Based on every meaningful investigation into the epic financial crash of 2008 that resulted in the worst economic crisis in the U.S. since the Great Depression, derivatives that were concentrated at Wall Street’s largest banks played a central role in the crisis. And yet, 11 years later, neither Federal regulators nor Congress have meaningfully reined in these risks.

Three years ago we reported on President Obama’s press conference of March 7, 2016 where Obama overtly misled the American people about how Wall Street banks were complying with the 2010 Dodd-Frank financial reform legislation that mandated that the banks’ trillions of dollars in dangerous derivatives be centrally cleared rather than traded as opaque private contracts between two counterparties.

President Obama stated during this press conference that “you have clearinghouses that account for the vast majority of trades taking place.” That wasn’t true then and it’s still not true, nine long years after the Dodd-Frank legislation was signed into law.

Siting two seats away from Obama at that press conference was Mary Jo White, then Chair of the Securities and Exchange Commission (SEC). Sitting directly across the conference table from Obama was Thomas Curry, then head of the Office of the Comptroller of the Currency (OCC). Both White and Curry had to know that the President’s statement was false, and yet, they made no effort to correct the public record.

It wasn’t that Obama was off by a small margin of error. It was that the President of the United States had flipped the truth on its head. Instead of the majority of derivatives being centrally cleared, the vast majority were still shrouded in darkness.

As the Federal regulator of national banks (those with branches in multiple states), the OCC is the official tabulator of cleared versus non-cleared derivatives at the handful of Wall Street mega banks that account for 90 percent of all derivative contracts. The OCC’s quarterly chart shown directly below for the period ending March 31, 2016, explains just how far from the truth the President’s statement actually was. Instead of the “vast majority” of derivative trades being centrally cleared, only 36.5 percent were being centrally cleared, meaning that 63.5 percent were not being centrally cleared.

Derivatives That Are Centrally Cleared as of March 31, 2016 (Source: OCC)

Derivatives That Are Centrally Cleared as of March 31, 2016 (Source: OCC)

If the President of the United States can tell a big lie about derivatives reform, apparently the central bank of the United States, the Federal Reserve, feels confident to do the same. In its November 2018 “Financial Stability Report,” the Federal Reserve first correctly explains that at the time of the 2008 financial collapse “Over-the-counter derivatives markets were largely opaque. And banks, especially the largest banks, had taken on significant risks without maintaining resources sufficient to absorb potential losses.” But then the Federal Reserve delivers this whopper of a falsehood to the American people:

“By some estimates, the percentage of such activity that is centrally cleared now exceeds 60 percent.”

While it may be true that some countries in Europe enjoy that 60 percent statistic, it’s the big dangerous mega bank holding companies on Wall Street that the Federal Reserve supervises and is expected to be talking about.

The newly released Table 12 from the quarterly OCC report shows that as of March 31, 2019, the vast majority (57.6 percent) of derivatives in the United States were not centrally cleared. The most dangerous type of derivative, credit derivatives, had the worst showing with only 27.7 percent being centrally cleared.

Derivatives That Are Centrally Cleared as of March 31, 2019 (Source: OCC)

Derivatives That Are Centrally Cleared as of March 31, 2019 (Source: OCC)

Another effort to mislead the public came in a highly unusual YouTube video released by the Commodity Futures Trading Commission (CFTC) on July 10 of this year. The video pointed out numerous dodgy practices that derivative dealers are using to defraud derivative counterparties. (Why release a video instead of prosecuting the crooks?) But toward the end of the video, Brian Bussey, the Director of the Division of Clearing and Risk at the CFTC, says this about progress being made by Wall Street banks in central clearing of derivatives:

“We are extremely satisfied with the industry’s progress in this area and particularly with the CCP’s (central counterparty clearing) and their clearing members’ efforts…Our data indicate that in the credit derivative space, credit default swaps on on-the-run indices, that is the most recently issued indices, that are subject to a CFTC clearing requirement, have already achieved a 77 percent clearing rate. We are also encouraged to see takeup of central clearing in the single name CDS

[credit default swap]

space, which is regulated by our fellow market regulator, the Securities and Exchange Commission.”

Bussey, to backup the preposterous assertion that there is something to be pleased about regarding Wall Street’s progress with conforming to the law on derivatives, simply picks out one small segment of the derivatives market and attempts to promote the false narrative that Wall Street is achieving a 77 percent clearing rate.

Curiously, after two decades of Federal government service, Bussey decided to take early retirement at the end of July. 

If your bank is under a criminal probe for potentially rigging gold and silver markets, it doesn’t help your case to have $50 million in fake gold bars sitting in your vaults. Nonetheless, this is what Reuters reported last week:

“In the last three years, bars worth at least $50 million stamped with Swiss refinery logos, but not actually produced by those facilities, have been identified by all four of Switzerland’s leading gold refiners and found in the vaults of JPMorgan Chase & Co., one of the major banks at the heart of the market in bullion, said senior executives at gold refineries, banks and other industry sources.”

