Tuesday, July 10, 2012

575 Germany to repatriate Gold from FED. Conservatives turn on the big Banks

Germany to repatriate Gold from FED. Conservatives turn on the big Banks

Newsletter published on 26-01-2013

(1) Banks under scrutiny at Davos; accused of endangering Public Safety
- Forbes
(2) Bankers' hedging and deceit presage another collapse; restore Jail
penalty for fraud
(3) House's top Republican tax law-writer suggests tightening tax
treatment of Derivatives
(4) UK businesses cool on David Cameron's crackdown on Tax Avoidance
(5) Australian Tax Office approved tech companies' tax avoidance tactics
(6) Frenzy in the Gold Market: Germany to repatriate Gold Reserves from
New York & Partis

(1) Banks under scrutiny at Davos; accused of endangering Public Safety
- Forbes


Davos: How Jamie Dimon and JPMorgan Chase Endanger the Public Safety

Steve Denning

1/24/2013 @ 4:15AM

[...] Let’s recap what we heard yesterday from Jamie Dimon, chairman and
CEO of JP Morgan Chase & Co. at Davos, who took a 50 percent cut in pay
for last year, following a $6 billion trading loss in London, from
gambling that got out of hand.

“We’re doing the right thing… Many of the bad practices of the recent
past were being phased out… Regulators are trying to do too much, too
fast…. We are getting an overly bad press… There is huge misinformation
out there about what we are doing to get things right… We have twice as
much capital as before to pad against losses… We help clients raise
money for socially-important projects in schools and hospitals…”

In response to criticism from Paul Singer, head of Elliott Capital
Management, that banks were “completely opaque” and that “the
unfathomable nature of banks’ public accounts made it impossible to know
which were actually risky or sound”, Dimon responded, according to the
Financial Times, “With all due respect hedge funds are pretty opaque too.”

CNBC reported Dimon as saying: “Businesses can be opaque. They are
complex. You don’t know how aircraft engines work either.”

The difference however between banks and hedge funds or airlines is that
taxpayers are legally committed to backstopping the bank’s activities,
come what may. If hedge funds or airlines want to gamble with their own
money, that is their affair. But JPMorgan Chase is in essence gambling
with the public’s money.

The risks are considerable. The $6 billion loss that JPMorganChase just
suffered is a drop in the ocean of gambling in which JPMorganChase is
involved—some $70 trillion in notional liabilities—roughly equal to the
size of the entire world economy. The notional value of the entire
derivatives market is some $700 trillion, or ten times the size of the
world economy

Why we had a financial crisis just five years ago

Let’s recall why we had a financial crisis just five years ago. The root
cause wasn’t just the reckless lending and the excessive risk taking.
The problem at the core was a lack of transparency. After Lehman’s
collapse, no one could understand any particular bank’s risks from
derivative trading and so no bank wanted to lend to or trade with any
other bank. Because all the big banks’ had been involved to an unknown
degree in risky derivative trading, no one could tell whether any
particular financial institution might suddenly implode.

Since then, massive efforts have been made to clean up the banks, and
put in place regulations aimed at restoring trust and confidence in the
financial system. But the result in terms of dealing with the basic
problem is failure. We still don’t have transparency.

“The products are too complicated,” said Min Zhu, deputy managing
director of the International Monetary Fund said yesterday in Davos.
“Transparency is not there. In this sense, I say the financial sector
still has a long way to go.”

Even finance apologist Robert Shiller has written in his book, Finance
And The Good Society, “As I write in 2012 we certainly do not believe
that it is over yet, and the worst may be yet to come. Efforts by
governments to solve the underlying problems responsible for the crisis
have still not gotten very far, and the ‘stress tests’ that governments
have used to encourage optimism about our financial institutions were of
questionable thoroughness.”

Regulation isn’t working

Let’s agree with Jamie Dimon on one thing. Regulation isn’t working.
“Five years and we don’t have mortgage rules yet, it’s a very complex
thing that we should make a lot simpler,” Dimon said. “You want
financial services you just don’t want to be leveraged and blow up.”

The net result of the effort to regulate the big banks is almost as
stupefying as the amounts of money involved. Draft Basel III regulations
total 616 pages. Quarterly reporting to the Fed required a spreadsheet
with 2,271 columns. 2010’s Dodd-Frank law was 848 pages and required
regulators to create so many new rules (not fully defined by the
legislation itself) that it could amount to 30,000 pages of legal
minutiae when fully codified. What human mind can possibly comprehend
all this?

Complex accounting rules have thus made the problem worse. Clever
bankers, aided by their lawyers and accountants, find ways around the
intentions of the regulations while remaining within the letter of the
law. Because these rules have grown ever more detailed and
lawyerly—while still failing to cover every possible circumstance—they
have had the perverse effect of allowing banks to avoid giving investors
the information needed to gauge the value and risk of a bank’s
portfolio. ...

{Denning goes on to endorse many of the points made in the following
article (item 2) - Peter M.}

(2) Bankers' hedging and deceit presage another collapse; restore Jail
penalty for fraud



What’s Inside America’s Banks?

Some four years after the 2008 financial crisis, public trust in banks
is as low as ever. Sophisticated investors describe big banks as “black
boxes” that may still be concealing enormous risks—the sort that could
again take down the economy. A close investigation of a supposedly
conservative bank’s financial records uncovers the reason for these
fears—and points the way toward urgent reforms.


THE FINANCIAL CRISIS had many causes—too much borrowing, foolish
investments, misguided regulation—but at its core, the panic resulted
from a lack of transparency. The reason no one wanted to lend to or
trade with the banks during the fall of 2008, when Lehman Brothers
collapsed, was that no one could understand the banks’ risks. It was
impossible to tell, from looking at a particular bank’s disclosures,
whether it might suddenly implode.

For the past four years, the nation’s political leaders and bankers have
made enormous—in some cases unprecedented—efforts to save the financial
industry, clean up the banks, and reform regulation in order to restore
trust and confidence in the American financial system. This hasn’t
worked. Banks today are bigger and more opaque than ever, and they
continue to behave in many of the same ways they did before the crash.

Consider JPMorgan’s widely scrutinized trading loss last year. Before
the episode, investors considered JPMorgan one of the safest and
best-managed corporations in America. Jamie Dimon, the firm’s
charismatic CEO, had kept his institution upright throughout the
financial crisis, and by early 2012, it appeared as stable and healthy
as ever.

One reason was that the firm’s huge commercial bank—the unit responsible
for the old-line business of lending—looked safe, sound, and solidly
profitable. But then, in May, JPMorgan announced the financial
equivalent of sudden cardiac arrest: a stunning loss initially estimated
at $2 billion and later revised to $6 billion. It may yet grow larger;
as of this writing, investigators are still struggling to comprehend the
bank’s condition.

The loss emanated from a little-known corner of the bank called the
Chief Investment Office. This unit had been considered boring and
unremarkable; it was designed to reduce the bank’s risks and manage its
spare cash. According to JPMorgan, the division invested in
conservative, low-risk securities, such as U.S. government bonds. And
the bank reported that in 95 percent of likely scenarios, the maximum
amount the Chief Investment Office’s positions would lose in one day was
just $67 million. (This widely used statistical measure is known as
“value at risk.”) When analysts questioned Dimon in the spring about
reports that the group had lost much more than that—before the size of
the loss became publicly known—he dismissed the issue as a “tempest in a

Six billion dollars is not the kind of sum that can take down JPMorgan,
but it’s a lot to lose. The bank’s stock lost a third of its value in
two months, as investors processed reports of the trading debacle. On
May 11, 2012, alone, the day after JPMorgan first confirmed the losses,
its stock plunged roughly 9 percent.

The incident was about much more than money, however. Here was a bank
generally considered to have the best risk-management operation in the
business, and it had badly managed its risk. As the bank was coming
clean, it revealed that it had fiddled with the way it measured its
value at risk, without providing a clear reason. Moreover, in
acknowledging the losses, JPMorgan had to admit that its reported
numbers were false. A major source of its supposedly reliable profits
had in fact come from high-risk, poorly disclosed speculation.

It gets worse. Federal prosecutors are now investigating whether traders
lied about the value of the Chief Investment Office’s trading positions
as they were deteriorating. JPMorgan shareholders have filed numerous
lawsuits alleging that the bank misled them in its financial statements;
the bank itself is suing one of its former traders over the losses. It
appears that Jamie Dimon, once among the most trusted leaders on Wall
Street, didn’t understand and couldn’t adequately manage his behemoth.
Investors are now left to doubt whether the bank is as stable as it
seemed and whether any of its other disclosures are inaccurate.

The JPMorgan scandal isn’t the only one in recent months to call into
question whether the big banks are safe and trustworthy. Many of the
biggest banks now stand accused of manipulating the world’s most popular
benchmark interest rate, the London Interbank Offered Rate (LIBOR),
which is used as a baseline to set interest rates for trillions of
dollars of loans and investments. Barclays paid a large fine in June to
avoid civil and criminal charges that could have been brought by U.S.
and U.K. authorities. The Swiss giant UBS was reportedly close to a
similar settlement as of this writing. Other major banks, including
JPMorgan, Bank of America, and Deutsche Bank, are under civil or
criminal investigation (or both), though no charges have yet been filed.

LIBOR reflects how much banks charge when they lend to each other; it is
a measure of their confidence in each other. Now the rate has become
synonymous with manipulation and collusion. In other words, one can’t
even trust the gauge that is meant to show how much trust exists within
the financial system.

