my intent was to make a joke, not to engage in prophecy. 

Just call me nostra-dumbass.

Headline of the Day

Quantifying Britain’s moron risk premium

—Financial Times

This is, of course, about British PM Liz Truss, who is doing her level best to replace Boris Johnson with something even more bizarrely inexplicable.

Money quote:

Not a whole lot of value has emerged from the past month’s omnishambles, but one valuable development is the coining of “moron risk premium” — in short, the extra money the UK is paying to borrow because its leaders are a few sandwiches short of a tea party.

The Tories might want to replace her with someone better suited to leadership, like Larry, #10's official cat, officially the Chief Mouser to the Cabinet Office.

This is Called a "Death Spiral"

One of the consequences of the Federal Reserve's aggressive interest rate policy is that it pushes the exchange rate up for the US dollar, and in addition to making the US less competitive on international markets, it forces other nations' central banks to raise their interest rates to protect their currency.

If their currency falls shortly, then their largely dollar denominated debt would become unaffordable, and the cost of imported goods would rise, increasing inflation, but it also has the effect of slamming the brakes on their economies:

Central banks around the world moved Thursday to combat the effects of a soaring dollar and rising inflation, joining the Federal Reserve in risking a recession to rein in climbing prices.

In a flurry of central-bank meetings from Norway to South Africa, many raised rates by larger-than-expected margins in a day that analysts at ING billed as “Super Thursday.”

The Bank of England raised its key interest rate for the seventh consecutive time on Thursday. Before the news came out, the British pound briefly touched its lowest point in 37 years against the dollar before recovering some of its losses to reach $1.13.

Even some countries that didn’t move rates—the Bank of Japan left its policy rate at its previous low level—took other action to ease the growing inflation pressure.

This has gone from belt-tightening to economic contagion in the space of a few months.

We are going to be driven into a world-wide recession by the fixation of the central banks.

Pass the Popcorn

With all the talk of Russia possibly defaulting on its debt, an important fact has been missed, that the bond contracts are written to allow payment Rubles if external events prevent the government's access to dollars.

The sanctions are exactly the sort of force majeure envisioned in these contracts, so Russia will not default, though it is likely that the bond holders would be paid in currency that they cannot use:

Russia is teetering on the edge of a possible sovereign debt default, and the first sign could come as soon as Wednesday.

The Russian government owes about $40 billion in debt denominated in U.S. dollars and euros, and half of those bonds are owned by foreign investors. And Russian corporations have racked up approximately $100 billion in foreign currency debt, JPMorgan estimates.

On Wednesday, $117 million in interest payments on dollar-denominated government debt are due.

But Russia is increasingly isolated from global financial markets, and investors are losing hope that they will see their money. As the government strives to protect what’s left of its access to foreign currency, it has suggested it would pay its dollar- or euro-denominated debt obligations in rubles instead. That has prompted credit rating agencies to warn of an imminent default.

What should be noted here is that  Russian bonds, at least since 2016, have had provisions that allow for it to make payments to foreign denominated bonds in Rubles if they are unable to make payments in dollars due to, "beyond its control," and their bonds do NOT had a provision ceding sovereign immunity or allowing foreign jurisdiction of these contracts, which means that these bonds, and associated credit default swaps, very likely have little recourse in US or UK courts.

………

On Monday, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.” The government has the money to meet its debt obligations, he said, but sanctions were hampering its ability to pay. Mr. Siluanov had also said over the weekend that the country had lost access to about $300 billion of its $640 billion currency reserves.

The government insists investors will be paid. The finance ministry said on Monday it would send instructions to banks to issue the payment due on dollar- or euro-denominated bonds in dollars or euros, but if the banks don’t execute the order then it will be recalled and payment will be made in rubles instead. The statement also said that the payments could be made in rubles and then converted to another currency only when the country’s gold and foreign exchange reserves are unfrozen.

Russia has been dealing with sanctions for some time now, so this could get ugly.

