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Authored by Pesha Magid and Umar Farooq in Istanbul  via The Guardian,

Those observing Istanbul’s construction boom will not have been surprised by last week’s currency collapse – it’s all based on debt..

The business and financial district of Levent, as seen from the Sapphire Tower, which was financed through loans worth 164m lira in 2013. Photograph: Osman Orsal/Reuters

From a distance, Esenyurt, a newly built up neighbourhood on the edges of Istanbul, looks a bit like Hong Kong or Dubai, with a bustling downtown of shiny skyscrapers. Upon closer examination, however, you notice that tower after tower stands incomplete, lacking windows or furnishings; others are only half-occupied, their windows dark after nightfall.

“In the residential areas, 100% of the construction has stopped,” says Mohamed Karman, a local estate agent, from his small office in the central square of Esenyurt. “Do you know why? The materials. Everything is in dollars, you pay in dollars.”

The crash of the Turkish lira last week after two years of steady decline spooked global markets – but anyone looking at Istanbul’s skyline would have been far from surprised. Everywhere you look in the city, evidence of a debt-fuelled construction boom abounds: new skyscrapers frame the horizon, huge shopping malls dot the streets and among several megaprojects is a new airport, set to be the world’s largest.

Construction continues on Istanbul’s new Taksim Mosque. But locals say residential construction has stopped as a result of financial uncertainty. Photograph: Chris McGrath/Getty Images

Funding for this construction frenzy has been at the heart of Turkey’s economy, accounting for up to 20% of the country’s GDP growth in recent years, and employing around two million people. In a parallel to the 2008 financial crash, the boom was funded by low-interest loans and ballooning debt. Property developers funded their buildings with cheap loans in foreign currencies – and will be struck particularly hard by the lira’s collapse, as those loans grow harder to repay every day. According to government statistics, at the end of 2016 nearly 90% of the credit in Turkish real estate companies came from loans in foreign currencies.

The currency crash was triggered by a spat with the US government over Turkey’s ongoing imprisonment of the American pastor Andrew Brunson, who is accused of involvement with a 2016 coup attempt. But the Turkish economy has been in slow-motion decline for a while, with the lira sliding steadily downhill since 2016.

“Turkey is a country trying to reach a high growth rate but not having enough foreign capital to reach that,” says Nihat Bulent Gultekin, former governor of Turkey’s Central Bank and a finance professor at the Wharton School at the University of Pennsylvania.

“Unless they export from time to time, they run into a crisis. It happens every 10 years.”

The construction industry is a prime example of that dependence. Much of its capital comes from loans denominated in foreign currency. The Istanbul Sapphire – one of the tallest buildings in Europe when completed in 2011 – was financed through loans worth 164m lira in 2013, 154m of which was in US dollars. That loan would now cost around 539m lira.

Istanbul New Airport, set to be the world’s largest, and one of a current crop of construction megaprojects. Photograph: Anadolu Agency/Getty Images

Turkey is also heavily reliant on imports for construction materials: it is the world’s ninth largest importer of steel, paying $8bn in 2016, a figure that rose to $9bn in 2017 as the lira began to fall.

That makes the Turkish economy’s dependence on the construction sector for growth particularly dangerous. In the third quarter of 2017, construction made up 18.7% of the economy. This over-reliance on an industry that is so sensitive to global downturns has long been criticised by Turkish economists.

“A country is not really any different from personal finance,” Gultekin says. “If you borrow money to splurge, there comes a point when the creditors will come after you. When it’s all done with foreign capital, someone has to pay eventually.”

The construction boom reached its height in 2013 and 2014, as Turkish banks issued low-interest loans, malls blossomed and new buildings clustered: 69 skyscrapers taller than 100 meters have been built in Istanbul alone since 2008. On top of that are the megaprojects: suspension bridges, a subway beneath the Bosphorus and the new airport, expected to cost over €10bn. A €5.7bn loan for the airport taken out in 2015 was worth 18bn lira then, and 40bn lira now.