Accusations of illegal, clandestine bank activities are also
proliferating. Large global banks have been accused by U.S. government
officials of helping Mexican drug dealers launder money (HSBC), and of
funneling cash to Iran (Standard Chartered). Prosecutors have charged
American banks with falsifying mortgage records by “robo-signing” papers
to rush the process along, and with improperly foreclosing on borrowers.
Only after the financial crisis did people learn that banks routinely
misled clients, sold them securities known to be garbage, and even, in
some cases, secretly bet against them to profit from their ignorance.

When we asked Ed Trott, a former Financial Accounting Standards Board
member, whether he trusted bank accounting, he said, simply, “Absolutely

Together, these incidents have pushed public confidence ever lower.
According to Gallup, back in the late 1970s, three out of five Americans
said they trusted big banks “a great deal” or “quite a lot.” During the
following decades, that trust eroded. Since the financial crisis of
2008, it has collapsed. In June 2012, fewer than one in four respondents
told Gallup they had faith in big banks—a record low. And in October,
Luis Aguilar, a commissioner at the Securities and Exchange Commission,
cited separate data showing that “79 percent of investors have no trust
in the financial system.”

When we asked Dane Holmes, the head of investor relations at Goldman
Sachs, why so few people trust big banks, he told us, “People don’t
understand the banks,” because “there is a lack of transparency.”
(Holmes later clarified that he was talking about average people, not
the sophisticated investors with whom he interacts on an almost hourly
basis.) He is certainly right that few students or plumbers or
grandparents truly understand what big banks do anymore. Ordinary people
have lost faith in financial institutions. That is a big enough problem
on its own.

But an even bigger problem has developed—one that more fundamentally
threatens the safety of the financial system—and it more squarely
involves the sort of big investors with whom Holmes spends much of his
time. More and more, the people in the know don’t trust big banks either.

AFTER ALL THE PURPORTED “cleansing effects” of the panic, one might have
expected big, sophisticated investors to grab up bank stocks, exploiting
the timidity of the average investor by buying low. Banks wrote down bad
loans; Treasury certified the banks’ health after its “stress tests”;
Congress passed the Dodd-Frank reforms to regulate previously unfettered
corners of the financial markets and to minimize the impact of future
crises. During the 2008 crisis, many leading investors had gotten out of
bank stocks; these reforms were designed to bring them back.

And indeed, they did come back—at first. Many investors, including
Warren Buffett, say bank stocks were underpriced after the crisis, and
remain so today. Most large institutional investors, such as mutual
funds, pension funds, and insurance companies, continue to hold
substantial stakes in major banks. The Federal Reserve has tried to help
banks make profitable loans and trades, by keeping interest rates low
and pumping trillions of dollars into the economy. For investors, the
combination of low stock prices, an accommodative Fed, and possibly
limited downside (the federal government, needless to say, has shown a
willingness to assist banks in bad times) can be a powerful incentive.

Yet the limits to big investors’ enthusiasm are clearly reflected in the
data. Some four years after the crisis, big banks’ shares remain
depressed. Even after a run-up in the price of bank stocks this fall,
many remain below “book value,” which means that the banks are worth
less than the stated value of the assets on their books. This indicates
that investors don’t believe the stated value, or don’t believe the
banks will be profitable in the future—or both. Several financial
executives told us that they see the large banks as “complete black
boxes,” and have no interest in investing in their stocks. A chief
executive of one of the nation’s largest financial institutions told us
that he regularly hears from investors that the banks are
“uninvestable,” a Wall Street neologism for “untouchable.”

That’s an increasingly widespread view among the most sophisticated
leaders in investing circles. Paul Singer, who runs the influential
investment fund Elliott Associates, wrote to his partners this summer,
“There is no major financial institution today whose financial
statements provide a meaningful clue” about its risks. Arthur Levitt,
the former chairman of the SEC, lamented to us in November that none of
the post-2008 remedies has “significantly diminished the likelihood of
financial crises.” In a recent conversation, a prominent former
regulator expressed concerns about the hidden risks that banks might
still be carrying, comparing the big banks to Enron.

A recent survey by Barclays Capital found that more than half of
institutional investors did not trust how banks measure the riskiness of
their assets. When hedge-fund managers were asked how trustworthy they
find “risk weightings”—the numbers that banks use to calculate how much
capital they should set aside as a safety cushion in case of a business
downturn—about 60 percent of those managers answered 1 or 2 on a
five-point scale, with 1 being “not trustworthy at all.” None of them
gave banks a 5.

A disturbing number of former bankers have recently declared that the
banking industry is broken (this newfound clarity typically follows
their passage from financial titan to rich retiree). Herbert Allison,
the ex-president of Merrill Lynch and former head of the Obama
administration’s Troubled Asset Relief Program, wrote a scathing e-book
about the failures of the large banks, stopping just short of labeling
them all vampire squids. A parade of former high-ranking executives has
called for bank breakups, tighter regulation, or a return to the
Depression-era Glass-Steagall law, which separated commercial banking
from investment banking. Among them: Philip Purcell (ex-CEO of Morgan
Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David
Komansky (ex-CEO of Merrill Lynch), and John Reed (former co-CEO of
Citigroup). Sandy Weill, another ex-CEO of Citigroup, who built a career
on financial megamergers, did a stunning about-face this summer,
advising, with breathtaking chutzpah, that the banks should now be
broken up.

Bill Ackman’s journey is particularly telling. One of the nation’s
highest-profile and most successful investors, Ackman went from being a
skeptic of investing in big banks, to being a believer, and then back
again—with a loss of hundreds of millions along the way. In 2010, Ackman
bought an almost $1 billion stake in Citigroup for Pershing Square, the
$11 billion fund he runs. He reasoned that in the aftermath of the
crisis, the big banks had written down their bad loans and become more
conservative; they were also facing less competition. That should have
been a great environment for investment, he says. He had avoided
investing in big banks for most of his career. But “for once,” he told
us, “I thought you could trust the carrying values on bank books.”

Last spring, Pershing Square sold its entire stake in Citigroup, as the
bank’s strategy drifted, at a loss approaching $400 million. Ackman
says, “For the first seven years of Pershing Square, I believed that an
investor couldn’t invest in a giant bank. Then I felt I could invest in
a bank, and I did—and I lost a lot of money doing it.”

A crisis of trust among investors is insidious. It is far less obvious
than a sudden panic, but over time, its damage compounds. It is not a
tsunami; it is dry rot. It creeps in, noticed occasionally and then
forgotten. Soon it is a daily fact of life. Even as the economy begins
to come back, the trust crisis saps the recovery’s strength. Banks can’t
attract capital. They lose customers, who fear being tricked and
cheated. Their executives are, by turns, traumatized and enervated.
Lacking confidence in themselves as they grapple with the toxic legacies
of their previous excesses and mistakes, they don’t lend as much as they
should. Without trust in banks, the economy wheezes and stutters.

And, of course, as trust diminishes, the likelihood of another crisis
grows larger. The next big storm might blow the weakened house down.
Elite investors—those who move markets and control the flow of
money—will flee, out of worry that the roof will collapse. The less they
trust the banks, the faster and more decisively they will beat that
path—disinvesting, freezing bank credit, and weakening the structure
even more. In this way, fear becomes reality, and troubles that might
once have been weathered become existential.

AT THE HEART of the problem is a worry about the accuracy of banks’
financial statements. Some of the questions are basic: How do banks
account for loans? Can investors accurately assess the value of those
loans? Others are far more complicated: What risks are posed by complex
financial instruments, such as the ones that caused JPMorgan’s massive
loss? The answers are supposed to be found in the publicly available
quarterly and annual reports that banks file with the Securities and
Exchange Commission.

The Financial Accounting Standards Board, an independent private-sector
organization, governs the accounting in these filings. Don Young,
currently an investment manager, was a board member from 2005 to 2008.
“After serving on the board,” he recently told us, “I no longer trust
bank accounting.”

Accounting rules have proliferated as banks, and the assets and
liabilities they contain, have become more complex. Yet the rules have
not kept pace with changes in the financial system. Clever bankers,
aided by their lawyers and accountants, can find ways around the
intentions of the regulations while remaining within the letter of the
law. What’s more, because these rules have grown ever more detailed and
lawyerly—while still failing to cover every possible circumstance—they
have had the perverse effect of allowing banks to avoid giving investors
the information needed to gauge the value and risk of a bank’s
portfolio. (That information is obscured by minutiae and legalese.) This
is true for the complicated questions about financial innovation and
trading, but it also is true for the basic questions, such as those
involving loans.

At one point during Young’s tenure, some members of the Financial
Accounting Standards Board wanted to make banks account for loans in the
same way they do for securities, by recording them at current market
values, a method known as “fair value.” Banks were instead recording the
value of their loans at the initial loan amount, and setting aside a
reserve based on their assumptions about how likely they were to get
paid back. The rules also allowed banks to use different methods to
measure the value of the same kind of loans, depending on whether the
loans were categorized as ones they planned to keep for a long time or
instead as ones they planned to sell. Many accounting experts believed
that the reported numbers did not give investors an accurate or reliable
picture of a bank’s health.

After bitter battles, turnover on the board, worries about acting in the
middle of the financial crisis, and aggressive bank lobbying, the
accounting mandarins preserved the existing approach instead of
switching to fair-value accounting for loans. Young believes that the
numbers are even less reliable now. “It’s gotten worse,” he says. When
we asked another former board member, Ed Trott, whether he trusted bank
accounting, he said, simply, “Absolutely not.”

