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US stock market daily report (December 11, 2012, Tuesday)

December 12, 2012, Wednesday, 04:53 GMT | 23:53 EST | 09:23 IST | 11:53 SGT
Contributed by Millennium Traders

Documents released Tuesday from the U.S. Justice Department provide new details about how HSBC Holdings PLC allegedly became “the preferred bank” for narcotics drug cartels in Mexico and Colombia as the bank left “dangerous gaps” that traffickers abused with major cash deposits as top executives froze staffing at the bank’s anti-money-laundering unit. A statement from the Justice Department notes that banks are supposed to try to mitigate money-laundering risks by monitoring wire transfers. HSBC however, allegedly used an internal system that would trigger a review of wire transfers based on the amount of the transaction and the type and location of the customer. From 2002 and 2009 HSBC ranked Mexico as having “standard” money laundering risks which was the lowest of the bank’s four possible country risk ratings. The result, HSBC transactions in Mexico were not subject to HSBC’s automated monitoring unless customers were classified as high risk. The Justice Department alleges the low ranking from HSBC allowed “hundreds of billions of dollars” in wire transfers from Mexico to be excluded from the bank’s internal reviews. HSBC failed to monitor over $670 billion in wire transfers from HSBC’s Mexico division between 2006 and 2009 and failed to monitor over $9.4 billion in purchases of U.S. dollars from HSBC’s Mexico unit over the same period, per the Justice Department. Even though the bank had “substantial resources” to limit money-laundering risks, HSBC allowed “hundreds of millions of dollars” from Mexican drug trafficking organizations to flow though accounts in the U.S.”, per the U.S. Treasury Department. The Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Columbia laundered $881 million in drug trafficking proceeds through HSBC’s U.S. unit without being detected by the bank, the Justice Department alleges. HSBC also failed to monitor over $200 trillion in wire transfers between 2006 and 2009 from countries that HSBC’s U.S. unit deemed to be “standard” or “medium” risk. The Justice Department said that between 2006 and 2009, the unit had only one or, at times two, compliance officers responsible for reviewing transactions of between 500 and 600 customers. In 2007, HSBC senior executives allegedly instructed its anti-money laundering departments to “freeze” staffing levels as part of a bank-wide effort to “cut costs and increase the bank’s return on equity.” The Justice Department said the goal was accomplished by not replacing departing employees, combining the functions of multiple positions into one, and not creating new positions.” By October 2009, a senior executive in HSBC’s U.S. compliance unit allegedly said its anti-money-laundering efforts had “gone down the hole in the past 18 months,” per the Justice Department. Assistant attorney general Lanny Breuer said over the years it became easy for narcotic drug traffickers. “These traffickers didn’t have to try very hard.  They would sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows in HSBC Mexico’s branches,” Breuer said. HSBC reached a landmark $1.9 billion settlement with U.S. authorities over allegations that the U.K. based big bank intentionally permitted illegal transactions with a variety of countries including Iran, Libya, Sudan and Burma.

On Tuesday, U.S. stocks moved higher due to optimism that the White House and House Republicans will come to terms on a deal to prevent the all ensuing, fiscal cliff. Reports out late Monday appear to present that negotiations between the White House and House Speaker John Boehner have made steady progress in recent days. Boehner addressed the House Tuesday with comments that he was hopeful a deal could be reached as they wait for President Barack Obama to outline acceptable spending cuts. Boehner took to the House floor on Tuesday to demand specific cuts from the White House as part of a deal, only to be rebuffed later in the day by the White House. Boehner and Senate Republican Leader Mitch McConnell of Kentucky spent more time Tuesday, emphasizing on spending cuts, a possible sign that Republican leaders are giving in on tax policy and may accept some higher taxes on the wealthy. Jay Carney, White House spokesman, pushed back against Boehner and said that the administration has detailed spending cuts for at least a year. Carney added that House Republicans haven’t given details about how they would raise revenue in a fiscal-cliff deal and that the White House’s cuts include savings from entitlement programs. The Obama administration wants unlimited power to raise the debt limit to be included in a fiscal-cliff deal but Republicans have rejected that proposal, and want to use the debt limit as a bargaining chip to extract spending cuts. On a negative note during Tuesday afternoon, Senate Democratic Leader Harry Reid said that a deal to avoid the fiscal cliff will be difficult to reach before Christmas. Reid added that, once an agreement is in hand, “we can do things very quickly”. Reid's comments resulted in a reversal of market gains on the day. Into the 5 o'clock hour, Boehner spokesman Michael Steel said, "We sent the White House a counter-offer that would achieve tax and entitlement reform to solve our looming debt crisis and create more American jobs." Steel said Republicans' offer was in response to a new White House offer but would not describe the GOP offer in detail.

The Commerce Department on Tuesday reported that U.S. wholesale inventories rose 0.6% during October, while wholesale sales fell 1.2%. The inventory-to-sales ratio increased to 1.22 from 1.19 in the prior month, with October's sales pace. During October, inventories of durable goods increased 1.0% in October while inventories grew 1.1% in September with sales up a slightly revised 1.9%.

The Commerce Department said Tuesday that the he U.S. trade deficit climbed 4.9% to $42.2 billion during October from a downwardly revised $40.3 billion in September. While imports decreased by 2.1% to $222.8 billion, exports fell by a larger 3.6% to $180.5 billion. The export value of U.S. goods, which consists of items such as autos, chemicals or electronics, dropped to the lowest level seen since November 2011. The drop reflects tough economic conditions in many overseas nations that are key markets for American manufacturers. Imports of foreign goods into the U.S. fell to the lowest level since April 2011. U.S. trade deficits increased on an unadjusted basis with Japan, the European Union and the oil-producing OPEC nations. Surpluses with Brazil, Central America and South America hit record highs.