Barclays

Casper the Friendly Ghost Can’t Regulate Wall Street

Leo Gerard — Tue, 17 Jul 2012 09:46:15 -0400

Bankers love to recount the fabled story of the invisible hand. In their version, the superhero Invisible Hand effectively controls the market, thoroughly trust-busting and fraud-forestalling. Everyone lives happily ever after.

Truth be told, however, the tale of the invisible hand is a horror story. The invisible hand fails miserably to constrain bankster racketeering. It didn’t prevent the market crash in 2008. The ending to that sad saga is recession.

Expecting an invisible hand to control the market is believing in fantasy. It is depending on the ethereal digits of Casper the Friendly Ghost to stop bid-rigging, price-fixing, self-dealing banksters. Casper’s airy little fist packed no wallop when it came to impeding high-risk betting on Wall Street, the LIBOR lending rate manipulation or the disappearance of client money at MF Global. There’s a much better way than Casper to catch a bankster: pay them to turn each other in.

Like delinquent children, bankers chafed under the restraints placed on them after the Stock Market Crash of 1929. Their lobbying chipped away at the regulations until 1999 when they achieved repeal of the most important one, the Glass-Steagall Act.

Within a decade, the market crashed again. Investigators discovered banks had packaged bad loans into securities and pawned them off to unwitting investors. That’s one of the same practices uncovered by a Depression-era inquiry into the 1929 Crash.

This spring, the Securities and Exchange Commission sued Goldman Sachs for its version of that scam. Here is how the SEC explained the ABACUS case:

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

But, hey, they don’t need no regulation, right?

Banks have now been sued for their bad behavior on both ends of the mortgage crisis. A U.S. attorney has accused Deutsche Bank of making federally insured mortgage loans without checking, as required and as it claimed it had, on whether borrowers had jobs, savings or any way to repay. The failure of such loans contributed significantly to the crisis.

After no-income-no-asset loans went bad, banks tried to foreclose to get their money back. Many engaged in illegal robo-signing of foreclosure documents and now face lawsuits from defrauded homeowners and municipalities.

But, hey, they don’t need no regulation, right?

Last October, commodities brokerage MF Global went bankrupt with $1.6 billion missing from client accounts. It is accused of wrongly using customer funds to cover capital shortages. As a criminal investigation ensued, bankers described this as a fluke and said it couldn’t happen again.

In fact, shortly afterward a similar fund, PFGBest, posted a note on its website assuring investors it observed all regulations and didn’t co-mingle funds.

And then it happened again. Just last week, PFGBest filed for bankruptcy. The same day, the Commodity Futures Trading Commission charged the firm with fraud and reported $215 million in client money missing.

But, hey, they don’t need no regulation, right?

That’s what Jamie Dimon, CEO of JPMorgan Chase, has said repeatedly since the crash. In fact, Dimon described the arguments that too-big-to-fail banks must be regulated as “infantile” and “nonfactual.” And then his bank lost billions. Billions. Well, at first, Jamie said it was only $2 billion. He dismissed concerns about it as a “tempest in a teapot.”

But then the tempest got really big, like hurricane size. On Friday, Jamie admitted the loss had nearly tripled to $5.8 billion and could rise another $1.7 billion.

Whoops. But hey, Jamie don’t need no infantile regulation, right?

Then there is the LIBOR price fixing case as well as the bank bid rigging convictions just secured by a prosecutor in Manhattan. In LIBOR, Barclays Bank paid $450 million in a plea settlement for manipulating LIBOR, the benchmark for countless interest rate determinations worldwide including those on savings accounts and mortgage loans.

Barclays’ juvenile-sounding defense was this: everybody was doing it. The U.S. Justice Department’s deal with Barclays suggests the bank is cooperating in the investigation of everybody else – which would be the dozen other banks that participate in setting the LIBOR rate, including none other than Jamie’s JP Morgan.