Last month there was another bizarre story making the wires about JPMorgan Chase owning a ship that was raided and found to contain 20 tons of cocaine. (See With Three Felony Counts Already, Did JPMorgan Chase Really Need to Own a Ship Containing 20 Tons of Cocaine?)

Then there was that rash of deaths among its technology workers with another bizarre one occurring in March of this year; its nesting doll frauds involving Bernie Madoff; its gambles in wild derivatives in London using deposits from its Federally insured bank; the book about its likeness to the Gambino crime family by two trial lawyers, and on and on.

Some folks might be inclined to think at this point that if it walks like a duck and quacks like a duck, there’s a very good chance it’s not a swan.

Jobs in banking are some of the most sought after for job seekers — but plenty of roles may not be around much longer. 

Despite a year of scandals that entangled many of the country’s largest banks, the desire to work at these companies remains high, according to a new report by LinkedIn. Some of the more high-profile scandals include Deutsche Bank‘s alleged involvement in a global money-laundering scheme and accusations against Well Fargo‘s auto-loan and mortgage practices. 

Nonetheless, Bank of America, Goldman Sachs, Citigroup, Wells Fargo, and JPMorgan Chase remain five of the most popular places to work in 2019. LinkedIn attributes the popularity to banks offering increasingly tech-focused jobs that attract talented software engineers and developers out of college. 

Read more: The 30 hottest companies of the year, according to LinkedIn

“The reality is that if somebody wants to learn finance and strategy, these banks are still the places to be trained and developed,” Heather Hammond, co-head of the global banking and markets practice at Russell Reynolds Associates, told LinkedIn

While job seekers may be flocking to banks at the current time, a new report revealed a million jobs in the industry could disappear in just over 10 years. Job losses or reassignments will impact 1.3 million bank workers in the US alone by 2030, according to a new report from British insights firm IHS Markit. Especially at-risk roles include customer-service reps, financial managers, and compliance and loan officers. 

Though the most at-risk jobs seem to be lower-paying, jobs in banking as a whole are some of the most expensive in the country. Starting analysts make $91,000 in base pay, while managing directors can earn almost $1 million after bonuses. In fact, the industry could add a whopping $512 billion in global revenue by 2020 with the use of intelligent automation, according to a 2018 report from Capgemini

While the use of AI remains sparse, and the technology is still basic, a boost in revenue will increase the adoption of automation, Business Insider analyst Lea Nonninger reports

Unfortunately for job seekers, banks’ investment into automation is well under way. In fact, a detailed 2018 report from Business Insider Intelligence noted that banks are already using AI to mimic bank employees, automate processes, and preempt problems. JPMorgan is cleaning thousands of databases to make room for machine learning tech. Citi president Jamie Forese said in 2018 that robots could replace as many as 10,000 human jobs within five years. 

Laura Barrowman, chief technology officer at the Swiss investment bank Credit Suisse, revealed the company is already retraining employees whose jobs have been displaced by AI: “Globally, if you look at cyber skills, I think there is a deficit,” Barrowman told Business Insider’s panel at the World Economic Forum earlier this year. “There is such a shortage of skills, and you need people who have that capability.”

(Bloomberg) — For an investor whose story was featured in a best-selling book and an Oscar-winning movie, Michael Burry has kept a surprisingly low profile in recent years.

But it turns out the hero of “The Big Short” has plenty to say about everything from central banks fueling distortions in credit markets to opportunities in small-cap value stocks and the “bubble” in passive investing.

One of his most provocative views from a lengthy email interview with Bloomberg News on Tuesday: The recent flood of money into index funds has parallels with the pre-2008 bubble in collateralized debt obligations, the complex securities that almost destroyed the global financial system.

Burry, who made a fortune betting against CDOs before the crisis, said index fund inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages more than a decade ago. The flows will reverse at some point, he said, and “it will be ugly” when they do.

“Like most bubbles, the longer it goes on, the worse the crash will be,” said Burry, who oversees about $340 million at Scion Asset Management in Cupertino, California. One reason he likes small-cap value stocks: they tend to be under-represented in passive funds.

Here’s what else Burry had to say about indexing, liquidity, Japan and more. Comments have been lightly edited and condensed.

Index Funds and Price Discovery

“Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies — these do not require the security-level analysis that is required for true price discovery.

“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

Liquidity Risk

“The dirty secret of passive index funds — whether open-end, closed-end, or ETF — is the distribution of daily dollar value traded among the securities within the indexes they mimic.

“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those — 456 stocks — traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different — the index contains the world’s largest stocks, but still, 266 stocks — over half — traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

It Won’t End Well

“This structured asset play is the same story again and again — so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexed, passive products, but they are not fools — they make up for it in scale.”

