We discuss the sound of one monkey-hand clapping as Alan Greenspan finger-painted the markets and grand heists ensued. In the second half of the show, Max Keiser talks to a former senior corporate and banking executive, David Smith, about Switzerland wearing concrete boots as it tries to maintain a currency peg to the euro with its only exit strategy being the Iraq one — that is, they have no plan at all. They also discuss how HSBC might have missed the 7,000 suitcases of cash that would have been needed to launder $7 billion in drug cartel money.
*****UPDATED WITH TRANSCRIPT**** :
KEISER: We’ve got somebody in the studio today – David Smith of GenevaBusinessInsider.blogspot.com. David has a law degree and is a qualified chartered accountant and has worked as a senior executive for major Swiss and US multinationals and global banks. David welcome to the Keiser Report.
SMITH: Pleasure to be in Paris and with you today.
KEISER: Alright David Smith, let’s talk about Switzerland, the legendary safe haven went bonkers a year ago and it pegged its good as gold currency – the Swiss Franc – to the euro. Tell us about that act of madness, or maybe it isn’t madness – why did they do it?
SMITH: Well, the basic reason for doing it is because the main part of the Swiss economy, which is 85% of it, apart from the banks, was suffering very much from having a strong exchange rate. The difficulties are for the tourist industry, the exportation of machine and capital goods and also if you think about it, for the companies in Switzerland with high exchange rates, their reported profits they have coming into Switzerland go down in Swiss francs, so the management bonuses go down.
KEISER: Now how much does it cost per month to maintain this peg?
SMITH: Well it started off at a modest 10-15 billion per month about a year ago, but this last quarter, as this crisis got ever deeper, the amounts are running between 30 and 50 billion. Now there we’re talking about amounts that exceed the gross national product of the country for the same period.
KEISER: Now the Swiss National Bank, they’ve been sellers of gold. They’re pegging the currency to the euro, they’re spending more than the GDP of the country every month to maintain this peg – presumably they have some exit strategy?
SMITH: I think they have something akin to the Iraq strategy – they had an entrance strategy and they thought they’d think about the exit strategy afterwards. But the reality now is that they’re hopelessly trapped. They’re really completely hostage to fortune. What is going to save them eventually is if the weak countries leave the euro and Germany becomes part of a stronger euro. At which point, the euro becomes a stronger currency. But if you imagine the opposite happening, where Germany decides to leave the euro and leave all these clowns in Club Med behind, the euros going to crash again and the only country that’s going to dive down with them, with the concrete boots on their feet, is Switzerland. They have more or less played heads or tails with their currency. And if you lose, you lose everything.
KEISER: Now David I wanted to have you in today because so much has been talked about Switzerland and the breaking up of the ability for Swiss banks to hide money, launder money, etc. But there hasn’t really been any diminishment in the global money laundering business, in fact, it’s gone up sharply. It’s just not happening in Switzerland. So what we see here is a bit of turf battle, we have the money laundering which used to be in Switzerland has moved to other locations, you can talk about that. And is Switzerland suffering as a result of this and, if so, how badly?
SMITH: That’s a very big question, I’ll try to take the first part. If you look at Switzerland, Switzerland has been, if you like, in the spotlight of money laundering ever since the James Bond films began and even before. But what people do not understand is that Switzerland has a pretty good regulatory environment, where there is a culture of knowing who your client is, where the money comes from and checking when the money comes into the system, its origins. And having a thorough follow up. So Switzerland is, in fact, being vilified and targeted in a very much bigger game. And it’s a very convenient political target because people in the street can identify with it. I would say at the moment, there have been very few major scandals in Switzerland in the last ten years because of this change. If you start looking at the other centres, people who have had shady money, have been moving it out of Switzerland. They’ve moved it to branches of the same banks very often, in Singapore, in Miami and other destinations that are more and more exotic and more and more risk that they might lose their money through seizure or internal political strife. If you take then the very major countries, you know like America and the UK, these are nice places to go because there is, on paper, a very good regulatory environment. But in reality, it’s completely dysfunctional. And this, I believe, is quite deliberate. There is no serious attempt to tighten things up. And if I were trying to launder money or have black accounts these days, I would probably try to do it in the US or perhaps London. In places like Nevada or have companies run out of Delaware where you can open accounts without even presenting a passport.
KEISER: Right I wanted to ask you about that because in the US, we had a scandal with Wachovia Bank, now part of Wells Fargo, where they were laundering $400 billion in Mexican drug money . . .
KEISER: . . . and they paid a small civil fine. Really a slap on the wrist, nothing consequential. But is it geographically important? The fact that you’ve got Mexico and the US that makes the US a prime money laundering place versus Switzerland? In other words, just the physical act of moving cash around, is that a factor?
SMITH: I think it must be. If you take Mexico, there’s a pretty interesting statistic that about 30,000 people die there every year and there’s about $30 billion of drug business. And there is no serious attempt by the current American administration to close the borders and put an end to it. And there are never ending scandals coming out of that as well, if you look what’s going on with the Attorney General at the moment.
So if you take money laundering, HSBC has been in the press recently for aiding and abetting money laundering in Mexico and moving that money into America. They were talking about an amount of $7 billion. Now I can tell you having been a little bit involved in my very early days of carrying suitcases for people, when it was legal, that to transport $7 billion, you’d need 7000 suitcases. So I’m just trying to imagine how a bank teller or a bank manager would fail to notice these 7000 people coming in with different briefcases over a period of a year. It is obviously not how it’s been done.
Then you have to say well if you are trying to get money into a bank, it’s much more difficult than to get it out. Because if you go into a bank with a machine gun and a few bombs and say ‘hand the money over,’ you’re in and out in seconds. But if you actually want the guy to look after your money and put it in a safe, you come in with a smart suit, a smart tie like you have on today and you need the cooperation.
Now the other question is how in banks where there are a strong regulatory environment, and banks do have a strong regulatory environment, most of them, can you actually get the money in. And the answer is because there are a few people who are in a position to over ride the basic rules of the bank and the basic controls of the bank to ensure that these things happen. So that is a cause.
KEISER: Seven billion requiring seven thousand suitcases, so just the quick math here, that would be about a million per suitcase?
SMITH: Approximately, a normal attache case with $100 dollar bills . . .
KEISER: Hundred dollar bills, so you need 10,000 hundred dollar bills? Per suitcase? Roughly speaking? And a line of 7000 guys?
SMITH: And a line of 7000 guys, you would think there was a soup kitchen that had been opened [laughs] at HSBC.