We are already, "Starting to see that uncertainty spill over into CDS markets," so, "Fasten your seat belts, it's going to be a bumpy night."

It's Finally Hitting the New York Times

It seems that people are finally noticing that The City of London's primary business is money laundering.

Of course, this has been obvious since before Margaret Thatcher was Prime Minister:

In 1969, two years after the Cayman Islands, a British territory, passed its first law to allow secretive offshore trusts, an official government report struck an ominous note. A tide of glossy propositions from private developers, it warned, was washing through the islands. Cayman was fast becoming a state captured by shady finance.

Those were the pungent beginnings of a modern system brought to light by the Pandora Papers, an enormous data leak coordinated by the International Consortium of Investigative Journalists. The papers exposed a smorgasbord of secretive and questionable financial dealings by more than 330 politicians and public officials from over 90 countries and territories — and over 130 billionaires from Russia, the United States and elsewhere. On display was a dizzying array of chicanery and wealth hoarding, often by the very people who should crack down on it.

The revelations, published on Oct. 3, are global in scope. But if there is one country at the system’s heart, it is Britain. Taken together with its partly controlled territories overseas, Britain is instrumental in the worldwide concealment of cash and assets. It is, as a member of the ruling Conservative Party said last week, “the money laundering capital of the world.” And the City of London, its gilded financial center, is at the system’s core.

For Britain, whose bloated financial sector exacerbates widespread economic problems, that’s bad enough. For the world, at the mercy of an economic system rigged for the rich, it’s even worse.

It's only the OP/ED pages, but hopefully, we'll start seeing some coverage on the front page and finance sections.

About those Pandora Papers

The International Consortium of Investigative Journalists (ICIJ) haws dumped its latest documentation about how the rich and politically connected hide their earnings and evade taxes, this one called the Pandora Papers:

A massive trove of private financial records shared with The Washington Post exposes vast reaches of the secretive offshore system used to hide billions of dollars from tax authorities, creditors, criminal investigators and — in 14 cases involving current country leaders — citizens around the world.

The revelations include more than $100 million spent by King Abdullah II of Jordan on luxury homes in Malibu, Calif., and other locations; millions of dollars in property and cash secretly owned by the leaders of the Czech Republic, Kenya, Ecuador and other countries; and a waterfront home in Monaco acquired by a Russian woman who gained considerable wealth after she reportedly had a child with Russian President Vladimir Putin.

Other disclosures hit closer to home for U.S. officials and other Western leaders who frequently condemn smaller countries whose permissive banking systems have been exploited for decades by looters of assets and launderers of dirty money.

 The files provide substantial new evidence, for example, that South Dakota now rivals notoriously opaque jurisdictions in Europe and the Caribbean in financial secrecy. Tens of millions of dollars from outside the United States are now sheltered by trust companies in Sioux Falls, some of it tied to people and companies accused of human rights abuses and other wrongdoing.

This news has prompted The New Republic to state that, "The Pandora Papers Show That South Dakota Is a Moral Sewer and Should Be Abolished," which is a rather interesting take on this matter.

Of course, the splitting of the Dakota Territory into 2 states was a blatantly political act in the first place, the Reopublicans of the day wanted 2 more reliably Republican seats, so there is some symmetry there.

It is interesting just how much South Dakota has thrown in its lot with the worst aspects of the finance system for decades, so its prominent position in tax evasion is no surprise.

One curious fact about this is the almost complete absence of any US people or US Businesses from the report.

There are two potential explanations for this:

1. The people and the businesses of the United States are law abiding folks who pay the taxes that they owe.
2. That this report was leaked by elements of the US State Security Apparatus, possibly with the goal of making life difficult for elements of the Russian and Chinese governments.

OK, there is ONE potential explanation for this, but all indications are that the documents are accurate, so it's best to proceed with with that you have. 