Much of that borrowing was done on the basis of profit margins that never materialised. The top executives of Turkey’s largest construction firms earned big paycheques, many of them benefiting from the light-touch approach the ruling AK Party has taken when it comes to regulation of the industry. Before he was appointed Turkey’s energy minister, and now finance minister, Erdoğan’s son-in-law Berat Albayrak used to be the CEO of Çalik Holding, one of the biggest construction companies in Turkey. Albayrak has been accused of changing tax law to save the company millions of dollars.

“We don’t act on a long-term basis,” said Kajin Bulut, who has worked in senior positions in forecasting and sales for a number of Turkish construction firms. “The longest plan I saw in a Turkish company was two months … That was the main problem.”

President Erdogan sits alongside son-in-law and current finance minister Berat Albayrak. Photograph: Osman Orsal/Reuters

Up to half the buyers of luxury properties built by companies such as Kiler Holding were expected to be wealthy investors from Gulf countries, Bulut said, especially after 2012 when legal barriers to foreign ownership were lifted. But the demand from the Gulf failed to rise to the level hoped for by Turkish real estate developers. Now the lack of demand, alongside rising costs for iron and steel, has caused many projects to stall.

The problem also affects many ordinary Turks who paid for new apartments upfront – apartments that are now on permanent hold because the companies say they can’t afford to build them.

“We’ve seen this problem for many years now that, people sell apartments to customers and they never end up being able to build those things,” said Orhan Boran, a lawyer in Istanbul representing hundreds of clients who claim to have been swindled by construction firms. Social media is littered with what Boran calls “construction victims” groups: middle-class homebuyers who organise online and hold protests across the country to bring attention to their plight.

The chain of parties involved in the construction sector is long, from construction firms to housebuilders to homebuyers – with everyone paid in lira.

“The construction sector is like the head of a train,” said Bulut. “If it goes, the whole country goes.”

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Federal investigators who conduct background checks for the Department of Defense have been asking whether DoD employees and prospective hires have had contact with the media, reports USA Today. 

The questioning has alarmed good-government activists, who see it as an attempt to intimidate government officials from speaking with reporters. Meanwhile, the head of the agency that conducts background checks says there has been no directive issued to investigators on news-media contacts and that a few rogue investigators may be at fault. –USA Today

The practice is not standard operating procedure, however, according to Charles Phalen, director of the National Background Investigations Bureau. 

“If this is happening routinely, I want to make sure we have a handle on it,” said Phalen, adding “This is not what were are instructing these people to do.”

“This is somebody not acting within the scope of what we’re asking them to do,” he said. “It’s outside of that scope. It’s that simple.”

In one case in recent weeks, a background investigator asked a person acting as a reference for a prospective Defense Department employee if that person had had contact with the news media, said the reference. Answering affirmatively, the reference was told, would delay and possibly prohibit the potential employee from receiving the security clearance.

The reference and the potential employee asked not to be identified out of concern that it could jeopardize employment. –USA Today

Government watchdogs are alarmed over the questioning, who see it as an attempt to intimidate government officials from speaking with reporters. Danielle Brian, executive director of the Project On Government Oversight said: “The president himself is publicly targeting people who should lose clearances,” adding “That opens up the vast universe of people involved in the process to feel more at liberty to be aggressive about asking these questions.”

Former CIA Director John Brennan’s security clearance was yanked last Wednesday over “unfounded and outrageous allegations” in the media against the Trump administration in connection with the ongoing Russia probe. 

Trump later told the Wall Street Journal his decision was connected to the ongoing federal probe into alleged Russian interference in the 2016 election and allegedly collusion by his presidential campaign.

“I call it the rigged witch hunt, (it) is a sham,” Trump said in an interview with the newspaper on Wednesday. “And these people led it.”

“It’s something that had to be done,” Trump added. –Reuters

National Security attorney Mark Zaid told USA Today that the question of contact with the news media should be strictly limited – though some agencies such as the CIA require contacts with reporters to be internally disclosed. 

“I am far more concerned, especially in the D.C. area, that individuals will be stigmatized or even penalized simply because they have friends or contacts who are journalists,” Zaid said. “It is an inappropriate question unless there is a substantive basis to ask, or if the individual themselves raise it as a question.”