“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.”

Bank of Japan Cushion

“Ironically, the Japanese central bank owning so much of the largest ETFs in Japan means that during a global panic that revokes existing dogma, the largest stocks in those indexes might be relatively protected versus the U.S., Europe and other parts of Asia that do not have any similar stabilizing force inside their ETFs and passively managed funds.”

Undervalued Japan Small-Caps

“It is not hard in Japan to find simple extreme undervaluation — low earnings multiple, or low free cash flow multiple. In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price.”

Read more: Michael Burry Discloses Investments in Five Japanese Companies

“There is a lot of value in the small-cap space within technology and technology components. I’m a big believer in the continued growth of remote and virtual technologies. The global retracement in semiconductor, display, and related industries has hurt the shares of related smaller Japanese companies tremendously. I expect companies like Tazmo and Nippon Pillar Packing, another holding of mine, to rebound with a high beta to the sector as the inventory of tech components is finished off and growth resumes.”

Cash Hoarding in Japan

“The government would surely like to see these companies mobilize their zombie cash and other caches of trapped capital. About half of all Japanese companies under $1 billion in market cap trade at less than tangible book value, and the median enterprise value to sales ratio for these companies is less than 50%. There is tremendous opportunity here for re-rating if companies would take governance more seriously.”

“Far too many companies are sitting on massive piles of cash and shareholdings. And these holdings are higher, relative to market cap, than any other market on Earth.”

Shareholder Activism

“I would rather not be active, and in fact, I am only getting active again in response to the widespread deep value that has arisen with the sell-off in Asian equities the last couple of years. My intention is always to improve the share rating by helping management see the benefits of improved capital allocation. I am not attempting to influence the operations of the business.”

Betting on a Water Shortage.

“I sold out of those investments a few years back. There is a lot of demand for those assets these days. I am 100% focused on stock-picking.”

A multi-billion-dollar asset management company plans to use the Stellar blockchain for a new fund.

Franklin Templeton Investments filed a preliminary prospectus with the U.S. Securities and Exchange Commission Tuesday for a money market fund whose shares would be recorded on the Stellar Network. The plan requires the SEC’s approval.

To be clear: the fund would not invest in any cryptocurrencies or crypto projects. Rather, “the ownership of the Fund’s shares may be maintained and recorded solely on the Stellar network,” the prospectus says.

According to the prospectus, the money fund would seek a $1 per share net asset value (NAV) with 99.5 percent of its investments in government securities, cash, and repurchase agreements further backed by government securities or cash.

Shares would purchasable on the asset manager’s online app but not on the secondary market. Minimum purchases start at $20.

The prospectus says Franklin Templeton believes blockchain-based shares provide transparency for shareholders but warns they come with their own risks, including hacking and loss of funds.

As such, the firm cautioned that its Stellar project is a test and the fund is liable to liquidation if decided upon by Franklin Templeton.

With over $700 billion in assets under management, Franklin Templeton, based in San Mateo, California, ranks among the top 35 mutual fund managers.

Benjamin Franklin image via Shutterstock

Crypto Firms Serving Netherlands Must Register With Dutch Central Bank

The Dutch Central Bank is taking a tougher stance on the cryptocurrency industry, citing new European Union anti-money laundering (AML) laws.

Beginning Jan. 10, 2020, companies or persons involved in the conversion of crypto to fiat currencies or offering crypto deposit services will be required to self-register with the De Nederlandsche Bank (DNB), the DNB announced Tuesday.

The order includes firms based outside the Netherlands that are serving Dutch nationals, even via the internet.

“It is irrelevant whether they are established in the Netherlands,” a DNB representative said in a Q&A, adding:

“Also providers that offer such services from another EU member state … for example via a website, must register, regardless of whether the provider is already registered in that member state.”

DNB says the oversight is to meant to comply with the fifth EU Anti-Money Laundering Directive (AMLD 5), which will also go into effect on Jan. 10, 2020.

The initial registration period will last six months after the January date. Companies that fail to submit registration beforehand could be forced to shut down once the rules go live, the DNB said.

“During these six months you must therefore already comply with the requirements of the law,” the DNB said. “If, at the time the law comes into force, you have not submitted a request for registration, you must stop your service.”

Further, significant shareholders and directors must also be able to prove their AML ability to a DNB assessment.

Under AMLD 5, member states must issue crypto regulations adhering to the policy before Jan. 10. Interpretation of what regulations must be considered or created falls to each state’s discretion, the release says.

In the Netherlands, the DNB will take into account past actions of each company in addition to the “the specific function, the nature, size, complexity and risk profile of the company, and the composition and functioning of the collective.”

Earlier this spring, the Dutch Financial Criminal Investigative Service shut down coin mixer, seizing multiple servers in the Netherlands and Luxembourg.

I’m Here to Tell You What Most People Won’t.