I find the discomfort of the rich and powerful to be personally gratifying, particularly the fact that got caught evading £300,000 in stamp taxes through the use of an offshore shell company. 

I'm hoping that they spend some time in dock over this.

I do think that there is a lot that the could be done, both by the White House and the Congress to reduced this phenomenon.

Because the City of London Owns England

Following announcements by G-7 countries about standardizing a minimum tax for trans-national corporations and cracking down on tax evasion and tax havens, the UK has decided to go to the mat for its finance industry, AKA the "City of London", whose core competency is tax evasion and money laundering:

U.K. Chancellor of the Exchequer Rishi Sunak is pressing for the City of London to be exempt from a plan by global leaders to make multinationals pay more tax to the countries where they operate.

Finance ministers from the Group of Seven advanced economies struck a historic deal last weekend that could force the world’s biggest companies to pay a minimum corporate tax rate of 15%.

Sunak is expected to make the case that financial services, including global banks with head offices in London, should be exempt from the plan when talks move to the G-20 next month.

………

A European Union official pushed back against the idea of an exemption. The EU expects all companies to pay their fair share of taxation, the official said at a briefing for journalists on Wednesday.

If they get an exemption, the City of London will spend its time turning client companies, and their subsidiaries into finance institutions so that hey can continue to evade taxes.

The UK would be hurt by this as much as any other nation, but they are the poodles of their finance industry, they have been since at least Margaret Thatcher.

Just Shut Them Down

The Federal Reserve has been forced to warned Deutsche Bank that it is money laundering again.

The fix for this is very simple:  Lock them out of the US, because they are not going to fix this.

This is BCCI with a German accent:

The Federal Reserve told Deutsche Bank AG in recent weeks that the lender is failing to address persistent shortcomings in its anti-money-laundering controls, according to people familiar with the matter.

The Fed’s frustration has escalated to a point that the bank could be fined, the people said.

Deutsche Bank has poured massive resources into addressing repeated shortcomings and penalties related to allowing suspect transactions. The Fed told Deutsche Bank that instead of making progress, the German lender with a large Wall Street presence is backsliding. The regulator has said that some of the anti-money-laundering control problems require immediate attention, according to the people.

………

The Fed’s harsh words contrast with the bank’s message that it has worked diligently to improve its systems and has put most of its legal troubles in the past.

The Fed’s latest warning comes four years after it classified Deutsche Bank’s U.S. operations as being in “troubled condition,” a rare rebuke for a major bank. In May 2020, it issued a fresh admonishment over the bank’s money-laundering controls.

………

Deutsche Bank is Germany’s largest lender and as a dollar clearing bank regulated by the Fed, is a major player in global financial transactions.

Shut down their dollar clearing operations.  Problem solved, and the Germans can deal with following their own "No Bailouts" advice that they foist on the rest of the Euro Zone.

Of Course They Do

The UK, normally the United States' poodle in all matters, is not offering its support for Biden's global business tax plan. 

This is not a surprise.  The British financial sector, known colloquially as the City of London, has two areas where it dominates world markets: Tax evasion and currency speculation.

The US may dominate the UK, but the City of London owns the whole government, lock, stock and barrel.

Of course they are objecting to a plan with makes revenue shifting a less profitable enterprise.  It's their profits that they are protecting.

The Front Fell Off

The Front Fell Off?

It now appears that the Ever Given, the massive container ship which had completely blocked the Suez Canal, has been freed and traffic has resumed through the waterway.

There is still a major backlog of ships in both directions, but after a week, we should expect a return to normal shipping conditions.

The bigger issue is how this event has demonstrated the fragility of international shipping.

What's more, it has increasingly been juxtaposed with economic fragility driven by the increasingly oligopolistic nature of shipping, which means that if one shipper fails, the entire system can seize up.