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In an odd disturbance in the ‘resistance’ farce, Michael Cohen’s lawyer, longtime Clinton friend and Bill Clinton’s special counsel, Lanny Davis crushed CNN’s hopes and dreams of a smoking gun over Trump’s awareness of the Trump Tower meetings and blew up the Russia collusion narrative by confirming that the Steele dossier was entirely false with regard Cohen’s alleged trip to Prague.

As The Daily Caller’s Chuck Ross details, a CNN report in July that Michael Cohen has information that President Donald Trump was aware of the infamous Trump Tower meeting before it occurred got “mixed up” and was inaccurate, Cohen attorney Lanny Davis said Wednesday night.

“So Michael Cohen does not have information that President Trump knew about the Trump Tower meeting with the Russians beforehand or even after?” CNN’s Anderson Cooper asked Davis.

“No, he does not,” replied Davis, a longtime Clinton insider who started representing Cohen earlier this summer.

Davis’s bombshell statement severely undercuts a July 27 CNN report that Cohen was willing to tell special counsel Robert Mueller that he was in a meeting when Donald Trump Jr. told his father about an offer to meet with a group of Russians who wanted to provide dirt on former Secretary of State Hillary Clinton.

According to CNN’s anonymous sources, Trump approved the meeting, which took place on June 9, 2016. Democrats seized on the CNN report as evidence of collusion between the Trump campaign and Russian government.

The report also opened up the possibility that Trump and Trump Jr. publicly lied about the Trump Tower meeting. Trump has said publicly that he did not know about the meeting until a year after it occurred. Trump Jr. told the Senate Judiciary Committee in September 2017 that his father did not know about the meeting.

Davis said that the initial report was “mixed up” and that Cohen’s legal team was unable to correct it because of an ongoing criminal investigation into the longtime Trump fixer. Cohen pleaded guilty on Tuesday in federal court in New York to tax evasion, bank fraud and making excessive campaign finance donations by arranging hush payments to two women who claimed to have had affairs with Trump.

“Well, I think the reporting of the story got mixed up in the course of a criminal investigation. We were not the source of the story. And the question of a criminal investigation, the advice we were given, those of us dealing with the media is that we could not do anything other than stay silent,” Davis told Cooper.

.@LannyDavis: Michael Cohen “might be able to be useful to the Special Counsel about whether Trump knew ahead of time about the hacking of the Hillary Clinton e-mails.”

“[I] think what he can say would be useful and that’s the way I have to leave it.” https://t.co/1j0yq1kYiU pic.twitter.com/FPrv5aYH7P

— Anderson Cooper 360° (@AC360) August 23, 2018

Davis was asked about the Trump Tower report because of a statement issued on Tuesday by North Carolina GOP Sen. Richard Burr and Virginia Democratic Sen. Mark Warner, the leaders of the Senate Select Committee on Intelligence. The senators said in the statement that Cohen told the committee in October 2017 that he was not aware of the Trump Tower meeting until it was reported in July 2017. Burr and Warner said Cohen’s legal team confirmed that the testimony was accurate.

Davis dealt another major blow to the allegations of Trump campaign collusion when he said in an interview with Bloomberg News that the Steele dossier’s allegations about Cohen are “false.”

“Thirteen references to Mr. Cohen are false in the dossier, but he has never been to Prague in his life,” Davis said.

The dossier, which was funded by the Clinton campaign and Democratic National Committee, alleged that Cohen visited Prague in August 2016 as part of a “clandestine” operation to collude with Kremlin insiders to influence the 2016 election. Dossier author Christopher Steele claimed that Cohen arranged payments to hackers to carry out the scheme.

“Never, ever, ever in Prague,” Davis reiterated in an interview on MSNBC later Wednesday.

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The happy days on Wall Street have never been happier.

