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More Bank Fraud Allegations Surface Years After the Fact

December 6th, 2012
in econ_news, syndication

Econintersect:  More and more of the ethically challenged and outright criminal activity that mascerades as banking is coming to light.  Yesterday's news (05 banksters-economist-cover-liborSMALLDecember 2012) carried stories of $12 billion of fraud at Deutsche Bank (NYSE:DB) and misrepresentation by HBOS plc,  a large banking and insurance company in the UK, preceding its acquisition by Lloyds TSB (NYSE:LYG).  Both events occurred during the financial crisis that came to a climax in the autumn of 2008.

Three complaints by former Deutsche Bank employees have been received by the U.S. SEC (Securities and Exchange Commission) about deception to avoid revealing dangerous financial weakness during the crisis.

Follow up:

Deutsche Bank has claimed that the whiste blowers have no personal knowledge of what they allege and that the bank is fully cooperating with the SEC.

The events affecting Lloyd's involve misrepresentation by HNOS plc that it was a conservative financial institution during the process of aquisition.  Brooke masters had the following in her Financial Times article:

Lord Stevenson, the former chairman of HBOS, stood accused on Tuesday of living in “cloud-cuckooland” after it emerged that he had assured the City watchdog that his bank was “as secure” as it could be – just six months before it collapsed.

In one of the most dramatic sessions of the UK’s Parliamentary Commission on Banking Standards Lord Stevenson was confronted with two letters written to the Financial Services Authority in 2008 in which he asserted HBOS was a “highly conservative institution”.  Six months later the bank sought government assistance.

Éric Tymoigne has made a good definition of Ponzi finance.  The following excerpt has been reformated by Econintersect for ease of reader inteaction:

Following Minsky’s framework, the degree of financial fragility can be defined by three categories: hedge, speculative, and Ponzi finance. Each of these categories is expected to require a certain level of defensive position-making operations, i.e., refinancing operations and/or liquidation to pay debt commitments. Note that this categorization is not a measure of the use of external funding, i.e., of the size of leverage, but rather a measure of the quality of the leverage.

  • Indeed, hedge financing may involve a heavy use of external funds, but is not expected to require any defensive position-making operations.
  • Speculative finance is expected to require a rolling over of the capital component of financial obligations;
  • Ponzi finance is expected to require growing position-making needs given existing outstanding debts because capital and income components of financial obligations are expected to be greater than cash inflows from normal economic operations.
According to the financial instability hypothesis, over time market-based economies tend to rely more and more on Ponzi finance. Thus, any slowing down in the growth of asset prices that sustains the net worth of individuals or the nonrealization of expected income threatens the willingness of banks to refinance borrowers.

Econintersect believes that there is something seriously wrong with a system that takes years to uncover what is often hidden in plain sight if there had been rudimentary audit functions.

Late addition: Yves Smith has done a major dissection of the Deutsche Bank story tonight  at Naked Capitalism.

Banks are an almost irresistible attraction for that element of our society which seeks unearned money.  J. Edgar Hoover

John Lounsbury

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