The problem extends well beyond the opacity of banks’ loan portfolios—it
involves almost every aspect of modern bank activity, much of which
involves complex investment and trading, not merely lending. Kevin
Warsh, an ex–Morgan Stanley banker and a former Federal Reserve Board
member appointed by George W. Bush, says woeful disclosure is a major
problem. Look at the financial statements a big bank files with the SEC,
he says: “Investors can’t truly understand the nature and quality of the
assets and liabilities. They can’t readily assess the reliability of the
capital to offset real losses. They can’t assess the underlying sources
of the firms’ profits. The disclosure obfuscates more than it informs,
and the government is not just permitting it but seems to be encouraging

Accounting rules are supposed to help investors understand the companies
whose shares they buy. Yet current disclosure requirements don’t
illuminate banks’ financial statements; instead, they let the banks turn
out the lights. And in that darkness, all sorts of unsavory practices
can breed.

WE DECIDED TO GO on an adventure through the financial statements of one
bank, to explore exactly what they do and do not show, and to gauge
whether it is possible to make informed judgments about the risks the
bank may be carrying. We chose a bank that is thought to be a
conservative financial institution, and an exemplar of what a large
modern bank should be.

Wells Fargo was founded on trust. Its logo has long been a strongly
sprung six-horse stagecoach, a fleet of which once thundered across the
American West, loaded with gold. According to the firm’s official
history, “In the boom and bust economy of the 1850s, Wells Fargo earned
a reputation of trust by dealing rapidly and responsibly with people’s
money.” People believed Wells Fargo would keep their money safe—the
bank’s paper drafts were as good as the gold it shipped throughout the

For a century and a half, Wells Fargo stock was also like gold, which is
what led Warren Buffett to buy a stake in the bank in 1990. Since then,
Buffett and Wells Fargo have been inextricably linked. As of fall 2012,
Buffett’s firm, Berkshire Hathaway, owned about 8 percent of Wells
Fargo’s shares.

Today, Wells Fargo still prominently displays the stagecoach logo at
branches, in advertising, on the 12,000-plus ATMs that dot the country,
and even at the bank’s museum stores. There, visitors can buy wholesome,
family-friendly items: a stagecoach night-light; stagecoach salt and
pepper shakers; a hand-painted ceramic stagecoach pillbox. These are
more than tchotchkes. They are emblems of the bank’s honest and
honorable mission.

Buffett’s impeccable reputation has rubbed off on the bank. Wells Fargo
is widely regarded as the most conservative of the nation’s biggest
banks. Many investors, regulators, and analysts still believe its
financial reports reflect a full, fair, and accurate picture of its
business. The market value of Wells Fargo’s shares is now the highest of
any U.S. bank: $173 billion as of early December 2012. The enthusiasm
for Wells Fargo reflects the bank’s good reputation, as well as one
seemingly simple fact: the bank earned solid net income of nearly $16
billion in 2011, up 28 percent from 2010.

To find out what’s behind that fact, you have to read Wells Fargo’s
annual report—and that is where we began our adventure. The annual
report is a special document: it is the place where a bank sets forth
the audited details of its business. Although banks also submit
unaudited quarterly reports and other periodical documents to the SEC,
and have conference calls with analysts and shareholders, the annual
report gives investors the most complete and, supposedly, reliable picture.

(Today, big banks have to answer to a dizzying litany of regulators—not
only the SEC, but also the Federal Reserve, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the Commodity Futures Trading Commission, the newly created Consumer
Financial Protection Bureau, and so on. The disclosure regimes vary,
adding to the confusion. Banks confidentially release additional
information to these regulators, but investors do not have access to
those details. That regulators have these extra, confidential
disclosures isn’t much comfort: given the inability of regulators to
police the banks in recent years, one of the only groups that investors
trust less than bankers is bank regulators.)

Wells Fargo’s most recent annual report, covering 2011, is 236 pages
long. It begins like a book an average person might enjoy: a breezy
journey through a year in a bank’s life. On the cover, that stagecoach
appears. The first page has a moving story about a customer. The next
few pages are filled with images of guys in cowboy hats, a couple
holding hands by the ocean, cupcakes, and solar panels. In bold 50-point
font, Wells Fargo reports that it contributed $213.5 million to
nonprofits during the year, and it even does the math to make sure we
appreciate its generosity: “$4.1 million every week or $585,000 every
day or $24,000 every hour.” The introduction’s capstone is this: “We
don’t take trust for granted. We know we have to earn it every day in
our conversations and actions with our customers. Here’s how we try to
do that.”

The sheer volume of “trading” at Wells Fargo suggests that the bank is
not what it seems.

Fortunately for Wells Fargo, most people do not read past the
introduction. In the pages that follow, the sunny faces of satisfied
customers disappear. So do the stories. The narrative is replaced by
details about the bank’s businesses that range from the incomprehensible
to the disturbing. Wells Fargo told us it devotes “significant resources
to fulfilling all reporting requirements of various regulators.”
Nevertheless, these disclosures wouldn’t earn anyone’s trust. They are
littered with language that says nothing, at length. The report is
riddled with progressively more opaque footnotes—the financial
equivalent of Dante’s descent into hell. Indeed, after the friendly
introduction, the report ought to bear a warning to the inquisitive
reader intent on truly understanding the bank’s financial positions:
“Abandon all hope, ye who enter here.”

The first circle of Wells Fargo’s version of the Inferno, like Dante’s
Limbo, merely hints at what is to come, yet it is nonetheless
unsettling. One of the main purposes of an annual report is to tell
investors how a company makes money. Along these lines, Wells Fargo
splits its businesses into two apparently simple and distinct
parts—“interest income” and “noninterest income.” At first blush, these
two categories appear to parallel the two traditional sources of banking
income: interest from loans and customer fees.

But here the descent begins. Suddenly, this folksy mortgage bank starts
showing signs of a split personality. It turns out that trading
activities, the type associated with Wall Street firms like Goldman
Sachs and Morgan Stanley, contribute significantly to each of Wells
Fargo’s two categories of income. Almost $1.5 billion of its “interest
income” comes from “trading assets”; another $9.1 billion results from
“securities available for sale.”

One billion dollars of the bank’s “noninterest income” are “net gains
from trading activities.” Another $1.5 billion is income from “equity
investments.” Up and down the ledger, abstruse, all-embracing categories
appear: “other fees earned from related activities,” “other interest
income,” and just plain “other.” The income statement’s “other”
catchalls collectively amounted to $6.6 billion of Wells Fargo’s income
in 2011. It will take the devoted reader 50 more pages to find out that
the bank derives a big chunk of that “other” income from, yes, “trading
activities.” The sheer volume of “trading” at Wells Fargo suggests that
the bank is not what it seems.

Some bank analysts say these trading numbers are small relative to the
bank’s overall revenue ($81 billion in 2011) and profit (again, $16
billion in 2011). Other observers don’t even bother to look at these
details, because they assume Wells Fargo is protected from trading
losses by its capital reserves of $148 billion. That number, assuming it
is accurate, can make any particular loss appear minuscule. For example,
buried at the bottom of page 164 of Wells Fargo’s annual report is the
following statement: “In 2011, we incurred a $377 million loss on
trading derivatives related to certain CDOs,” or collateralized debt
obligations. Just a few years ago, a bank’s nine-figure loss on these
sorts of complex financial instruments would have generated major
headlines. Yet this one went unremarked-upon in the media, even by top
investors, analysts, and financial pundits. Perhaps they didn’t read all
the way to page 164. Or perhaps they had become so numb from bigger bank
losses that this one didn’t seem to matter. Whatever the reason, Wells
Fargo’s massive CDO-derivatives loss was a multi-hundred-million-dollar
tree falling silently in the financial forest. To paraphrase the late
Senator Everett Dirksen, $377 million here and $377 million there, and
pretty soon you’re talking about serious money.

EVEN CONSERVATIVELY RUN BANKS can be risky, as George Bailey learned in
It’s a Wonderful Life. But the Bailey Building and Loan Association did
not earn money from trading. Trading is an inherently opaque and
volatile business. It is subject to the vagaries of the markets. And yet
in the past two decades, as profits from traditional lending and
brokering activities have been squeezed, banks have turned more and more
to trading in order to make money.

Today, banks’ trading operations involve more leverage, or borrowed
money, than in the past. Banks also obtain a form of leverage by
promising to pay money in the future if some event doesn’t go their way
(much like an insurance company must pay out a lot of money if a house
it covers burns down). These promises come in the form of derivatives,
financial instruments that can be used to hedge against various
risks—like the possibility that interest rates will rise or the
likelihood that a company will default on its debts—or simply to place
bets on those same possibilities, hoping to profit. Because many of
these bets are both large and complex, trading carries the potential for
catastrophic losses.

The cryptic way Wells Fargo describes its trading raises many questions.
The bank breaks what it calls “net gains from trading activities”—which
doesn’t cover all of its trading income, but is an important part—into
three subcategories, leaving the annual-report reader to play a kind of
shell game.

Look first at “proprietary” trading—activity a firm undertakes to make
money for its own account by buying or selling stocks, bonds, or
more-exotic financial creations. Self-evidently, this activity might
involve big risks. When this shell is lifted, the bank’s exposure seems
reassuringly inconsequential: the reported loss is just $14 million.
Still, there may be more under this shell than meets the eye: that $14
million might not be indicative of the bank’s true exposure. Was Wells
Fargo just lucky to finish slightly down after a roller-coaster year of
wild gambling with much bigger gains and losses? Without more
information about the size of the bank’s bets, it is impossible to know.

