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The first charges for money-laundering are laid against Danske Bank

Thu, 12/06/2018 - 15:42

AS EUPHEMISMS FOR suspected money-laundering go, “insufficiently legitimised” takes some beating. That is how Denmark’s Financial Supervisory Authority (FSA) described some of Danske Bank’s customers in a report in 2012. The country’s largest bank now faces criminal charges at home and investigations elsewhere.

The dirty-money scandal swirling around Danske is the largest ever uncovered. Over €200bn ($227bn) of suspicious transfers originating in ex-Soviet countries may have been rinsed through the bank’s Estonian branch. As the scale of the suspected laundering, dating back a decade, has emerged this year, the bank has lost its boss and seen its share price halved.

In preliminary criminal charges filed on November 28th, Danish prosecutors accuse Danske of failing to report suspicious transactions, not training staff in anti-money-laundering procedures, and having no senior manager responsible for...

The moral assumptions embedded in economic models of climate change

Thu, 12/06/2018 - 15:42

CLIMATE CHANGE is many problems in one. Developing and deploying zero-carbon technologies is a formidable challenge. So is the politics of co-ordinating disparate groups to achieve the necessary collective action. In America, where the Republican Party persists in climate denialism, it is an epistemological pickle. Policymakers met in Katowice, Poland, this week to discuss implementing the climate deal signed three years ago in Paris, from which America withdrew under President Donald Trump.

Behind all this, however, lies an economic problem. Humanity must work out how many resources should be diverted from other, valuable uses—from life-enriching consumer goods to funding for pensions—to the task of limiting global warming. These calculations may look bloodless, but they are built on weighty moral assumptions, namely, how to value other people’s lives. Though it is hard to know what might finally impel humanity to take the...

Why do so many people fall for financial scams?

Thu, 12/06/2018 - 15:42

Unmissable, you say?

IN HINDSIGHT, DAVID CARTER sees the deal differently. The 63-year-old has a Master’s degree in technology. A successful career meant he found a six-figure salary offer perfectly plausible. He knew from reading newspapers that tech stocks were up and the job market was hot. So when an email offered him a job with a Swiss firm at a $100,000 salary, he took it.

Mr Carter never saw a penny. Instead he owes $80,000, which he is paying off from his retirement savings. The job was too good to be true. All he had to do was use his credit card to buy iPhones and iPads. He started in June, buying them at Best Buy and Walmart and sending them from his home in Maryland to an address in California. The company paid his credit-card bill—for a few weeks. In July those payments were voided. His bank said the debts were his. The company’s website vanished. The people he had spoken to...

Europe makes contingency plans for clearing-houses after Brexit

Thu, 11/29/2018 - 15:47

AS THEY PREPARE for Brexit, many of London’s financial firms have begun to move some staff, or operations, to the continent. But financial contracts, notably derivatives, are difficult to uproot. London’s clearing-houses, which ensure that a contract is honoured even if one side goes bust, are globally important. As fears of an acrimonious Brexit have risen, so too have those of havoc. Now European Union regulators have unveiled contingency plans.

Clearing-houses have grown vastly in significance since the financial crisis, after which the G20 group of economies made it mandatory to settle most simple derivatives trades through them. London’s three big clearing-houses handle vast amounts of derivatives, and much of the trading cannot be done elsewhere. LCH, London’s largest clearing-house, clears interest-rate swaps with a notional value of over $340trn, making up 95% of the world’s total. LME Clear (part of the London Metal...

Non-bank firms are now big players in America’s mortgage market

Thu, 11/29/2018 - 15:47

Not so bankable

TWICE IN THE past 30 years, housing finance has taken down America’s economy. As interest rates rise and the housing market stutters (see article), regulators are again pondering the risks from the mortgage market—this time from a shift towards non-bank originators.

These firms, which create mortgages and often sell them on to other institutions, exist outside the bank-regulatory framework. They now account for 44% of lending by the top 25 originators, up from 9% in 2009, according to Inside Mortgage Finance, a trade publication. Five of the largest ten are non-banks, as is the largest retail mortgage originator, Quicken Loans. Their market share for servicing mortgages, or collecting monthly payments, has risen from 5% in 2009 to 41% in 2018.

Some of this shift reflects non-...

Paul Volcker’s memoir invites a rethink of the fight against inflation

Thu, 11/29/2018 - 15:47

PAUL VOLCKER’S legend is almost as grand and imposing as his physical personage, all six feet and seven inches of it. In 1979 President Jimmy Carter chose him to run the Federal Reserve and tackle America’s high inflation. Mr Volcker acted with grim determination, tightening monetary policy even as the economy sank into deep recession and beleaguered Americans pleaded for relief. Eventually he not only routed inflation, but also won a hard-earned credibility for the Fed that would help successors keep inflation stable. Mr Volcker himself recounts the story in a new memoir, “Keeping At It”, which calls on central banks to resist the siren song of loose money. But the book also invites readers to reconsider his legacy, and to ask whether central bankers have drawn the right lessons from the legend of Chairman Volcker.