Your project almost definitely won’t benefit, even 1%, from choosing to use Blockchain. You’re not using it for anything innovative that a centralized Oracle database couldn’t do twenty years ago. That’s what the posturing Blockchain influencers and engineers looking to make a quick buck fail to share. They’re doing absolutely nothing which is new or innovative.

What you’re doing is building a vanity project which strokes your own ego. You’re not using blockchain technology because you have to, you’re using it because you want to and think that it will impress other people. That’s sad.

The same is almost universally true for AI and Machine learning by the way. Both have rotted to become empty adjectives used to describe functions which have no characteristics of either. They amount to little more than fancy parlor tricks involving automated bots which act in a very small, specific niche.

The sad reality is that we live in the replication age, the desires to innovate are nowhere to be found. Instead, people focus mindlessly on the replication of the existing. They take what use in their analog world and espouse about how their imagination of this thing recreated for a digital decentralized age will change the world. Sure, it might sound impressive but when you analyze the details…

There is a fundamental misunderstanding of what decentralization even is, its purpose and why it would ever be a means to an end. Without understanding that in first principles we are sentenced to repeat the mistakes of the past. Much like the dot com explosion, crypto and Blockchain will encounter its own reckoning and it is fast approaching. It becomes so difficult to see the wood for the trees that absolutely everything you encounter either looks revolutionary or like a dumpster fire about to REKT the universe.

You Thought the Crash of 2018 was it?

Not even close. That was, in fact, public sentiment running wild and had next to no bearing on the investment or innovation in the space. Yes, ICO’s were an investment but not in the way that it typically matters, i.e. the money raised came from the pockets of ‘unsophisticated investors’ (not a term I used fondly but apt for this purpose).

That meant that these projects were white elephants funded on nothing but sketches on the back of a fag packet.

There was no diligence done on any of them and they raised capital on a white paper. Rather than focus on things that were real and already had working prototypes, the focus drifted to nothing but the financial reward. As it turns out, greed as an incentive to participate is an unlikely route to oversized returns.

Institutional capital certainly has its faults, but for the most part, it can be relied upon to fund projects which conform to a very specific set of expectations. This in no way guarantees their success, or that the investments made are to people who reflect the range of diversity in the world, but their diligence on investments fall somewhere above a whim and a prayer.

And that is a great pity. We focussed on the low hanging fruits, which is typically fine when focussing on such novel technology, but on this occasion, it turned out that they were rotten. The low hanging fruits weren’t sweet.

The solution then is to demand better and develop honesty. It’s about ensuring we act with integrity rather than ego. It’s about being braver and bolder and embracing the possibility of failure in the hopes of arriving at a far more exciting destination.

Are you recreating the wheel? If so, use the wheel that already exists.

Don’t let your ego lead to compounding misery like so much of the projects that exploded and have now crashed and burned.

Blockchains promise is clear. It could enable trust in a trustless world. A final solution to the ephemeral problem of the Byzantine general. Where intermediaries have historically been required to ensure trust, technology can first reduce our reliance before rendering them completely unnecessary.

That means Airbnb without the need for the platform to take a cut of your profits. It means Uber without the faceless shark that everyone seems to hate.

Blockchain’s killer app hasn’t been invented yet.

That’s because of human greed and individual selfishness. Rather than building the impossible, we shirk the responsibility and take the easy route.

The brutal truth of blockchain is that, like Thor’s hammer, few are worthy to wield its power.

Unlike Thor’s hammer, it is your Imagination and Bravery to dream that dictate whether you ever Will

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.  

At the podium, Stockman’s expertise and experience cannot be matched, and he has a reputation for zesty financial straight talk. Defying right- and left-wing boxes, his latest book, Trumped!: A Nation on the Brink of Ruin and How to Bring it Back, catalogues both the corrupters and defenders of sound money, fiscal rectitude, and free markets. Stockman discusses the forces that have left the public sector teetering on the edge of political dysfunction and fiscal collapse and have caused America’s financial system to morph into an unstable, bubble-prone gambling arena that undermines capitalist prosperity and showers speculators with vast windfall gains.  

Stockman’s career in Washington began in 1970, when he served as a special assistant to U.S. Representative, John Anderson of Illinois. From 1972 to 1975, he was executive director of the U.S. House of Representatives Republican Conference. Stockman was elected as a Michigan Congressman in 1976 and held the position until his resignation in January 1981.  

He then became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. Stockman was the youngest cabinet member in the 20th century.  

Although only in his early 30s, Stockman became well known to the public during this time concerning the role of the federal government in American society.  

After resigning from his position as Director of the OMB, Stockman wrote a best-selling book, The Triumph of Politics: Why the Reagan Revolution Failed (1986). The book was Stockman’s frontline report of the miscalculations, manipulations and political intrigues that led to the failure of the Reagan Revolution. A major publishing event and New York Times bestseller in its day, The Triumph of Politics is still startlingly relevant to the conduct of Washington politics today.  