A second subcategory is “economic hedging.” An activity labeled
“hedging” might sound soothing. Wells Fargo says it lost an
inconsequential $1 million from economic hedging in 2011. So maybe there
is nothing to worry about under this shell, either. In its pure form,
hedging is supposed to reduce risk. A person buys a house and then
hedges the risk of a fire by purchasing insurance. But hedging in the
world of finance is more complex—so much so that it requires advanced
mathematics and computer modeling, and still can be little better than
guesswork. It is difficult to anticipate how a portfolio of complicated
financial instruments will respond as variables like interest rates and
stock prices go up and down. As a result, hedges don’t always work as
intended. They may not fully eliminate large risks that banks think
they’ve taken care of. And they may inadvertently create new, hidden
risks—“unknown unknowns,” if you will. Because of all this complexity,
some traders can disguise speculative positions as “hedges” and claim
their purpose is to reduce risk, when in fact the traders are purposely
taking on more risk to try to make a profit. That is what the traders
within JPMorgan’s Chief Investment Office appear to have been doing. Was
Wells Fargo’s “economic hedging” like buying straightforward insurance?
Or was it more like speculation—what JPMorgan did? Do the reported
numbers suggest low risk when in fact the opposite is true? The bank’s
disclosures don’t answer these questions.

Finally we come to a third shell—and there’s unquestionably something to
see under this one. It carries an innocuous label: “customer
accommodation.” Wells Fargo made more than $1 billion from
customer-accommodation trading in 2011. How did it make so much money
merely by helping customers? This should be a plain-vanilla business: a
broker sits between a buyer and a seller and takes a little cut of the
transaction. But what we learned from the 2008 financial crisis, and
what we keep learning from incidents such as the JPMorgan scandal, is
that seemingly innocuous activities that appear highly profitable can be
dangerous to a bank’s health—and to our economy.

Don’t look to the annual report for clarity. Here is the bank’s
definition: “Customer accommodation trading consists of security or
derivative transactions conducted in an effort to help customers manage
their market price risks and are done on their behalf or driven by their
investment needs.”

That might seem safe, but the report notably fails to explain why this
activity would be so profitable. In fact, at many large banks, customer
accommodation can be a euphemism for “massive derivatives bets.” For
Wells Fargo, the subcategory of “customer accommodation, trading and
other free-standing derivatives” included derivatives trades of about
$2.8 trillion in “notional amount” as of the end of 2011, meaning that
the underlying positions referenced in the bank’s derivatives were that
large then. By way of explanation: if we were to make a bet with you
about how much the price of a $70 share of Walmart would change this
year—we pay you any increase, you pay us any decrease—we’d say the
“notional amount” of the bet is $70.

Wells Fargo doesn’t expect to gain or lose $2.8 trillion on its
derivatives, any more than we would expect the payment on our Walmart
bet to be $70. Bankers generally assume that the likely risk of gain or
loss on derivatives is much smaller than their “notional amount,” and
Wells Fargo says the concept “is not, when viewed in isolation, a
meaningful measure of the risk profile of the instruments.” Moreover,
Wells Fargo reports that many of its derivatives offset each other, as
yours might if you placed several wagers that Walmart stock would go up,
along with several other bets that it would go down.

Yet, as investors in bank stocks learned in 2008, it is possible to lose
a large portion of the “notional amount” of a derivatives trade if a bet
goes terribly wrong. In the future, if interest rates skyrocket or the
euro unravels, Wells Fargo might sustain huge derivatives losses, just
as you might lose the full $70 you bet on Walmart if the company went
bust. Wells Fargo doesn’t tell investors how much of the $2.8 trillion
it could lose in a worst-case scenario, nor is it required to. Even a
savvy investor who reads the footnotes can only guess at what the bank’s
potential risk exposure to derivatives might be.

One reason Wells Fargo is trusted more than other big banks is that its
notional amount of derivatives is comparatively small. At the end of the
third quarter of 2012, JPMorgan had $72 trillion in notional amount on
its books—about five times the size of the U.S. economy. But even at
Wells Fargo levels, the numbers are so large that they lose their
meaning. And they put Wells Fargo’s seemingly immense capital
reserves—$148 billion, you’ll recall—in a rather different light.

How much risk is the bank actually taking on these trades? For which
customers does it place a requested bet, then negate its risk by taking
an exactly offsetting position in the market, so that it is essentially
acting as an agent simply taking a commission? And for all these trades,
what risk is Wells Fargo taking on its customers? Many of these bets
involve the customers’ promises to pay Wells Fargo depending on how
certain financial numbers change in the future. But what happens if some
of those customers go bankrupt? How much money would Wells Fargo lose if
it “accommodates” customers who can’t pay what they owe?

We asked Wells Fargo officials if we could talk to someone at the bank
about its disclosures, including those concerning its trading and
derivatives. They declined. Instead, they suggested we submit questions
in writing, which we did.

In response, Wells Fargo public-relations representatives wrote, “We
believe our disclosures on the topics you raised are comprehensive and
stand on their own.” In answering our written questions about the annual
report, the representatives simply pointed us back to the annual report.
For example, when we inquired about the bank’s trading activities, Wells
Fargo responded: “We would ask you to refer to our discussion of ‘Market
Risk-Trading Activities’ on pages 80–81 in the Management Discussion and
Analysis section of the Wells Fargo 2011 Annual Report.”

Yet it was precisely those pages that generated our questions about the
bank’s various categories of trading. When we specifically asked Wells
Fargo to help us quantify the risks associated with
customer-accommodation trading, its representatives pointed us to those
same pages. But those pages don’t answer that question. Here is the most
helpful of the bank’s disclosures related to customer-accommodation trading:

For the majority of our customer accommodation trading we serve as
intermediary between buyer and seller. For example, we may enter into
financial instruments with customers that use the instruments for risk
management purposes and offset our exposure on such contracts by
entering into separate instruments. Customer accommodation trading also
includes net gains related to market-making activities in which we take
positions to facilitate expected customer order flow.

Bankers, and their lawyers, are careful about the language they use in
annual reports. So why did they use the word expected in discussing
customer order flow in that last sentence? Is Wells Fargo speculating
based on what one of its traders “expects” a customer to do, instead of
responding to what a customer actually has done? The language the bank
pointed to for answers to our questions only raises more questions.

Wells Fargo’s annual report is filled with similarly cryptic
declarations, but not the crucial information that investors actually
need. It doesn’t describe worst-case scenarios for
customer-accommodation trades, or even include any examples of what such
trades might involve. When we asked straightforward questions—such as
“How much money would Wells Fargo lose from these trades under various
scenarios?”—the bank’s representatives declined to answer.

Only a few people have publicly expressed concerns about
customer-accommodation trades. Yet some banking experts are skeptical of
these trades, and suspect that they hide huge risks. David Stockman, who
was the federal budget director under President Reagan, an investment
banker at Salomon Brothers, and a partner at the private-equity firm
Blackstone Group, calls the big banks “massive trading operations.”
Stockman has become so disillusioned by America’s financial system that
he is now regarded, in some quarters, as a wild-eyed heretic, but his
expertise is undeniable. He recently told reporters for “The Gold
Report,” an online newsletter, “Whether they called it customer
accommodation or proprietary is a distinction without a difference.”

Bankers and regulators today might dismiss warnings that
customer-accommodation derivatives could bring down the financial system
as implausible. But a few years ago, they said the same thing about
credit-default swaps and collateralized debt obligations.

THE PENULTIMATE STOP on our expedition through Wells Fargo’s annual
disclosures brings us to one of the most important concepts in bank
reporting: fair value. It’s the topic that led Don Young to conclude
that he could not trust banks’ accounting after fighting about it on the
Financial Accounting Standards Board. Banks hold huge amounts of assets
and liabilities, including derivatives, and are supposed to record them
at their “fair value.” Fair enough? Not so fast.

Like other banks, Wells Fargo uses a three-level hierarchy to report the
fair value of its securities. Level 1 includes securities traded in
active, public markets; it isn’t too scary. At Level 1, fair value
simply means the reported price of a security. If Wells Fargo owned a
stock or bond traded on the New York Stock Exchange, fair value would be
the closing price each day.

Level 2 is more worrisome. It includes some shadier characters, such as
derivatives and mortgage-backed securities. There are no active, public
markets for these investments—they are bought and sold privately, if at
all, and are not listed on exchanges—so Wells Fargo uses other methods
to figure out fair value, including what it calls “model-based valuation
techniques, such as matrix pricing.” At Level 2, fair value is what
accountants would charitably describe as an “estimate,” based on
statistical computer models and what they call “observable” inputs, such
as the prices of similar assets or other market data. At Level 2, fair
value is more like an educated guess.

Many banks’ stocks are below “book value” today. This indicates that
investors don’t believe the stated value of the assets on banks’ books,
or don’t believe banks will be profitable in the future—or both.

Level 3 is hair-raising. The bank’s Level 3 estimates are “generated
primarily from model-based techniques that use significant assumptions
not observable in the market.” In other words, not only are there no
data about the prices at which these types of assets have recently
traded, but there are no observable data to inform the assumptions one
might use to generate prices. Level 3 contains the most-esoteric
financial instruments—including the credit-default swaps and synthetic
collateralized debt obligations that became so popular and prevalent at
the height of the housing boom, filling the balance sheets of Bear
Stearns, Merrill Lynch, Citigroup, and many other banks.

