The Wrongologist

What’s Wrong Today:

Now that Barclays Bank has paid its big fine for rigging Libor rates, everybody else on Wall Street is trying to avoid the spotlight by teaming up to pay a gigantic joint settlement, while hoping that no one pays too much attention to the individual banks who are walking the plank. More than a dozen banks are being investigated in the scandal, including Citigroup, HSBC, Deutsche Bank and JPMorgan Chase, but it is unclear which banks are involved in the potential settlement talks.

Apparently, no bank now wants to be second in line for fear that they will get similarly hostile treatment from politicians and the public. Bank discussions about a group settlement initially took place before the Barclays agreement, and have picked back up in the aftermath.

The specter of severe penalties from regulators and the possibility of multi-billion dollar class action suits has hung over these and other banks being investigated worldwide since the extent of attempts to rig Libor became clear in US Commodity Futures Trading Commission (CFTC) and the UK Financial Services Authority (FSA) documents released with the Barclays settlement.

A group agreement would appeal to the financial regulators because they would be able to announce a headline-grabbing settlement, showing that they were dealing firmly with the banking industry’s crimes and misdemeanors. They are politicians after all.

For example, earlier this year, five top U.S. banks negotiated a $25 billion settlement with the U.S. Justice Department and other federal and state agencies to resolve allegations of mortgage services abuses; it got lots of press, but really was not much more than a slap on the wrist for the banks involved.

So, What’s Wrong?

Does money paid equal justice? That is the way the global banks do business. Steal possibly billions. Settle with the government authorities, neither admit nor deny any wrong doing. Rinse, repeat…

If you are one of the unindicted banks, settling with the regulators is smart business. The banks know they’re guilty, and they all know they’re going to pay up eventually. The document dumps are likely to be hugely damaging. So why not just avoid all that, fess up (sort of), and avoid the public disclosure of damning emails? It’s only money, after all. Sounds like a no-brainer.

But, is it smart for the rest of us? As Rep. Peter Welch, (D-VT) member of the Sub-Committee on Investigations, told James Stewart of the NYT:

“The Justice Department has to decide: Is the day of consent decrees and settlements, where you pay a fine, one passed on to shareholders, are those days over? Are the days of jail time here?”

He is speaking here about capture of the regulators by the industry that they are supposed to regulate.

Gretchen Morgenstern reports that Neil Barofsky, the man hired to police the $700 billion Troubled Asset Relief Program says in his book, “Bailout”, that he had assumed that his assignment to oversee TARP meant that he should be independent from the Treasury Department, but in asking other Inspectors General in the government, he found they thought otherwise:

“There are three different types of I.G.’s. You can be a lap dog, a watchdog or a junkyard dog.” A lap dog is seen as too timid, and being a junkyard dog was also ill-advised. “What you want to be is a watchdog,” he continues. “The agency should perceive you as a constructive but independent partner, helping to make things better for the agency, so everyone is better off.”

(Emphasis by the Wrongologist)

Barofsky goes on to speak about the system that has led to capture of the regulators:

“We need to re-educate our regulators that it’s O.K. to be adversarial, that it’s not going to hurt your career advancement to be more skeptical and more challenging,” he said. “It’s implicit in so much of the regulatory structure that if you don’t make too many waves there will be a job for you elsewhere. So we have to limit those job opportunities and develop a more professional path for regulators as a career. That way, they won’t always have that siren call of Wall Street.”

(Emphasis by the Wrongologist)

 

Common sense tells us that a crime that has no punishment is a crime that will be committed over and over and over. Regulators collect a fine that goes into the US Treasury and the company signs a letter saying it will obey the law in the future.

But, they all sin again. So unless the regulators file criminal complaints and perpetrators are charged, tried and convicted, there will be no end to the crime.

Here is yet another egregious example of regulator capture: Union Bank of Switzerland (UBS). UBS, with dual headquarters in Zurich and Basel, traces its roots to 1854. Last year, it had more than $26 billion in revenue and ne
arly 65,000 employees worldwide. It was deemed too big to fail during the financial crisis, and was bailed out by the Swiss government after a $50 billion write-down on mortgage-backed securities.

The bank has signed MANY letters with US regulators saying it will sin no more, but it is unrivaled in its ability to escape prosecution:

• In 2008 in what at the time was the largest settlement in SEC history, UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities.

• UBS also paid a $150 million fine to settle consumer and securities fraud charges filed by New York and other states on the same matter.

• In 2009, UBS agreed to pay $780 million in fines for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud.  

• At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker-dealer and investment adviser to American clients and paid a $200 million fine.  

• In 2011, UBS admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution.

Yet, in 2012, UBS revealed that it had received conditional immunity from the Justice Department and other authorities in the Libor investigation. How bad a record of violating our laws does it take before a regulator files criminal charges? It was shown this leniency even though the Justice Department has pointedly said that Barclays, not UBS, was the first bank to cooperate.

Is it any wonder that despite repeated apologies and promises to change, UBS and other banks keep violating our laws?

Bank regulator capture doesn’t only exist in the US: The Wall Street Journal reported that in 2008, US Treasury Secretary Geithner sent a note to the Bank of England (BOE), the UK Central Bank, indicating concern about how the Libor rate was being determined. The BOE sent the note on to The British Banker’s Association (BBA) a private industry group which sets Libor. Upon seeing the note, the BBA asked the BOE to take on a formal role in overseeing Libor to help address questions of governance. But the BOE declined.

According to Bloomberg, the way the Bank of England handled Mr. Geithner’s concerns was to hand his letter to the British banking lobby and ask them to look into it. That was it. No wonder British love football, they are very good at kicking it around.

You tell the guy who is in charge of the hen house that there appear to be foxes doing shifty things with the hens, and he says OK I will handle it. So then he asks the foxes’ paid employees to look into it for him, with no follow up.

And here we are four years later.

Here is what has to change:

• Stop the revolving door between the regulatory authorities and industry by requiring a 3 year “cooling off” period before a regulator can take a job in the industry he/she regulates.

• Make an example of a corporation that is a bad actor by giving it the business equivalent of a prison term in the line of business where it misbehaved.

• Start prosecuting Banksters under RICO, the Racketeer Influenced and Corrupt Organizations Act.  Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.”

• Put. Some. Banksters. In. Jail.