This means (economic) war

Opening a new front in the war

Scott Bessent has been drafted. Bessent, who built his career on Wall Street and as treasury secretary is tasked with things like managing the dollar, was sent out to explain to reporters that if negotiations to end the Iran war fail the administration will pivot, and the new front will be economic. 

The administration was prepared to ramp up sanctions and pull whatever other levers it can pull to impose as much economic pain on Iran as possible, he said, adding that these new maneuvers would be the financial equivalent of a bombing campaign.

This should not be surprising. I said a month ago that Iran was fighting an economic war. The Persians were never going to be able to match the U.S. militarily but had one monster advantage, their ability to control the Strait of Hormuz and all the oil that travels through it. So they quickly seized it and throttled the global economy to the best of their ability.

Turned out it was a pretty good strategy. The International Energy Agency is warning that Europe has six weeks of jet fuel left, and that the world is facing its worst energy crisis since John D. Rockefeller started spudding wells in Pennsylvania. Gas prices are up sharply, helping to drive inflation higher. And foreclosures are up 26% from a year ago, according to our sister publication National Mortgage News. Repossessions were up 45%.

It sounds like a problem, but all of it is a sharp contrast to what we've seen from the big banks this week. Every bank we've written about so far has posted very healthy profits. Bank of America's earnings rose 17%. Citizens Financial Group's earnings jumped 39%. U.S. Bancorp's profits rose 14%. Bank of New York Mellon posted record revenue. When even the super-staid, super-boring, trust-bank business is booming, you know it's good times. Oh, and the stock market hit a fresh all-time high this week.

A number of bank executives during their conference calls did flick at the possible ramifications of the war, which started in the last month of the quarter, though those ramifications certainly didn't show up in the numbers. But if the shooting war in the Middle East becomes a full-fledged economic war as Bessent is promising, that might change.

The common defense

I got a pitch the other day from a company I'd never heard of, called Unit21. They're a fintech that sells a product they say allows financial institutions to share data about frauds and money laundering and the like without sharing any of the so-called PPI – personally identifiable information – of their clients. The benefit of this, they argue, is that by sharing information, individual firms can have a better handle on threats. Unit21 claims that because of this kind of information sharing it can spot fraud patterns within hours.

It's not a bad idea, really. In fact, that same idea is one that the International Monetary Fund advocated for this week, as our Carter Pape reports. Researchers at the IMF said there has been a "massive" spike in what it calls cyber events and digital fraud and are imploring banks to start networking together to fight it.

This is not just crying wolf. We reported earlier this year that financial crime has become a $4 trillion industry. Some of it is penny-ante stuff: There are $300 kits out there that help people get around bank security. But for the most part these aren't just the guys in Tony Soprano's crew; these are highly organized, multinational enterprises – corporations in everything but legal standing.

Networking to fight crime is an idea that seems to be gaining steam. U.S. regulators have been pushing banks to share data. And Japanese banks earlier this month agreed to start sharing data through a cooperative that will work with law enforcement. 

The bottom line is that way too much illicit money is flowing through the global financial system, and technology is every day making crime easier to commit, even without Anthropic's Mythos code-busting AI out there in the wild. And while the biggest banks can probably shoulder most of this on their own, it's the smaller banks with less resources that will have a harder time. Those are the ones that really need this kind of network effect in order to protect their clients.