At Level 3, fair value is a guess based on statistical models, but with
inputs that are “not observable.” Instead of basing estimates on market
data, banks use their own assumptions and internal information. At Level
3, fair value is an uneducated guess.

Surely, one would assume, Wells Fargo’s assets would mostly reside on
Level 1, with perhaps a small amount on Level 2. It’s just a simple
mortgage bank, right? And it seems inconceivable that Wells Fargo would
be loaded with Level 3 investments long after regulators have supposedly
purged the banks of toxic assets and nursed them back to health.

Yet only a small fraction of Wells Fargo’s assets are on Level 1. Most
of what the bank holds is on Level 2. And a whopping $53
billion—equivalent to more than a third of the bank’s capital
reserves—is on Level 3. All three categories include risky assets that
might lose value in the future. But the additional concern with Level 2
and Level 3 assets is that banks might have errantly recorded them at
values that were inflated to begin with. There is no way to check
whether reported values are accurate; investors have to trust the bank’s
managers and auditors. Scholarly research on Level 3 assets suggests
that they can be misstated by as much as 15 percent at any given time,
even if the market is stable. If Wells Fargo’s estimates are that far
off, the bank could be sitting on billions of dollars of hidden losses.

Wells Fargo discloses in a quiet footnote in small print on page 133 of
the annual report that its Level 3 assets include “collateralized loan
obligations with both a cost basis and fair value of $8.1 billion, at
December 31, 2011.” In English, that means that the bank is recording
the value of some of its most complicated investments (composed of
packages of loans to companies) at exactly the price it paid for them
(the “cost basis”). Were these products bought a year ago? Two? Before
the crash of 2008? Have they actually retained their value? Don Young
finds it curious that the fair value and cost basis would be the same.
“With interest rates much lower than most expected, why didn’t the CLOs
rise in value?” he asks. But he’s the first to admit that he’s really in
no position to say. Without more information about the composition of
the loan packages and when they were purchased, an outsider cannot
determine what these assets might be worth.

Accountants and regulators insist that categorizing an investment as
Level 1, 2, or 3 is better than simply recording the investment’s
original cost. But the current system permits bankers to use their own
internally generated estimates. Who oversees those estimates? Auditors
who are dependent on the bank for significant revenue, and regulators
who are endemically behind the curve. Such a setup erodes trust. And
when that trust disappears, so does any confidence in what the bank says
its investments are worth.

The Level 3 issue isn’t simply theoretical. One major problem during the
2008 crisis was that banks and investors didn’t know what to trust about
Level 3, so they panicked. We just suffered through a crisis in Level 3
assets. We can’t afford another.

THERE IS AN EVEN LOWER CIRCLE of financial hell. It is populated with
complex financial monsters once known as “special-purpose entities.”
These were the infamous accounting devices that Enron employed to hide
its debts. Around the turn of the millennium, the Texas energy-trading
firm used these newly created corporations to borrow money and take on
risks without recording the liabilities in its financial statements.
These deals were called “off-balance-sheet” transactions, because they
did not appear on Enron’s balance sheet.

Suppose a company owns a slice—just a small percentage—of another
company that has a lot of debt. The first company might claim that it
doesn’t need to include all of the second company’s assets and
liabilities on its balance sheet. Let’s say we owned shares of IBM. We
aren’t suddenly on the hook for all of the company’s liabilities. But if
we owned so many IBM shares that we effectively controlled it, or if we
had a side agreement that made us responsible for IBM’s debts, common
sense dictates that we should treat IBM’s liabilities as our own. A
decade ago, many companies, including Enron, used special-purpose
entities to avoid common sense: they kept liabilities off the balance
sheet, even when they had such control or side agreements.

As in a horror film, the special-purpose entity has been reanimated, and
is now known as the variable-interest entity. In the alphabet soup of
Wall Street, the acronym has switched from SPE to VIE, but the idea is
the same. Big companies create these entities to borrow money and buy
assets, but—like Enron—they do not include them on their balance sheets.
The problem is especially worrisome at banks: every major bank has
substantial positions in VIEs.

As of the end of 2011, Wells Fargo reported “significant continuing
involvement” with variable-interest entities that had total assets of
$1.46 trillion. The “maximum exposure to loss” it reports is much
smaller, but still substantial: just over $60 billion, more than 40
percent of its capital reserves. The bank says the likelihood of such a
loss is “extremely remote.” We can hope.

However, Wells Fargo acknowledges that even these eye-popping numbers do
not include its entire exposure to variable-interest entities. The bank
excludes some VIEs from consideration, for many of the same reasons
Enron excluded its special-purpose entities: the bank says that its
continuing involvement is not significant, that its investment is
temporary or small, or that it did not design or operate these deals.
(Wells Fargo isn’t alone; other major banks also follow this Enron-like
approach to disclosure.)

We asked Wells Fargo to explain its VIE disclosures, but its
representatives once again simply pointed us back to the annual report.
We specifically asked about the bank’s own reported corrections of these
numbers (in one footnote, Wells Fargo cryptically says, “?‘VIEs that we
consolidate’ has been revised to correct previously reported amounts”).
But the bank would not tell us anything about those corrections. From
the annual report, one cannot determine which VIEs were involved, or how
big the corrections were.

Don Young calls variable-interest entities “accounting gimmicks to avoid
consolidation and disclosure.” The Financial Accounting Standards Board
changed the accounting rules that govern them in recent years, but the
new rules, he says, are easy to manipulate, just like the old ones were.
The presence of VIEs on Wells Fargo’s balance sheet “is a signal that
there is $1.5 trillion of exposure to complete unknowns.”

These disclosures make even an ostensibly simple bank like Wells Fargo
impossible to understand. Every major bank’s financial statements have
some or all of these problems; many banks are much worse. This is an
untenable situation. Kevin Warsh, formerly of the Fed, argues that the
SEC should tell the biggest banks that their accounts are unacceptably
opaque. “The banks should give a full, fair, and accurate account of
their financial positions,” he says, “and they are failing that test.”

IN THE DECADES following the 1929 crash, banks were understandable.
That’s not because they were financially simple—that era had its own
versions of derivatives and special-purpose entities—but because the
banks’ disclosures were more straightforward and clear. That clarity
sprang from the fear of consequences. The law, as Oliver Wendell Holmes
Jr. said, is a prediction of what a court will do. And the broadly
scoped laws of that time gave courts wide latitude.

Going to jail for financial fraud was a real risk back then, and bank
executives worried that their reputations would be destroyed if a judge
criticized what they had done. Richard Whitney, a broker who had been
the president of the New York Stock Exchange, was sent to Sing Sing
prison in 1938 for embezzlement. “Sunshine Charlie” Mitchell, the
president of National City Bank, the predecessor to Citibank, was
indicted for tax evasion after the 1929 crash and was also the first of
many bankers to testify before the famous Senate Pecora Committee in
1933. The Pecora investigation galvanized public opinion, and helped
usher in the landmark banking and securities laws of 1933 and 1934. The
scrutiny and continuing threat of prosecution convinced many bank
executives that they should keep their business simple and transparent,
or worry about the consequences if they did not.

In the wake of the recent financial crisis, the government has moved to
give new powers to the regulators who oversee the markets. Some experts
propose that the banking system needs more capital. Others call for a
return to Glass-Steagall or a full-scale breakup of the big banks. These
reforms could help, but none squarely addresses the problem of opacity,
or the mischief that opacity enables.

The starting point for any solution to the recurring problems with banks
is to rebuild the twin pillars of regulation that Congress built in 1933
and 1934, in the aftermath of the 1929 crash. First, there must be a
straightforward standard of disclosure for Wells Fargo and its banking
brethren to follow: describe risks in commonsense terms that an investor
can understand. Second, there must be a real risk of punishment for bank
executives who mislead investors, or otherwise perpetrate fraud and abuse.

These two pillars don’t require heavy-handed regulation. The
straightforward disclosure regime that prevailed for decades starting in
the 1930s didn’t require extensive legal rules. Nor did vigorous
prosecution of financial crime.

Until the 1980s, bank rules were few in number, but broad in scope.
Regulation was focused on commonsense standards. Commercial banks were
not permitted to engage in investment-banking activity, and were
required to set aside a reasonable amount of capital. Bankers were
prohibited from taking outsize risks. Not every financial institution
complied with the rules, but many bankers who strayed were judged, and

Since then, however, the rules have proliferated, the arguments about
compliance have become ever more technical, and the punishments have
been minor and rare. Not a single senior banker from a major firm has
gone to prison for conduct related to the 2008 financial crisis; few
even paid fines. The penalties paid by banks are paltry compared with
their profits and bonus pools. The cost-benefit analysis of such a
system tilts in favor of recklessness, in large part because of the
complex web of regulation: bankers can argue that they comply with the
letter of the law, even when they violate its spirit.

As rules have proliferated, arguments about compliance have become more
technical, and punishments have been rare. Not one senior banker from a
major firm has gone to prison for conduct related to the 2008 financial

In an important call to arms this past summer, Andrew Haldane, the Bank
of England’s executive director for financial stability, laid out the
case for an international regulatory overhaul. “For investors today,
banks are the blackest of boxes,” he said. But regulators are their
facilitators. Haldane noted that a landmark regulatory agreement from
1988 called Basel I amounted to a mere 18 pages in the U.S. and 13 pages
in the U.K. Likewise, disclosure rules were governed by a statute that
was essentially one sentence long.