After leaving government, Stockman joined Wall Street investment bank Salomon Bros. He later became one of the original partners at New York-based private equity firm, The Blackstone Group. Stockman left Blackstone in 1999 to start his own private equity fund based in Greenwich, Connecticut.  

In his newest New York Times best-seller, The Great Deformation: The Corruption of Capitalism in America (2013), Stockman lays out how the U.S. has devolved from a free market economy into one fatally deformed by Washington’s endless fiscal largesse, K-street lobbies and Fed sponsored bailouts and printing press money.  

Stockman was born in Ft. Hood, Texas. He received his B.A. from Michigan State University and pursued graduate studies at Harvard Divinity School.  

He lives in Aspen, Colorado, with his wife Jennifer Blei Stockman. They have two daughters, Rachel and Victoria. 

September 3, 2019 ~

Steve Ricchiuto, Chief U.S. Economist at Mizuho Securities USA

One year ago, investors could have purchased a one-year U.S. Treasury Bill with a yield of 2.47 percent. As of this past Friday’s closing price of the Dow Jones Industrial Average, the Treasury Bill would have beaten the performance of the Dow over the past year by more than three-quarters of a point (not taking into account dividends on the Dow stocks).

On Friday, August 31, 2018, the Dow closed at 25,964.82. This past Friday, August 30, 2019, the Dow closed at 26,403.28 That’s a gain of 438.46 points in a year or a return of 1.68 percent versus earning 2.47 percent on a T-bill.

You would have been saved yourself the agony of living through the 800-point market plunge on August 14 and the 3746-point rout in the Dow from the close of trading on November 30, 2018 until Christmas eve – marking the worst December performance since the Great Depression.

The meager performance of the Dow comes despite the $1.5 trillion tax cut that President Donald Trump signed into law on December 22, 2017. That tax cut, which reduced corporate tax rates from 36 percent to 21 percent, was supposed to boost economic growth and pay for itself. Instead, the U.S. Treasury Department reported earlier this month that for the first ten months of the government’s fiscal year, the deficit stood at $866.8 billion versus $684 billion for the corresponding period the prior fiscal year.

The Congressional Budget Office is projecting that the deficit will widen to $960 billion for the 2019 fiscal year; reach $1 trillion for the 2020 fiscal year; and then continue to rise every year for the next decade, reaching $1.4 trillion by the end of fiscal year 2029.

The Congressional Budget Office is also projecting that the total national debt outstanding will rise from $22.5 trillion at the end of this fiscal year (it’s actually already at $22.5 trillion), then increase by $1 trillion or more each year over the next decade to reach $34.4 trillion at the end of 2029.

Despite taking on massive amounts of new national debt to deliver a corporate welfare program masquerading as a tax cut, the U.S. economy has remained stuck in the same 2 percent average GDP range it has been in since it emerged from the epic Wall Street financial crisis. From 2010 through 2018, GDP has averaged 2.28 percent. When GDP hits the upper band of this range, for example 2.9 percent in 2015 and 2018, it invariably gives this back in subsequent years, for example, GDP reached only 1.6 percent in both 2011 and 2016.

And despite all of the promises for a big boost in GDP from the massive tax cut, the highly reliable Atlanta Fed’s GDPNow forecast as of August 30, is projecting that the U.S. economy will grow this year at an annual rate of just 2 percent.

As we previously reported, one of the first individuals to put the so-called “economic recovery” into proper perspective was Steve Ricchiuto, Chief U.S. Economist at Mizuho Securities USA. In February of 2015, Ricchiuto told a CNBC audience the following:

“…there’s also this wrong concept that I keep hearing over and over again in the financial press about this acceleration in economic growth. That isn’t happening. Last month we had a horrible retail sales number. We had a horrible durable goods number. We’re likely to have a very disappointing retail sales number coming forward. This month we’ve had a strong payroll number – we say everything’s great. It’s not great. It’s running where it’s been. It’s been the same thing for the last five years. There’s no improvement in the economy.”

In the United States, approximately 70 percent of GDP stems from consumption by the consumer. When workers are deprived of an adequate share of the nation’s income and wealth, they are crippled as consumers. Until the 1 percent’s share of the nation’s wealth and income is brought into proper balance, the stock market, GDP growth and the future of the democracy will all be at risk.

  • Singapore is about to shake up its banking sector for the first time in two decades that would allow technology players and non-banking firms to challenge traditional lenders.
  • The disruption could be a win-win situation for consumers, according to marketing information services company J.D. Power.
  • The Monetary Authority of Singapore on Thursday said it will now accept applications for the five new digital bank licenses that will be up for grabs until the end of the year.
GP: Singapore banks 190830

A customer uses an automated teller machine in Singapore.Nicky Loh | Bloomberg | Getty Images

Singapore is about to shake up its banking sector for the first time in two decades — a move that would allow technology players and non-banking companies to challenge traditional lenders. The disruption could be a win-win situation for consumers, according to marketing information services company J.D. Power.