According to the latest quarterly FDIC report released on Thursday, banks reported aggregate net income of $60.2 billion in the second quarter of 2018, up $12.1 billion (25.1%) from a year ago and a new quarterly record. Only 3.8% of institutions were unprofitable during the quarter, down from 4.3%  in second quarter 2017. The average return on assets was 1.37%, up from 1.13% a year earlier, most of it again thank to Trump’s tax law. 

The improvement in earnings was mostly attributable to higher net interest income and a lower effective tax rate, which contributed more than $6 billion to the bottom line. Assuming the effective tax rate before the new tax law, net income would have totaled an estimated $53.8 billion, an increase of $5.6 billion (11.7%) from Q2 2017.

The FDIC reported that bank net interest income totaled $134.1 billion, an increase of $10.7 billion (8.7 percent) from 12 months earlier and the largest annual dollar increase ever reported by the industry. Specifically, more than four out of five banks (85.1%) reported year-over-year increases.

Meanwhile, net interest margin (NIM) rose fractionally to 3.38%, up 16 bps from a year earlier, as average asset yields grew more rapidly than average funding costs, although it wasn’t clear if these numbers are actuals or pro forma.

One potential caution: institutions with assets of $10 billion to $250 billion reported the largest annual increase in average funding costs (up 30 basis points), as a result of the Fed’s rising interest rates. Still, the improvement in NIM was widespread, as more than two out of three banks (70.2 percent) reported increases from a year earlier.

Noninterest income also increased but at a more modest pace, rising to $68.1 billion, an increase of $1.3 billion (2%) from the previous year. The 12-month increase in noninterest income was attributable to servicing fees (up $638.2 million, or 29.5 percent), fiduciary activity (up $558.4 million, or 6.3 percent), and net gains on sales of other assets (up $388.3 million). Slightly more than half of all institutions (55.6 percent) reported increases in noninterest income from a year earlier. Which also means that slightly less than half of all banks reported a decline.

Some more good news: total loan and lease balances increased by $104.3 billion (1.1%) from Q1, as more than three out of four banks (76.2%) reported quarterly increases, although that pace of increase may be in jeopardy: as we reported yesterday, there has been a sudden collapse in loan demand, reflecting rising interest rates even as banks loosened loan standards: if loan growth has finally topped and reversed, the broader is likely to follow.

Confirming that loan demand may be peaking, the FDIC’s new Chair Jelena McWilliams said the new numbers show banks continue to grow, but she warned that competition for business could drive some institutions to take on more risk.

“The competition to attract loan customers will be intense, and it will remain important for banks to maintain their underwriting discipline and credit standards,” she said. Translation: banks are about to unleash a flood of loan to anyone and anything that can fake a pulse.

For now, however, it’s smooth sailing as all major loan categories registered quarterly increases, led by commercial and industrial loans (up $25.5 billion, or 1.2 percent); consumer loans, which include credit card balances (up $23.7 billion, or 1.4 percent); nonfarm nonresidential loans (up $18.9 billion, or 1.3 percent); and residential mortgage loans (up $17.9 billion, or 0.9 percent).

But the best news for bank employees is that after years of contraction, noninterest expenses rose by $5 billion (4.6 percent) from a year earlier, as salary and employee benefits grew by $2.7 billion (5.2 percent) while “other noninterest expense” increased by $1.8 billion (4.2 percent).

Average assets per employee totaled $8.4 million for the current quarter, up from $8.2 million in second quarter 2017. The efficiency ratio (noninterest expense as a percent of net operating revenue) improved to 55.5 percent in the second quarter, the lowest level since first quarter 2010.

Predictably, the US banking industry continues to shrink: while two new bank charters were added in the second quarter, 64 institutions were absorbed by mergers (no banks failed in Q2): as a result, the number of FDIC-insured commercial banks and savings institutions declined by 65 to 5,542. According to the FDIC, the number of problem banks monitored by regulators fell to 82 in the second quarter, from 92 in the first. That is the lowest number since the fourth quarter of 2007. Assets of problem banks declined from $56.4 billion to $54.4 billion.

Finally, despite another quarter of record earnings, the market continues to be concerned about the global systematically important banks (G-SIFI) pushing the aggregate stock price of the sector to a one year low.