Basel II, the second iteration of global banking regulation, issued in
2004, was 347 pages long. Documentation for the new Basel III, Haldane
noted, totals 616 pages. And federal regulations governing disclosure
are even longer than that. In the 1930s, a bank’s reports to the Federal
Reserve might have contained just 80 entries. Yet by 2011, Haldane said,
quarterly reporting to the Fed required a spreadsheet with 2,271 columns.

The Glass-Steagall Act of 1933, which Haldane said was perhaps “the
single most influential piece of financial legislation of the 20th
century,” was only 37 pages. In contrast, 2010’s Dodd-Frank law was 848
pages and required regulators to create so many new rules (not fully
defined by the legislation itself) that it could amount to 30,000 pages
of legal minutiae when fully codified. “Dodd-Frank makes Glass-Steagall
look like throat-clearing,” Haldane said.

What if legislators and regulators gave up trying to adopt detailed
rules after the fact and instead set up broad standards of conduct
before the fact? For example, consider one of the most heated Dodd-Frank
battles, over the “Volcker Rule,” named after former Federal Reserve
Chairman Paul Volcker. The rule is an attempt to ban banks from being
able to make speculative bets if they also take in federally insured
deposits. The idea is straightforward: the government guarantees
deposits, so these banks should not gamble with what is effectively
taxpayer money.

Yet, under constant pressure from banking lobbyists, Congress wrote a
complicated rule. Then regulators larded it up with even more
complications. They tried to cover any and every contingency. Two and a
half years after Dodd-Frank was passed, the Volcker Rule still hasn’t
been finalized. By the time it is, only a handful of partners at the
world’s biggest law firms will understand it.

Congress and regulators could have written a simple rule: “Banks are not
permitted to engage in proprietary trading.” Period. Then, regulators,
prosecutors, and the courts could have set about defining what
proprietary trading meant. They could have established reasonable and
limited exceptions in individual cases. Meanwhile, bankers considering
engaging in practices that might be labeled proprietary trading would
have been forced to consider the law in the sense Oliver Wendell Holmes
Jr. advocated.

Legislators could adopt similarly broad disclosure rules, as Congress
originally did in the Securities Exchange Act of 1934. The idea would be
to require banks to disclose all material facts, without specifying how.
Bankers would know that whatever they chose to put in their annual
reports might be assessed at some future date by a judge who would ask
one simple question: Was the report complete, clear, and accurate?

The standard of proof for securities-fraud prosecutions, meanwhile,
could and should be reduced from intent, which requires that prosecutors
try to get inside the heads of bankers, to recklessness, which is less
onerous to prove than intention, but more so than negligence. The goal
of this change would be to prevent bankers from being able to hide
behind legalese. In other words, even if they did not purposefully
violate the law, because they had some technical justification for their
conduct, they still might be liable for doing something a reasonable
person in their position would not have done.

Senior bank executives should face the threat of prosecution the same
way businesspeople do in other areas of the economy. When a CEO or CFO
sits holding a pen, about to sign a certification that his or her bank’s
financial statements and controls are accurate and adequate, he or she
should pause and reflect that the consequences could include jail time.
If bank directors and executives had to think through their
institution’s risks, disclose them, and then face serious punishment if
the disclosures proved inadequate, we might begin to construct a culture
of accountability.

A bank seeking to comply with the principles we’ve laid out wouldn’t
need to publish a 236-page report with appendices. Instead, it could
submit a statement perhaps one-tenth as long, something that a reader
who made it through the introduction to Wells Fargo’s current annual
report might actually continue reading. Ideally, a lay reader would be
able to understand how much a bank might gain or lose based on
worst-case scenarios—what would happen if housing prices drop by 30
percent, say, or the Spanish government defaults on its debt? As for the
details, banks could voluntarily provide information on their Web sites,
so that sophisticated investors had enough granular facts to decide
whether the banks’ broader statements were true. As the 2008 financial
crisis was unfolding, Bill Ackman’s Pershing Square obtained the details
of complex mortgages and created a publicly available spreadsheet to
illustrate the risks of various products and institutions. Banks that
wanted to earn back investors’ trust could publish data so that Ackman
and others like him could test their more general statements about risk.

IS THIS JUST A FANTASY? The changes we’ve outlined would certainly be
difficult politically. (What isn’t, today?) But in the face of
sufficient pressure, bankers might willingly agree to a grand bargain:
simpler rules and streamlined regulation if they subject themselves to
real enforcement.

Ultimately, these changes would be for the banks’ own good. Banks need
to be able to convince the most-sophisticated people in the
markets—investors like Bill Ackman—that they are once again
“investable.” Otherwise, investors will continue to worry about which
bank will be the next JPMorgan—or the next Lehman Brothers. Today,
Ackman says the risk of investing in a big bank is too great: “I think
the JPMorgan loss was a really bad loss for confidence. If the best CEO
in the industry has a loss like that, what about the other banks?” he
says. “If JPMorgan can have a $5.8 billion derivative problem, then any
of these guys could—and $5.8 billion is not the upper bound.”

The banks provide “a ton of disclosure,” Ackman notes. There are a lot
of pages and details in any bank’s annual report, including Wells
Fargo’s. But “it’s what you can’t figure out that’s terrifying.” In the
gargantuan derivatives-trading positions, for instance, he says, “you
can’t figure out whether the bank has got it right or not. That’s faith.”

A combination of clearer, simpler disclosure and stronger enforcement
would help clean up the system, just as it did beginning in the 1930s.
Not only would shareholders better understand banks’ businesses, but
managers would have the incentive to run their businesses more
ethically. The broad cultural failure on Wall Street has arisen in part
because disclosure rules encourage the banks to be purposefully opaque.
Today, their lawyers don’t judge whether statements are clear and
meaningful but rather whether they are on the bleeding edge of legality.
If bank managers faced real consequences when their descriptions proved
inaccurate or incomplete, they would strive to make those descriptions
as clear and simple as Strunk and White’s The Elements of Style.

Perhaps there is a silver lining in the loss of sophisticated investors’
trust. The disillusionment of the elites, on top of popular outrage,
could foment change. Without such a mobilization, all of us will remain
in the dark, neither understanding nor trusting the banks. And the rot
will spread.

Frank Partnoy is a law and finance professor at the University of San
Diego and the author of Wait: The Art and Science of Delay. Jesse
Eisinger is a senior reporter at ProPublica and a columnist for The New
York Times’ Dealbook section.

(3) House's top Republican tax law-writer suggests tightening tax
treatment of Derivatives


U.S. Congress tax writer offers ideas on derivative tax changes

Thu Jan 24, 2013 4:03pm EST

* House's top Republican tax writer mulls tax code revamp

* Latest proposal looks at derivatives, mark to market

* Crackdown on 'wash sales' eyed by Ways & Means chairman

By Kim Dixon

WASHINGTON, Jan 24 (Reuters) - The Republican head of the House of
Representatives' tax-writing committee on Thursday unveiled options to
revamp tax treatment of derivatives and other financial instruments amid
criticism the current law permits gaming the system for tax advantages.

The discussion draft comes from House Ways and Means Committee Chairman
Dave Camp, who has been exploring for more than a year a thorough
rewrite of the tax code - a politically daunting project made even more
so by this Congress' deep divisions.

Many tax rules for financial instruments "are inconsistent with each
other and have no basis in the reality of economics," said David Miller,
a tax lawyer at Cadwalader law firm who also teaches derivatives
taxation at Columbia University Law School in New York. "As a result,
sophisticated taxpayers are free to choose a tax treatment that
minimizes their taxes."

Camp's draft lays out options for altering the tax treatment of
financial products, such as puts, calls, and swaps. One proposal would
require marking certain securities to fair market value at year-end,
triggering recognition of gains or losses. Mark-to-market rules would
not apply to end-use companies, such as airlines hedging risk for
changes in the price in jet fuel.

Another Camp option would tighten "wash sale" rules intended to prevent
an abusive strategy that involves gaining a tax deduction by selling a
security at a tax-deductible loss and then immediately re-buying the
same or a similar security.

More broadly, House Republicans wants to slash the top corporate tax
rate to 25 percent from 35 percent and simplify the loophole-riddled tax
code. The United States has one of the steepest corporate tax rates in
the world.

Most companies do not pay the top rate after deductions and other tax
breaks. But both parties, including Democratic President Barack Obama,
back a corporate tax rate cut, though they disagree on how deep it
should be.

Camp's House panel, along with the Senate Finance Committee, held a
joint hearing on financial products in late 2011, exploring the taxation
of stocks, bonds and derivatives.

Congress is locked in a series of budget battles, including raising the
debt ceiling and automatic spending cuts.

(4) UK businesses cool on David Cameron's crackdown on Tax Avoidance


Thumbs down from FTSE100 businesses to David Cameron's call for more tax

The leaders of Britain’s biggest multi-national companies have warned
David Cameron to abandon plans which will force them to disclose details
of their businesses' tax affairs, warning that it threatens to undermine
the economic recovery, The Daily Telegraph discloses today.

By Christopher Hope, Senior Political Correspondent

10:00PM GMT 24 Jan 2013

The Prime Minister on Thursday launched an outspoken attack on corporate
tax avoidance telling firms that they needed to "wake up and smell the
coffee" in reference to the recent furore over the tax affairs of the
Starbucks coffee chain.

He said that firms have a moral duty to pay tax - in comments which
angered global business leaders meeting in Davos, Switzerland.

Mr Cameron is to spearhead an international tax "transparency" drive
this year which is expected to lead to firms being forced to publish
details of where and how much tax they pay.