The recessions and disinflation of the early 1980s proved a watershed both for macroeconomics and the practice of...

Financial firms have quietly prepared for Brexit

Thu, 11/29/2018 - 15:47

SINCE BRITONS chose to leave the European Union in June 2016, the clichés have piled up almost as thickly as the votes: “no deal is better than a bad deal”; “Brexit means Brexit”. And you might count yourself rich—even by the City of London’s standards—if you had a fiver for every time you had heard a banker say his firm was “hoping for the best, but preparing for the worst”. Four months before Britain is due to quit the EU, financial firms have long ago given up hoping for the best (for most, that Britain would remain after all) and are still not sure they will avoid the worst—a sudden, no-deal Brexit on March 29th 2019. But they have been quietly bracing themselves for it.

Firms based in any EU member state may serve clients in any other: lending and raising money, trading and clearing derivatives, and insuring lives and property across the union without setting up shop locally, in a system known as “passporting”. London is by...

Corporate bonds in an ageing business cycle

Thu, 11/29/2018 - 15:47

IN THE 1970s the junk-bond market was a dark underworld. It was the home of “fallen angels”, the bonds of investment-grade firms that had gone to seed. Most investors were too genteel to hold them. So they traded at hefty discounts to face value. Then Michael Milken, a junk-bond guru, came along with a new gospel. A portfolio of high-yield junk was a better bet than one of supposedly safer bonds. After all, an A-rated bond can only go in one direction—down.

The corporate-bond class system is still in place. Many types of mutual fund are barred from holding non-investment grade (ie, junk) bonds. But junk is no longer a stunted and shameful offspring. The high-yield market in America is now worth $1.2trn. And investment-grade bonds have also come down in the world. Around half are rated BBB, a notch above junk. Issuers are slumming it for a reason. A low rating is the price they pay for loading up on cheap debt.

A world with less snobbery of any kind is a better...

Why opening pubs on the Emerald Isle is so difficult

Thu, 11/29/2018 - 15:47

Whither ’Spoons?

FOR A COUNTRY whose chief cultural export is its pubs—there are some 7,000 Irish pubs worldwide, and 8,403 on the island itself—Ireland makes it surprisingly difficult to open a drinking establishment. In both Northern Ireland (part of the United Kingdom, but with many of its own laws) and the Republic, the process is slow, pricey and fraught with uncertainty.

Both use a system familiar to anybody who has ever queued to get into a nightclub: one in, one out. Aspiring landlords must buy licences from those willing to “surrender” theirs. Moreover, buyers must prove local “need” by pointing to a growing population or the closure of nearby pubs. Objections, from existing publicans, say, can cause months of delays. Transfers of licences are approved by courts and dates for disputed cases are hard to come by, says Maura McKay, a lawyer in Belfast.

Getting a licence in Ireland...

Green asset classes are proliferating

Thu, 11/29/2018 - 15:47

IF THE WORLD is to tackle global warming, vast amounts of money—$3.5trn annually from now until 2050, according to the International Energy Agency, a forecaster—will have to flow into clean-energy research and generation. Capital will have to shift from carbon-intensive industries into clean ones. That means asset managers will have to offer more green investment products, and regulators will have to set standards that enable investors to make green choices.

Much has already been done. In a decade green-tinged assets under management have grown from almost nothing to a small but significant share of the total. In America, where scepticism about climate change is common, climate is the most frequently used “ESG” (environmental, social and governance) criterion among asset managers, reckons US SIF, an industry group. As of this year, $3trn of the $46.6trn in professionally managed American assets take climate issues into account—more...

Bitcoin has lost most of its value this year

Thu, 11/29/2018 - 15:47

ON DECEMBER 17TH 2017 the price of bitcoin on CoinMarketCap, a cryptocurrency exchange, neared $20,000. True believers hoped that was just the beginning. One analyst at a Danish investment bank predicted bitcoin could be worth $100,000 by the end of 2018. The year is not yet over. But as The Economist went to press, bitcoin’s price was $4,223, and trending downwards (see chart). Where bitcoin goes, other cryptocurrencies follow. Ether, the second-most popular cryptocurrency, is down from $1,432 in January to $120 today.

All this marks the deflating of the third cryptocurrency bubble (the others were in 2011 and 2013). The trigger is unclear. Explaining the movements of deep, liquid markets is tricky at the best of times. Cryptocurrency markets are neither. One popular theory is that the the supply of brave buyers willing to take a punt has now been exhausted.

Regulatory interest may be another reason. Cryptocurrencies have long been a...

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