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For the first time since headlines hit of US-China trade talks, PBOC fixed the Yuan weaker overnight and having surged ahead of the talks, offshore yuan appears to have resumed its collapse.

US equities were panic-bid at the open today but as Yuan slipped further and as the dollar strengthens so stocks reversed course…

And if history is a tell, the S&P will follow Yuan lower…

Bear in mind the massive decoupling between bonds and stocks since China levitated the Yuan ahead of the trade-talks – time for some reversion now that’s over…

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Amid reports that pressure is mounting on the Securities and Exchange Commission to act on Elon Musk’s “funding secured” Tweet, there is also another camp making the argument that Musk “might not have to worry” at all about the SEC.

One of the main reasons offered in a recent Bloomberg article is the fact that the Securities and Exchange Commission’s San Francisco office is reportedly understaffed and “often outgunned”. That is, they often pursue companies that have more talent, more capital and more resources.

The San Francisco office of the SEC is also tasked with competing for employment with the same “disruptive” technology companies that they are supposed to supervise. The article suggests that the best and the brightest in Silicon Valley don’t aspire to work for the SEC – many would rather work at tech companies and start ups offering the allure of getting in on something big.

“There’s not quite as much trepidation about the SEC” in Silicon Valley, Yale Law Professor Jonathan Macey told Bloomberg. 

There also have been examples in the past of the SEC failing to make any type of meaningful difference when going after technology companies. For instance, the company went after two Apple executives in 2007 for backdating stock options and for Steve Jobs not fully disclosing the extent of his medical leave, when he stated he was getting a “relatively simple” treatment, but was really undergoing a liver transplant. The SEC did nothing.

Or how about the massive data breach at Yahoo while the company was in the midst of its excruciatingly long process of selling itself to Verizon? Back then, the data breach was a major headline that some people thought could jeopardize the deal. The resolution, years later, was likely only reported in a small print headline somewhere on the back pages of the financial news. The SEC settled with Yahoo/Altaba this year for just a $35 million fine.

Everybody also famously remembers when, back in 2013, the SEC went after Mark Cuban for alleged insider trading. Cuban, with exponentially more capital and resources went out, hired a top-notch legal team, and beat the SEC in court at trial.

The SEC’s response to some of the bigger frauds in history – names like Theranos, Enron and Madoff – all generally came after the fraud had already been exposed to the mainstream. The SEC was not the first to act, and some would argue didn’t act preemptively at all, in all three of these cases.

While the field of technology has grown and evolved at an exponential rate, companies have pushed boundaries on how they are allowed to report material information. In a couple of well known cases, the SEC appeared to bend the rules in favor of companies, versus taking enforcement action against them.

One such example was when the SEC changed its corporate communication rules in 2005 in response to Salesforce.com needing to delay its IPO due to comments its CEO made:

In 2005 the SEC passed rules to ease restrictions on corporate communications during an SEC-imposed “quiet period” before an initial public offering. The changes were put in place after Salesforce.com Inc. had to delay its IPO in 2004 because its CEO gave extensive comments to the New York Times. Google also ran into trouble that year for an interview co-founders Sergey Brin and Larry Page gave to Playboy magazine that was published after the company registered to sell shares.

Another is the famous “Reed Hastings” example where, back in 2013, the SEC approved making corporate disclosures through social media, as long as investors were made aware that these avenues would be used for disclosure. The change came after Netflix CEO made a post that the market deemed material on his personal Facebook page. In that case, the SEC did not pursue enforcement against Hastings. 

Instead of trying to pursue enforcement actions against these executives, the SEC revised the rulebook to “normalize” executives’ behavior. It isn’t often that securities laws, some initially written in the 1930s, get meaningful updates. The last of these updates relating to technology came after the Reed Hastings incident, which was nearly 10 years ago.

If you’re an Elon Musk supporter, you need to hope that the delta between these arcane laws and how technology has evolved could be a middle ground where he finds some leniency. However, as Yale Law Professor Jonathan Macey told Bloomberg, “That doesn’t mean you can just say anything.”

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