The Liberal Democrats have suggested that there should be a minimum
level of corporate tax paid by those making money in Britain. Some
businesses fear this will spark consumer boycotts and lead to a hostile
anti-enterprise environment developing in this country.

A Conservative MP wrote to the chief executives of each of Britain's 100
biggest companies in November and The Daily Telegraph today publishes
the responses of more than 50 FTSE companies.

The letters show that 32 of the 52 members of the FTSE-100 who have
responded warn against publishing more details of their tax affairs.

There is growing concern that the Government’s attacks on the tax
affairs of companies will undermine the economic recovery ahead of the
release of key figures today which will show whether Britain faces a
so-called "triple-dip" recession.

Two of Britain's major supermarkets - which are losing business to
offshore-based internet firms – had some controversial suggestions.

Sainsbury's said that the information be disclosed to allow consumers to
boycott firms not paying tax in this country, while Morrisons urged
Chancellor George Osborne to force firms to disclose annual corporation
tax payments.

The letters disclose how:

• Ian Livingston, chief executive of BT, warned against imposing more
red tape on companies: “Any money spent on reporting is money that could
be spent on investment and it’s investment that’s the top priority at

• Ian Gorham, chief executive of stockbroker Hargreaves Lansdown said
the blame lay with officials. He said: “There are some very highly paid
civil servants who are supposed to be collecting taxes. If they cannot
collect the taxes that should be due from corporates that are dodging
their obligations they should try harder or be given the tools to do so.”

• Justin King, the chief executive of Sainsbury’s, urged people to
boycott companies that were not paying their fair share of tax. He said:
“Consumers can elect which companies they stop with and, if they don’t
believe a company is fairly contributing to society, can vote with their
wallet. This is the quickest and most powerful way in which to encourage
a business to change their practices.”

• Dalton Philips, chief executive of Morrisons, said a “first step”
would be for Mr Osborne to force all firms to disclose their annual
corporation tax payments to “ensure that a level playing field exists”.
He added: “We believe that this will encourage those companies that are
concerned about their wider public to ensure they pay their fair share.”

• Rupert Soames, chief executive of Aggreko and brother of Tory MP
Nicholas Soames, said his company was “on the side of the angels”
because it paid 28.5 per cent tax in 2011, and that any attempt to force
greater disclosure was a “lousy idea”.

The intervention from the business leaders came as the Prime Minister
launched Britain's presidency of the G8 group of industrialised
countries with a call for global action to tackle tax evasion and
aggressive tax avoidance by big businesses.

Mr Cameron told an audience at the World Economic Forum in Davos,
Switzerland on Thursday that abuse of tax systems was “an issue whose
time has come” and that he wanted to make sure individuals and companies
“pay their fair share”.

The Prime Minister said that he hoped the UK’s G8 presidency in 2013
would “put turbo-boosters” under the issue of tax transparency.

He said: “Any businesses who think that they can carry on dodging that
fair share or that they can keep on selling to the UK and setting up
ever-more complex tax arrangements abroad to squeeze their tax bill
right down - well, they need to wake up and smell the coffee because the
public who buy from them have had enough.”

The coffee reference was seen as a veiled reference to coffee chain
Starbucks, which has promised to review its “tax approach” in the UK
after a customer boycott.

Earlier this month Mr Cameron he wanted to make “damn sure” that foreign
companies do not dodge their share of corporation tax in the UK and
suggested companies like Starbucks, Google and Amazon which have been
legally avoiding large corporation tax bills in the UK had no “moral

However, proposals for a new accounting standard disclosing tax payments
by country were also rejected in a letter from the Hundred group, which
represents the views of the finance directors of all FTSE100 companies.

The letters - which offer a rare insight into the personal views on tax
of Britain's most successful businessmen - were sent to Stephen
McPartland, a Conservative MP who is campaigning for greater tax
transparency, over the past eight weeks.

Last night Mr McPartland said the “disappointing responses” from the
FTSE100 companies meant that “in the end it will be up to the companies
themselves to lead the way and they will only do that if their
customers-the British public-drag them kicking and screaming towards tax
transparency and a fairer tax system for us all”.

He told The Daily Telegraph: “The refreshingly honest response from
Aggreko summed up what many other companies felt, that they were paying
lots of tax - probably more than needed - but felt greater tax
transparency was a ‘lousy idea’.

“I could go on, but the general thrust is pretty simple - the biggest
companies in Britain believe they all honestly pay their taxes and make
a huge contribution to the economy by employing people who have to pay

“The majority of responses so far clearly show that they are not
prepared to be proactive and will only comply with the laws as they stand.

“Unfortunately, fancy corporate lawyers can blur the lines between tax
avoidance and tax evasion, but it is clearly wrong, and unfair to the
rest of society.”

He said he would continue to continue to publish the responses on his
website so “the public [could] decide individually whether the biggest
companies in Britain really care about the poorest in our society, at
home and abroad. From the responses I have received so far, I am not
convinced they do care”.

A spokesman from Starbucks said: “Starbucks agrees that all businesses
should pay their fair share. We employ 9,000 people in the UK, create
nearly £300 million worth of annual economic impact and are forgoing tax
deductions that will ensure the UK Exchequer is £10 million better off
in each of the next two years.”

Official figures to be published this morning will reveal whether the
economy grew or shrank during the last three months of 2012.

The previous quarter’s figures showed 0.9 per cent growth, but some
economists think that expansion did not continue, forecasting a small

That would not mean a recession, which needs two consecutive negative
quarters, but it would be embarrassing for ministers, who have claimed
the economy is “healing”. George Osborne, the Chancellor, who was shown
the figures on Thursday, hinted at positive news on Friday.

Britain’s economy was “on a difficult path” but was “heading in the
right direction”, he said.

(5) Australian Tax Office approved tech companies' tax avoidance tactics


ATO approved tech companies' tax avoidance tactics

Summary: The Australian Tax Office looked into the "double Irish Dutch
sandwich" tax-dodging techniques last year and deemed them "commercially
realistic," according to FOI documents.

By Spandas Lui | January 23, 2013 -- 03:23 GMT (14:23 AEST)

The Australian government might be going after big tech multinationals
for using complex tax avoidance methods, but the Australian Taxation
Office (ATO) actually gave those companies its blessing to do so,
according to documents released under the Freedom of Information (FOI) Act.

The revelation, first reported by the Australian Financial Review, came
in the form of an ATO briefing paper given to a Senate Estimates
committee. This was done prior to Assistant Treasurer David Bradbury
declaring war against "double Irish Dutch sandwich" tax schemes in which
companies shift profits to countries with lower tax rates and announced
changes to transfer pricing rules.

Companies such as Google, Apple, and Microsoft have all been accused of
employing such tactics.

In the briefing paper, sighted by ZDNet, the ATO said that it is aware
of the double Irish Dutch sandwich methods used by technology companies
to avoid paying taxes in Australia, and said that the department has
been looking at the issue extensively.

The Organisation for Economic Co-operation and Development (OECD)
currently does not view a website as a permanent establishment (PE), so
profits made on Australian websites are only taxable in the country
where the business is based.

"Given the PE threshold for taxation, many significant businesses
undertaking e-commerce across borders have structured their affairs ...
so that any sales they make are not effectively connected or attributed
to any PE that might exist in Australia for other purposes, such as
support services," the document said. "The ATO has 'risk reviewed'
several of these structures over the years.

"The tax outcomes in these entities were found to be 'commercially
realistic' in light of the current law and policy settings."

Bradbury has assembled a taskforce against tax dodging by
multinationals, headed by Treasury executive Rob Hefern, which will meet
in late February.

(6) Frenzy in the Gold Market: Germany to repatriate Gold Reserves from
New York & Partis

From: "Sandhya Jain" <sandhya206@bol.net.in>

24 January 2013

Frenzy in the Gold Market: The Repatriation of Germany’s Post World War
II Gold Reserves

by Michel Chossudovsky


The decision of Germany’s Bundesbank to repatriate part of its Gold
Reserves held at the New York Federal Reserve bank has triggered a
frenzy in the gold market.German news sources suggest that a large
portion of the German gold stored in the vaults of the New York Fed and
the Banque de France is to be moved back to Germany. According to
analysts, this move could potentially “trigger a chain reaction,
prompting other countries to start repatriating the gold stored in
London, New York or Paris….”

If gold repatriation becomes a worldwide trend, it will be obvious that
both the US and UK have lost their credibility as gold custodians. For
gold markets worldwide, this move may mark a switch from “financial
gold” to “physical gold”, but the process is definitely in its early stages.

The decision to repatriate the German gold is a big victory for a part
of the German press that first forced the Bundesbank to admit that 69%
of its gold is stored outside Germany. Almost certainly both the German
press and at least several German lawmakers will demand a verification
procedure for the gold bars returned from New York, just to make sure
that Germany doesn’t receive gold-plated tungsten instead of gold. It
seems that German decision makers no longer trust their American
partners. (Voice of Russia, January 15, 2013, emphasis added)

While the issue is actively debated in Germany, US financial reports
have downplayed the significance of this historic decision, approved by
the German government last September. Meanwhile, a “Repatriate our Gold”
campaign has been launched by several German economists, business
executives and lawyers. The initiative does not apply solely to Germany.
It calls upon countries to initiate the homeland repatriation of ALL
gold holdings held in foreign central banks.

While national sovereignty and custody over Germany’s gold assets is
part of the debate, several observers – including politicians – have
begged the question: “can we trust the foreign central banks” (namely
the US, Britain and France) which are holding Germany’s gold bars “in
safe keeping”:

…Several German politicians have … voiced unease. Philipp Missfelder, a
leading lawmaker from Chancellor Angela Merkel’s center-right party, has
asked the Bundesbank for the right to view the gold bars in Paris and
London, but the central bank has denied the request, citing the lack of
visitor rooms in those facilities, German daily Bild reported.