The Monetary Authority of Singapore on Thursday said it will now accept applications for five new digital bank licenses until the end of the year.

MAS, both a regulator and the central bank of Singapore, announced in June that virtual bank licenses will be issued as part of “Singapore’s banking liberalization journey.”

The regulator will distribute up to two digital full bank licenses, which will allow non-banking entities to take deposits from retail customers. It also plans to issue up to three digital wholesale bank licenses for companies to serve small and medium-sized businesses and other non-retail segments.

Applicants have to meet a number of eligibility criteria, which includes showing they can manage a sustainable digital banking business and demonstrating experience in the technology or e-commerce sectors.I think that’s a win-win-win for customers right now.Anthony ChiamJ.D. Power

Digital full bank applicants must be “anchored in Singapore, controlled by Singaporeans and headquartered in Singapore,” according to MAS. Wholesale digital banks, meanwhile, can be controlled by either Singaporeans or foreign entities.

Who wins?

“It’s well overdue, in terms of more choices for customers,” Anthony Chiam, regional practice leader for global business intelligence at J.D. Power, told CNBC.

Singapore’s banking sector is dominated by three major local banks — DBS Group, Oversea-Chinese Banking Corp, and United Overseas Bank. A number of international banks with comparatively smaller operations are also key players. Still, technological progress in the city-state has led to the presence of a variety of financial technology, or fintech firms, which provide digital payments, online money transfers and remittance services, among others.

MAS’ decision to issue those licenses came afterthe Hong Kong Monetary Authority gave out eight virtual banking licenses this year in a sector dominated by big lenders such as HSBC, Standard Chartered and various Chinese banks. The moves from regulators in Singapore and Hong Kong are part of a broader shifting trend where more and more people in Asia are turning to online banking services.

New data from research and advisory firm Forrester found many users across the region said they believe they should be able to accomplish any financial task on a mobile device.

“The adoption of digital banking is about to accelerate and reach new levels of scale in Asia Pacific. Pioneers such as WeBank and Kakao have foreshadowed what is on the way, but this is just the beginning,” Forrester analysts wrote in a report, titled “The Pulse of Financial Services Customers In Asia Pacific,” which was released last month.

J.D. Power’s Chiam explained that the selected entities that ultimately receive the digital bank licenses in Singapore would have been thoroughly vetted by the monetary authority’s strict standards, which would make them more reliable. “I think that’s a win-win-win for customers right now,” said Chiam.

Who can apply for the licenses

MAS said the forthcoming digital lending licenses would be extended to non-bank players to keep Singapore’s banking sector competitive and resilient. “These new digital banks are in addition to any digital banks that Singapore banking groups may already establish under MAS’ existing regulatory framework,” the regulator said in a statement.

Following the initial announcement in June, a number of non-banking companies including Singapore Telecommunications and ride-hailing giant Grab expressed preliminary interest in applying for those licenses.

Grab, which has a sizable financial business across Southeast Asia that includes a digital payment service and an electronic wallet, said it is studying the newly released framework from MAS closely.

“We believe digibanks will make banking and financial services accessible and more convenient to a greater number of people in Singapore,” a Grab spokesperson told CNBC by email. “We will be keen to apply for the license once we have evaluated the framework.”

Gaming hardware manufacturing firm Razer, which also has a digital payments business, is another company that’s expressed interested in applying for one of those licenses.

“Razer is keen to explore applying for the digital full bank license through our Razer Fintech arm,” Jasmine Ng, CEO of Razer Fintech, said in a statement last Thursday. “Since we announced our interest in the digital bank license back in June, we have had many parties approach us for partnerships.”

GP: Monetary Authority of Singapore 190701

Signage for the Monetary Authority of Singapore (MAS) is displayed outside the central bank’s headquarters in Singapore.Sam Kang Li | Bloomberg | Getty Images

Given that the total number of licenses available is limited to just five, it is likely that many companies would band together into consortia to apply, according to Varun Mittal, global emerging markets fintech leader at professional services firm EY. He explained that those partnerships would be formed along four main areas: distribution, technology and operations, product and capital.

“I would expect most of the winners to be (consortia). The number of licenses is limited, it’s fixed,” he told CNBC. “It’s better you do the consortium beforehand because the premise is, you have only four months.”

For its part, MAS said Singapore banking groups, which are already governed by the city-state’s internet-only banking framework, can take minority stakes in the entities that will apply for the digital bank licenses. Foreign banks can take a minority stake in digital full bank applicants and any stake in digital wholesale bank entities.