The classic Clarke and Dawe sketch, "The Front Fell Off," (shown) is a perfect metaphor for this:

In this newsletter, I do a lot of explaining about complicated problems caused by big dumb corporate institutions. I don’t have to do that this time, because the story of the mess in the Suez is so simple. “After years of bitcoin and reddit short selling and credit default swaps and a million other things I don’t understand,” one random person put in a tweet that went viral, “it’s so refreshing to hear that global commerce is in peril because a big boat got stuck in a canal.”

That’s basically the story right there, it’s a big boat and it got stuck in a canal. The ship blocking the Suez, called the Ever Given, weights 220,000 tons, and is as long as the Empire State Building is high. Despite the hilarious nature of the problem, the disruption to world trade is large and serious, costing tens of billions of dollars. And if the ship can’t be dislodged soon, some consumers will once again experience shortages of basic staples like toilet paper.

That said, the reason this disruption to global commerce seems so dumb is because it is. It starts with the ship size itself. Over the last few decades, ships have gotten really really big, four times the size of what they were 25 years ago, what the FT calls “too big to sail.’ The argument behind making such massive boats was efficiency, since you can carry more at a lower cost. The downside of such mega-ships should have been obvious. Ships like this, which are in effect floating islands, are really hard to steer in tight spaces like ports and canals, and if they get stuck, they are difficult to unstick. In other words, the super smart wizard financiers who run global trade made ships that don’t fit in the canals they need to fit into.

The rise of mega-ships is paralleled by the consolidation of the shipping industry itself. In 2000, the ten biggest shipping companies had a 12% market share, by 2019 that share had increased to 82%. This understates the consolidation, because there are alliances among these shippers. The stuck ship is being run by the Taiwanese shipping conglomerate Evergreen, which bought Italian shipping firm Italia Marittima in 1998 and London-based Hatsu in 2002, and is itself part of the OCEAN alliance, which has more than a third of global shipping.

Making ships massive, and combining such massive ships into massive shipping monopolies, is a bad way to run global commerce. We’ve already seen significant problems from big shipping lines helping to transmit financial shocks into trade shocks, such as when Korean shipper Hanjin went under and stranded $14 billion of cargo on the ocean while in bankruptcy. It’s also much harder for small producers and retailers to get shipping space, because large shippers want to deal with large clients. And fewer ports can handle these mega-ships, so such ships induce geographical inequality. Increasingly, we’re not moving ships between cities, we’re moving cities to where the small number of giant shipping lines find it efficient to ship.

Dumb big ships owned by monopolies are the result of dumb big ideas, the physical manifestation of what Thomas Friedman was pushing in the 1990s and 2000s with books such as The Lexus and the Olive Tree and The World is Flat, the idea that “taking fat out of the system at every joint” was leading towards a more prosperous, peaceful and competitive world. Friedman’s was a finance-friendly perspective, a belief that making us all interdependent with a very thin margin of error would force global cooperation.

………

What is new isn’t the vulnerability of the Suez Canal as a chokepoint, it’s that we’ve intentionally created lots of other artificial chokepoints. And since our production systems have little fat, these systems are tightly coupled, meaning a shortage in one area cascades throughout the global economy, costing us time, money, and lives.

It’s a dumb way to organize a global supply chain system, just as it was dumb to build ships that are too big to fit into canals. And that’s why the "big boat stuck in canal" is such a great illustration of the problem, it shows our policymakers and corporate leaders couldn’t even think through what would happen if Really Big Thing Got Stuck In Important Canal.

………

The answer to addressing the problem of thinned out supply chains is to recognize that hyper-efficient globalization inherently carries the downside of unpredictable shortages, geopolitical tension, and supply disruptions. And then redesign our global trading order to make it less efficient and more resilient. There are three basic changes we’ll need.

Matt Stoller calls for a rigorous enforcement of anti-monopoly measures, a reimpositition of border friction like tariffs, and a restructuring of business so that they are less indebted and less vulnerable.

Unfortunately, this will not happen, because this system was created to benefit financial institutions and to drive wages down through labor arbitrage, so his reforms are actually a repudiation of the entire system.