Given the growing political unease about the issue and the pressure from
auditors, the central bank decided last month [September] to repatriate
some 50 tons of gold in each of the three coming years from New York to
its headquarters in Frankfurt for ‘‘thorough examinations’’ regarding
weight and quality, the report revealed.

…Several passages of the auditors’ report were blackened out in the copy
shared with lawmakers, citing the Bundesbank’s concerns that they could
compromise secrets involving the central banks storing the gold.

The report said that the gold pile in London has fallen ‘‘below 500
tons’’ due to recent sales and repatriations, but it did not specify how
much gold was held in the US and in France. German media have widely
reported that some 1,500 tons — almost half of the total reserves — are
stored in New York. (Associated Press, Oct 22, 2012, emphasis added)

A full and complete repatriation of gold assets, however, is not envisaged:

“The Bundesbank plans to transfer 300 tonnes of gold from the Federal
Reserve in New York and all of its gold stored at the Banque de France
in Paris, 374 tonnes, to Frankfurt beginning this year. By 2020, it
wants to hold half of the nearly 3,400 tonnes of gold valued at almost
138 billion euros – only the United States holds more – in Frankfurt,
where it stores about a third of its reserves. The rest is kept at the
Federal Reserve, the Banque de France and the Bank of England. (Reuters,
January 16, 2012)

The German Federal Court of Auditors has called for an official
inspection of German gold reserves stored at foreign central banks,
“because they have never been fully checked”. Are these German bullion
reserves held at the Federal Reserve “separate” or are they part of the
Federal Reserve’s fungible “big pot” of gold assets. Does the New York
Federal Reserve Bank have “Fungible Gold Assets to the Degree Claimed”?
Could it reasonably meet a process of homeland repatriation of gold
assets initiated by several countries simultaneously?

According to the NY Federal Reserve, 98% of its gold bullion reserves is
in custody, i.e. it belongs to foreign countries. The remaining 2%
belongs to the IMF and the NY Federal Reserve Bank. In a bitter irony
the actual gold reserves of the NY Federal Reserve Bank are minimal.

Why is German Gold held outside Germany?

“Why is our gold in Paris, London and New York” and not in Frankfurt?
The official explanation – which borders on the absurd – is that West
Germany at the outset of the Cold War decided to store its central bank
gold assets in London, Paris, and New York to “put them out of reach of
the Soviet empire” which was allegedly intent upon looting West
Germany’s gold treasures.

According to Reuters: As the Cold War set in, Germany kept its gold
reserves put, keeping them out of reach of the Soviet empire. But
government officials have grown uneasy about the storage set-up and have
called for the Bundesbank to inspect the bars.

The Bundesbank now wants to change the arrangement too, even though it
has said it does not see a need to count the bars or check their gold
content itself and considers written assurances from the other central
banks as sufficient. With the end of the Cold War it was no longer
necessary to keep Germany’s gold reserves “as far to the west and as far
from the Iron Curtain as possible”, Bundesbank board member Carl-Ludwig
Thiele told reporters on Wednesday. The Bundesbank gained more space in
its vaults after the transition to the euro from the deutschmark.
Reuters, January 16, 2013)

According to the Western media, in chorus, the threats of the “evil
empire” in the course of the Cold War era had so to speak encouraged the
“looking after” and “safe-keeping” of billions of dollars of German gold
bullion in the secure central bank vaults of France, England and
America. This was a “responsible” initiative undertaken by these three
countries – “friends of West Germany”– with a view to allegedly
assisting the Bundesbank located in Frankfurt am Main against an
imminent attack by The Red Army.

But now more than 21 years after the official end of the Cold War
(1991), the Bundesbank “plans to bring home some of its gold reserves
stored in the United States’ and French central banks, bowing to
government pressure to unwind a Cold War-era ploy that secured the
national treasure.”

What was the objective of the US, in the wake of the World War II in
pressuring countries to deposit their gold bullion in the custody of the
US Federal Reserve? Historically, the accumulation of gold bullion in
the vaults of the US Federal Reserve (on behalf of foreign countries)
has indelibly served to strengthen the global dollar system, both during
the period of the (Bretton Woods) post-war “gold exchange standard”
(1946-1971) as well as in its aftermath (1971-).

History: In the Wake of World War II

The gold bullion storage arrangement has nothing to do with the Soviet
threat, as conveyed in official statements. It has a lot to do with the
history of World War II and its immediate aftermath. The early postwar
central banking arrangement was dictated by the Victors of World War II,
namely America, France and Britain. The military occupation governments
of these three countries directly controlled the post-war monetary
reforms implemented in West Germany starting in 1945. West Germany had
been split up into three zones, respectively under the jurisdiction of
the US, Britain and France (see map). From 1945 to 1947, the Reichmark
continued to circulate with new paper money printed in the US.

In 1947, the US and UK controlled occupation zones merged into an
Anglo-American “BiZone”. In 1948, under a so-called “First Law on
Currency Reform”, the occupation military government set up the Bank
deutscher Länder (Bank of the German States) in liaison with the US
Federal Reserve and the Bank of England. The currency reforms were
implemented in parallel with the Marshall Plan, launched in June 1947.

The Bank deutscher Länder (BdL) was to manage the monetary system of the
Länder (equivalent to states in a federal structure) in the Bizone under
the jurisdiction of the US-UK military government, leading to the
establishment of the Deutsche Mark in June 1948, which replaced the

Ludwig Erhard – who became Finance Minister under the FGR government of
Conrad Adenauer and then German Chancellor (1963-1966) – played a
central role in the process of monetary reform. He started his political
career as an economic consultant to the US military Government (USMG).
In 1947, he was appointed chairman of the currency reform commission.
From January 1947 to May 1949, the US military governor of the US zone
(USMG) who supervised the setting up the new currency arrangement was
General Lucius D. Clay, nicknamed “Der Kaiser”.

The Deutsche Mark initiative was then extended to the occupation zone
controlled by France in November 1948 (“TriZone” arrangement), with the
inclusion and participation of the Banque de France. While the Federal
Republic of Germany (FRG) (Bundesrepublik Deutschland), was created in
May 1949, the Bundesbank only came into existence 8 years later, in 1957.

Germany’s gold reserves were under the jurisdiction of the Bank
deutscher Länder (and subsequently of the Bundesbank). But the BdL was
an initiative of the US-UK-France military occupation governments.

Of significance, under the Bretton Woods gold exchange standard
(1946-1971), the dollar denominated export revenues accruing to West
Germany were converted into gold at 32 dollars an ounce. In other words,
the export earnings resulting from the sale of German commodities in the
US market were, in a sense, “returned” to America in the form of gold
bullion which was deposited for “safe-keeping” at the New York Federal
Reserve Bank.

The important question is the following: Did the procedures and
agreements determined by the occupation military governments in 1947-48
envisage a framework whereby part of West Germany’s gold bullion was to
be held in the victors’ central banks, namely the Bank of England, the
US Federal Reserve and the Banque de France?

Gold Reserves from the Third Reich

The issue of the gold reserves of the Third Reich is a subject matter in
itself, beyond the scope of this article.

A couple of observations: As of 1945, large amounts of gold from the
Third Reich were transferred into custody of the military governments.
Part of this gold was used to finance war reparations:

In September 1946, the United States, Britain, and France established
the Tripartite Commission for the Restitution of Monetary Gold (TGC).
The commission has its roots in Part III of the Paris Agreement on
Reparation, signed on January 14, 1946 concerning German war
reparations. Under the 1946 Paris Agreement, the three Allies were
charged with recovering monetary gold looted by Nazi Germany from banks
in occupied Europe and placing it in a “gold pool.”

Claims against the gold pool and subsequent redistribution of the gold
to claimant countries were to be adjudicated and executed by the three
Allies. ” (for further details see US State Department, Tripartie Gold
Commission, February 24, 1997, A Foreign Exchange Depositary (FED) had
been established at the Reichbank in Frankfurt. Referred to as “the Fort
Knox of Germany”, a process of collection had been established `by the
FED on behalf of the Allied Occupation Council.

Gold was collected by the FED, both in monetary and non-monetary form.
By October 1947 – coinciding with the establishment of the Bank
deutscher Laender – the FED, had accumulated 260 million dollars of
monetary gold (at the 1947 price of gold, this represented a colossal
amount of bullion).

A large part of this gold was restituted to different claimant
countries, organizations and individuals. In 1950, the remaining assets
of the FED – which were minimal, according to the US State Department –
were transferred to the Bank deutscher Laender. (William Z. Slany, US
Efforts to Restore Gold and Other Assets Stolen or Hidden by Germany
During World War II, US State Department, Washington, 1997, p. 150-59).


Germany´s 3,400 tons of gold reserves does not pertain to gold from the
pre-1945-era. Moreover, while the procedures of West Germany’s monetary
reform under allied military occupation (1947-48) were instrumental in
setting the foundations of German central banking in the post-war era,
the initial amounts of gold bullion deposited in the early days of the
Bank Deutscher Laender were minimal and of little significance.

It is understood that outside the realm of central banking and monetary
reform, the allied forces of World War II including the US, Britain,
France and the USSR did appropriate part of the gold of the Third Reich.
This in itself is an entirely separate and complex issue which is beyond
the scope of this article.

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