What traditional banks are saying

Digital-only banks are set to gain ground on traditional lenders across Asia Pacific over the next few years, according to Forrester. In Singapore, about a fifth of the people Forrester surveyed said they would consider switching to digital-only banks within the next two years.

But local banks appeared to be optimistic about what the five new digital lending licenses entail for the industry.

“We welcome the diversity that the new players may bring with the digital bank licenses to be granted,” a spokesperson from UOB told CNBC.The inclusion of these additional players will tighten the competitive landscape.Gonzalo Luchettihead of consumer banking for APAC and EMEA at Citi

Meanwhile, OCBC Bank’s Head of Digital and Innovation Pranav Seth told CNBC the bank is open to forming new partnerships and ventures to serve new segments and markets. Media reports suggested that OCBC is in talks with companies, including Singtel, for one of the banking licenses.

DBS CEO Piyush Gupta said at its second-quarter results briefing in July that Singapore’s largest lender is relatively confident about tackling potential challenges posed by digital banks entering the market. “With the rise of digital, we have been focused on reimagining banking,” a DBS spokesperson told CNBC separately by email.

“Incumbents today continue to place emphasis on innovation to develop the type of capabilities that digital banks will be able to offer customers. The inclusion of these additional players will tighten the competitive landscape,” Gonzalo Luchetti, head of consumer banking for Asia Pacific and EMEA at U.S. lender Citi, told CNBC. Citi has an established presence in Singapore.

Competition would create the impetus for banks to do more with technology and provide better services, Luchetti explained. He added Citi’s ongoing investments in digital technologies and focus on strategic partnerships makes it well-placed to handle disruption in the banking services industry.

House Republicans might want to think twice before taking on the FBI director over Hillary’s emails.

FBI Director Comey halo
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Journalist Garrett M. Graff (@vermontgmg) is the author of The Threat Matrix: The FBI at War, and a former editor of Politico Magazine. His next book, Raven Rock, about the U.S. government’s Doomsday plans, will be published in May 2017. He can be reached at

FBI Director James Comey is about to discover whether Rep. Jason Chaffetz, the 49-year-old Republican chairman of the House Oversight Committee, can be scarier than a 25-year-old employee of the world’s largest hedge fund. Comey, who hasn’t spoken publicly since his political bombshell on Tuesday that the FBI wouldn’t recommend an indictment of Hillary Clinton, would probably argue no.

Comey is set to appear Thursday before the House committee to answer questions about the FBI’s yearlong investigation into Clinton’s private email system as secretary of state—a hearing that already appears to have the FBI director firmly in its cross hairs. Chaffetz has said that he found Comey’s decision “surprising and confusing,” and added in a statement, “Congress and the American people have a right to understand the depth and breadth of the FBI’s investigation.” 

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Even after weeks of statements from Republican leaders and conservative media figures that they trusted Comey to conduct an impartial and independent investigation into Clinton’s emails and would respect whatever his decision ended up being, it took just hours after his 11 a.m. news conference before critical questions began flying. Former—and likely future—GOP presidential candidate Sen. Ted Cruz called Comey’s conclusion a “dubious decision.” House Speaker Paul Ryan (R-Wis.) said it “defies explanation” and instantly promised further hearings. Sen. Rand Paul (R-Ky.) declared it an “outrage,” saying, “The FBI should be better than this.”

Yet Chaffetz and his colleagues might get more than they bargain for in attempting to set up the FBI director for an oversight hearing bloodbath—just as last summer’s marathon hearing on Clinton’s role in Benghazi ended up backfiring on the select committee empaneled to investigate the 2012 Libya attacks, as the former secretary of state parried questions with confidence and ended up making Republican lawmakers look small by comparison. 

In attempting to set up the FBI director for an oversight bloodbath, House Republicans might get more than they bargained for.

Comey, as it turns out, is in his element when he’s under fire: He’s an experienced courtroom prosecutor and savvy Washington political in-fighter, and he burst onto the national stage in 2007 with some of the most riveting—and unexpected—congressional testimony in memory. But more than that, Comey comes armed Thursday with a secret weapon that he didn’t have even during that 2007 hearing, when he shocked the committee room by blowing the lid off a secret high-level showdown over the NSA’s domestic spying program that nearly caused mass resignations within George W. Bush’s Justice Department. 

After he left government, Comey spent three years being grilled, or “probed,” as an executive at Bridgewater Associates, the $150 billion hedge fund founded by Ray Dalio that the New Yorker has labeled“the world’s richest and strangest hedge fund.” Dalio, who regularly ranks among the 50 or 60 wealthiest people on the Forbes 400 list, has built the highly successful fund since the 1970s on a platform of “radical transparency,” a principle that encourages—actually forces—deep questioning from the ranks of all leadership decisions. 