I support his ideas, but I don't think that they are politically realistic at this time.

 

SoftBank-Funded ……… Is Never a Good Start for a Sentence

It is remarkable just how many enterprises that Softbank funds are fraudulent, criminal, or fraud and criminality adjacent.

When one looks at their investment targets, like WeWork, Uber, and DoorDash, which are basically criminal enterprises, with defrauding investors, evading transportation and safety regulations, and stealing from delivery boys (respectively) being central to their business models.

And now another SoftFank funded dodgy outfit has blown up, Greensill, which financed supply chains.

It's model was to pay suppliers immediately at a discount, and then collect the difference when the large firms actually buying the stuff paid on a 90 day, and frequently longer, cycle. 

Its finances were sufficiently sketchy that their insurer stopped writing them policies, and then the house of cards collapsed:

Supply chain finance disruptor Greensill is undone by its own financial alchemy, putting at risk thousands of jobs in the UK, Australia and the EU. The timing could not be worse for already buckling supply chains.

Disruptor seems to be a synonym for criminality and ignoring the lessons of finance learned over more than 500 years of fractional reserve banking.

On Monday, the supply chain finance firm Greensill Capital filed for insolvency after defaulting on a $140 million loan it owes to Credit Suisse. Its parent company in Australia had already filed for insolvency there. According to UK court documents, Greensill had “fallen into severe financial distress” and can no longer pay off its debts. Over the past week many of the company’s directors have been frantically jumping ship, including its chairman Maurice Thompson, Australia’s former foreign minister Julie Bishop and former Morgan Stanley executive David Brierwood.

The firm has been in trouble for some time, as I warned in a previous NC post. A number of its client companies already collapsed in 2020. In the aftermath attention switched to the financial menage á trois Greensill had formed with its primary backer, Soft Bank, and Swiss mega-lender Credit Suisse. Greensill was also under investigation by German banking regulator BaFin and the Association of German Banks, an industry group, over its German subsidiary Greensill Bank’s huge exposure to a single client: U.K.-based steel magnate Sanjeev Gupta.

Yep, SoftBank.  

When you want to get in on a fraud, pump it up, and get out leaving suckers holding the bag.

Greensill’s fall from grace was as spectacular as its meteoric rise, writes the FT‘s John Plender:

Greensill Capital went from nothing in 2011, when Lex Greensill abandoned a big-bank career, doing global supply chain financing at Morgan Stanley and Citibank, to go it alone. By 2019 this upstart non-bank says it had extended $US143 billion ($185.5 billion) of financing to 10m-plus customers and suppliers in 175 countries. Its founder also notched up powerful contacts in government and hired former UK prime minister David Cameron as an adviser.

Yeah, hiring David Cameron as an adviser is another tell that they are relying on smoke and mirrors more than anything else. 

It turns out that the model Greensill used was "Working" in the short term because it allowed companies to cook the books:

For large companies the advantages are twofold: they get to preserve cash on-hand by extending payment terms with vendors. They can also record the amount they owe to the supply chain finance firm or bank as accounts payable on the balance sheet rather than as debt. This makes their liquidity position appear healthier than it actually is. And that can be dangerous. Companies can conceal the true size of their debt for longer, leaving investors and creditors bearing bigger losses when they finally collapse, as happened with Spanish green energy giant Abengoa in 2015, UK outsourcing giant Carillion in 2018 and NMC Health, the former FTSE 100 private hospital company, in 2020.

They then repackaged and resold the debt, but this was dependent on these bonds being insured, and when their insurer decided to stop writing policies, and the debt became profoundly unattractive to put it mildly. so the house of cards collapsed.

Once again, though, the principals of the firm will be fine, but this collapse is ricocheting around the trans-national supply chain, and we don't know when this game of musical chairs will end.

If this sounds familiar to you, it's because it's rather similar like Bear Stearns in 2008.

One hopes that the repercussions are less severe.