Bank Breakups and Bribery Abroad
Bribes, relationships, etc.
The FIFA stuff is a good reminder that the U.S. is pretty imperialistic about imposing its laws, and its view of corruption, on foreign countries and cultures. But this is not a reminder that JPMorgan particularly needs, since the Securities and Exchange Commission and Department of Justice continue to investigate it for hiring the relatives of Chinese government officials, a practice that U.S. investigators seem to dislike rather more than, say, the Chinese officials do. "The request for information regarding some of China’s highest-ranking officials could strain U.S.-China relations," and it is pleasing to think that America's great-power diplomacy is being conducted by bank regulators and the SEC.
Meanwhile in FIFA, there are some ominous rumblings that prosecutors will "widen the investigation of FIFA officials and banks that may have been used in the alleged conspiracy," emphasis added, and can't you just see how this will play out? Here, I will tell you:
- Corrupt FIFA Guy #1 wired a million dollars to Corrupt FIFA Guy #2 for bribes.
- Bedraggled European Bank cleared the wire transfer for them.
- Bedraggled European Bank never asked Corrupt FIFA Guys a question to the effect of "hey this isn't for bribes is it?"
- In failing to ask that question, Bedraggled European Bank ignored obvious red flags, like the fact that everyone has known FIFA was corrupt forever.
- U.S. prosecutors will charge Bedraggled European Bank with wire fraud for knowingly facilitating bribery and money laundering.
- Prosecutors will demand a guilty plea and a massive fine, and hold a press conference saying "this was the UEFA Champions League quarterfinal of fraud and we have ruled Bedraggled European Bank offside."
- Everyone will tut-tut about how the banks are all recidivist criminals.
If a bank cashes a check for a soccer bribe, is that really the bank's fault? Anyway here's the FIFA indictment, here is Noah Feldman at Bloomberg View on the jurisdictional questions, and here's the New York Daily News last year on the FIFA informant who kept a $6,000-a-month Trump Tower apartment for his "unruly cats."
Breaking up the banks.
Here's a piece by Michael Grunwald arguing against breaking up the big banks. It has come in for a certain amount of criticism but I'm sort of broadly in sympathy with it; it seems to me that bank size is an overrated risk factor and that systemic risk is more about the system than it is about the size of the individual banks.
Maybe more interesting, though, is the question of, if you've decided to break up the banks, what do you break them into? One popular answer is to bring back Glass-Steagall and separate commercial banking from investment banking. This probably has some good effects, but ending "too big to fail" isn't one of them: JPMorgan Commercial Bank and JPMorgan Investment Bank would both be huge and systemic, and the huge damaging systemic failures in the last crisis were pure investment banks (Lehman Brothers) or pure commercial banks (Washington Mutual). Though perhaps that's an argument for Glass-Steagall; Lehman and WaMu could fail but, say, Citi could not.
In any case, Glass-Steagall leaves you with some huge banks, so it doesn't get you as far as the tougher bank breakup advocates want to go. So you have to ask, like, if you broke JPMorgan into 10 pieces, what would the pieces be? People like the idea of separating the banks into business lines -- put the trading business here, the advisory boutique there, the credit-card lender over there, etc. -- but, one, some of those businesses are also really big and systemic, and, two, putting them together probably does reduce the bank's risk. Boring old commercial banking is pretty risky! There was a savings and loan crisis, etc., plus ask WaMu. Combining regular banking with other businesses, with different cyclical properties, reduces the risk that it will blow up. In boring times, boring banking is profitable, and trading is less so; in volatile times, trading is profitable and offsets some of the losses on credit cards or whatever. So if you broke JPMorgan into its constituent businesses you'd lose the benefits of diversification. (And cross-selling, which is I guess a thing.)
On the other hand if you broke it into 10 perfect miniature clones of JPMorgan, each with 1/10th of its existing businesses, you probably would lose a lot of the benefits of scale. One answer is to just require or encourage size reductions -- with a deposit cap, or a steeply rising capital surcharge for larger banks, or whatever -- and let the banks themselves work out the best way to achieve the reductions. But it's not obvious that the approach they'd choose would be the systemically preferable one.
Here's Jamie Dimon being Jamie Dimon-y:
“God knows how any of you can place your vote based on ISS or Glass Lewis,” Dimon, 59, said Wednesday at an investor conference in New York. “If you do that, you are just irresponsible, I’m sorry. And you probably aren’t a very good investor, either.”