It was just weeks after he joined Bridgewater—whose corporate culture of high-achieving intellectuals resembles a moneyed management cult that shares more in common with the 1970s personal-improvement fad est than it does with a typical Wall Street firm—that Comey was cornered by a similarly new 25-year-old employee. The junior associate interrogated the former Justice Department official on a seemingly illogical stance that Comey had taken in an earlier meeting. “My initial reaction was ‘What? You, kid, are asking me that question?’ … I was deputy attorney general of the United States; I was general counsel of a huge, huge company. No 25-year-old is going to ask me about my logic,” he recalled. “Then I realized ‘I’m at Bridgewater.’” 

Comey said that, even though he was excited to embrace the new way of thinking, it took him at least three months to settle in with Bridgewater’s culture. “I finally relaxed and untied the knot in my stomach that would instantly appear when someone questioned me,” he recalled. “Bridgewater’s a hard place. … It’s a place filled with really smart people who are always going to tell you the truth, and that’s hard.”

Inside Bridgewater, the culture of questioning is known as “probing,” a chance to understand the deeper “whys” inherent in an individual’s thinking or a corporate process. It’s a chance for everyone, from junior associates right up to Dalio himself, to force people past easy answers or glib statements into tight, rigorous thinking. “At Bridgewater, every day is a kind of after-action review, although the process goes much deeper than a typical postmortem,” business writers Robert Kegan and Lisa Laskow Lahey concluded in their book. Inside Bridgewater, where the “Culture of the Probe” reigns, meetings are even recorded, to force accountability for people’s statements and commitments.

According to Comey, who prosecuted targets ranging from Mafia boss John James Gambino to Martha Stewart to the bombers of the Khobar Towers, the decision-making environment for the firm’s 1,300 employees is tougher than anything he ever endured during decades rising through the ranks of the Justice Department, from a junior prosecutor to U.S. attorney for the Southern District of New York—the department’s highest-profile posting—to the No. 2 job under Attorney General John Ashcroft.

In a corporate video still on Bridgewater’s website, a cashmere sweater-clad Comey discusses the hedge fund’s emphasis on transparency and accountability: “I’ve been ‘probed’ in this strange field trip through life that I’ve had a lot of different places. I’ve testified in court, I have briefed the president of the United States repeatedly, I’ve argued in front of the United States Supreme Court, and I’ve been probed at Bridgewater. And Bridgewater is by far the hardest,” Comey says. “You combine that intelligence, the depth and the almost 360 [degree] vector of the questioning, there is no more demanding, probing, questioning environment in the world than Bridgewater.” 

“Sometimes I felt my head spinning when people were questioning me, but it’s uniquely demanding,” he said in the video. “If you say something stupid to the president of the United States, he may backhand you and say that’s a dumb answer, but he doesn’t want to know why you said that and what does that tell me about the way that you’re approaching your work, and what does it tell me about you. He’s never going to ask that.”

The deeply philosophical Comey, a religion major from William & Mary who wrote his college thesis on exegesis, the close study of texts, found himself comfortably at home inside Bridgewater once he got over the initial shock of transferring from the insular bureaucracy of the defense contractor Lockheed Martin, which he’d served as general counsel. “The mind control is working. I’ve come to believe that all the probing actually reduces inefficiencies over the long run, because it prevents bad decisions from being made,” Comey toldthe New Yorker in 2011 a year after he joined Bridgewater and two years before he was considered for the FBI director’s role. About Dalio, he added: “He’s tough and he’s demanding and sometimes he talks too much, but, God, is he a smart bastard.”

Comey explicitly carried many of the lessons from Bridgewater, where he made millions of dollars a year, into his new role as FBI director, which pays significantly less but is for him a dream position. “I went to Bridgewater in part because of that culture of transparency,” he told Iowa Senator Chuck Grassley during his confirmation hearing in 2013. “It’s something that’s long been part of me. I think it’s incumbent upon every leader to foster an atmosphere where people will speak truth to power. Bridgewater and the FBI are two different institutions, but I promise I will carry those values with me and try to spread them as far as I can within the institution.” Grassley, for his part, might not agree that Comey’s gone far enough in that direction: He was one of the skeptical GOP lawmakers who chimed Wednesday, calling the FBI’s decision on Clinton “suspect.”

Today, three years after assuming office as FBI director—and with seven more years left on his 10-year term—the straight-talking Comey has forcefully inserted himself into public controversies on government surveillance, picking a high-profile fight with Apple CEO Tim Cook, and demonstrated that he’s not afraid to break from the White House line on criminal justice issues.

And now, as he heads to the Hill on Thursday, it seems likely that he—perhaps more than anyone in Washington—is prepared to face the toughest questions about Clinton’s emails that the Republicans can muster. 

One common Washington joke about officials who mostly dread testifying on Capitol Hill is that they all immediately commit perjury by proclaiming that they’re “pleased to be here before the committee.”

James Comey may be the exception. In fact, he may welcome the chance to engage in verbal judo with inquisitors.