The context is that Institutional Shareholder Services and Glass Lewis & Co. recommended that JPMorgan shareholders vote against Dimon's pay package this year, and in favor of splitting JPMorgan's chairman and chief executive officer roles two years ago. So this is personal for him. That does not make him wrong: Good investors presumably do their own research and come to their own conclusions on voting and governance matters. (Though they might retain proxy advisers and use their analyses as "the 'base case' voting recommendation," as JPMorgan's own funds do.)
On the other hand, in shareholder democracy as in regular democracy, rational ignorance is a thing; if you run a relatively small amount of money and are broadly diversified in a quasi-indexing strategy, it is probably not worth it for you to do your own voting research, and you might as well outsource it to ISS. Dimon might prefer that all his shareholders be careful, thoughtful and engaged, but then again he might not; in any case, it's probably not a realistic demand. (Of course he's not demanding it, just making fun of the ones who aren't, which is perfectly reasonable.)
Hank Greenberg is fun.
Here are Bloomberg's Max Abelson and Sonali Basak on former AIG boss Hank Greenberg and his memoir, "The AIG Story":
As AIG expands into China and the Soviet Union and offers insurance for kidnapping and a secret satellite, Greenberg slays a Hungarian stag, outfoxes Mikhail Gorbachev, yells at Ferdinand Marcos and rescues a jailed colleague accused by Iran of spying.
Even that freed colleague calls Greenberg stubborn. “Hank is not an easy man to work for,” K.C. Shabani said this month while praising his drive. “Very rude to me, almost abrasive.”
Jeff Sonnenfeld, a professor at the Yale School of Management and a friend of Greenberg’s, brought up Siddhartha, Odysseus, Nietzsche, Moses and Job to describe him. Greenberg’s own book gets biblical when it says his “wrath befell those who delayed or deceived.”
His wrath is currently befalling the U.S. government for giving AIG a bailout that was less shareholder-friendly than the bailouts that the big banks got, and while I am not sure there's a verse in Job about receiving an insufficiently generous financial bailout, he does seem to be doing better with that lawsuit than anyone expected.
Tax law is also fun.
Here is Victor Fleischer with a delightful little history lesson on spin-offs of appreciated property: Apparently the spin-off structure that Yahoo is hoping to use with its Alibaba shares is more or less exactly the trade that Evelyn Gregory was using in the 1934 case that led Judge Learned Hand to declare, famously (in certain circles), that "Any one may so arrange his affairs that his taxes shall be as low as possible." Except maybe Yahoo.
The car really is the ultimate mobile device.
I recently made fun of Carl Icahn for (1) confidently predicting that Apple would build a car and (2) saying, cheesily, that "Apple would view the car itself as a the ultimate mobile device," and I hereby concede defeat and humbly apologize to Icahn. He was completely correct, at least about the second part:
Confronted by a shareholder Wednesday at a rare public forum over where Apple is looking to invest its cash, Jeff Williams, Apple’s senior vice president of operations, seemed to suggest the automotive industry.
“The car is the ultimate mobile device, isn’t it?” Williams said during the Re/code conference in Rancho Palos Verdes, California. Pressed further by Re/code co-founder Walt Mossberg, Williams appeared to pull back a little, addressing the importance of Apple’s in-car information and entertainment system, CarPlay.
I don't ... I mean, isn't an airplane more mobile than a car? Or like a helicopter? A drone? A cruise missile? A space shuttle? I don't really understand this claim but I guess I'm not a car-culture guy.
People are investing in Argentina again. Business lending is up. Avago will buy Broadcom. Michael Kors Has Poor Timing for Its Stock Repurchases. The Value and Pricing of Cash. Fun With Canadian Retail Precious Metals Merger Arbitrage. Charities are making big money by acting like venture capitalists. What Chicago’s Fiscal Emergency says about the Quality of Credit Analysis in the Municipal Bond Market. Hanergy founder Li Hejun spent $50m on more stock on crash day. Donald Trump built a golf course on a pile of garbage, but you can still see the garbage when you play golf. McDonald’s Will Toast Its Buns For Five More Seconds. Greedy fish. This Chinese Heir Gave his Dog Two Gold Apple Watches. Space Weird Thing.
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