In the Manhattan case, a jury convicted three employees of GE Capital in a decade-long interest rate bid rigging scam that skimmed billions from the coffers of cities and towns. Also involved were virtually every major bank on Wall Street, including Jamie’s JP Morgan.

But, hey, they don’t need no regulation. There’s Casper the Friendly Ghost’s invisible hand, right?

Earlier this month, a survey of 500 American and British financial services executives found that a quarter of them had seen wrongdoing in the workplace and believed it was essential to success. But here’s the most important figure: 94 percent said they’d report wrongdoing if shielded from reprisal and guaranteed financial rewards.

It’s simple: Show them the money. For cash, all honor among thieves vanishes like Casper.

They do need regulation. But in addition, regulators should be equipped with even bigger bribes than they’ve got now to encourage banksters to rat each other out.

Crooked Bankers Are Corrupting Government: The Real LIBOR Story

Richard Eskow — Wed, 11 Jul 2012 10:00:07 -0400

A new survey showing the extent of bankers' criminal inclinations, together with the "LIBOR" scandal, gives us more insight into how deeply corrupt the banking industry has become.

Big banks have metastasized into a kind of "Financial/Industrial Complex" which is distorting and engulfing our economy. And they've captured the critical government functions designed to stem the corruption and keep them in check.

Washington, we have a problem.

Scandalous Survey

The survey, sponsored by whistleblower defense firm Labaton Sucharow, is a revelation: Almost half of the senior-level bankers in a recent poll refused to say they wouldn't break the law. One in four said "had observed or had firsthand knowledge of wrongdoing in the workplace." Only 41 percent of them said that colleagues in their own firm had "definitely not" committed crimes to get ahead.

And "nearly one-fourth ... believed that financial services professionals may need to engage in unethical or illegal conduct in order to be successful."

I discussed the survey with a few other people familiar with the banking industry, and they had the same reaction I did: If anything, those numbers sound low. That makes sense. Admitting your criminal inclinations to a total stranger isn't not as easy as telling a them your favorite color or what kind of music you like.

But even if taken at face value, the poll's an eye-opener: One in six bankers said they were "fairly likely" to commit a banking crime if they could get away with it. 45 percent refused to rule it out if the payoff were big enough.

And it's not just a matter of personal morality: "Nearly one-third of all financial services professionals reported feeling pressured by bonus or compensation plans to violate the law or engage in unethical conduct,. Nearly one-quarter of the respondents felt similar pressure from other sources." (Presumably including their bosses.)

In other words, the system is designed to encourage lawbreaking in critical banking functions. The survey's sample size was fairly small - only 500 people - but that's still a decent-sized group. Even if you don't think they're understated, the answers are devastating.

The Big LIBOR

LIBOR - the London Interbank Offer Rate - determines borrowing costs for trillions of dollars in loans. It's based on each bank's own reporting of the interest rates it expects to be charged from other banks. Barclays admitted it lied about the number and agreed to pay a half-billion-dollar fine. Its Board Chair and CEO resigned.

But the real story isn't about Barclays. Reuters now reports that "More than a dozen banks, including Citigroup, JPMorgan Chase & Co, Deutsche Bank, HSBC Holdings Plc, UBS and Royal Bank of Scotland" have been implicated in the LIBOR scandal.

Of course they have. Banks were allowed to report their own borrowing costs without outside auditing. How many were likely to tell the truth with so much at stake? LIBOR lying was one of the worst-kept secrets on Wall Street.

The LIBOR scandal is also the story of politicians, regulators and journalists who actively collaborated in banking's descent into lawlessness and amorality.

Fallen Fed

Take the Federal Reserve, which was created by Congress to serve the public interest. Reports say that the Fed knew about Barclays' deception back in 2007 and did nothing. No, scratch that: It rescued Barclays and its executives with nearly a trillion dollars in publicly-backed loans.

Thanks to the GAO audit of the Fed - an audit which it vigorously resisted - we know that Barclays was the fifth largest recipient of emergency loans. Bailout loans for Barclays came to $868 billion. That means that Barclays probably made billions off the reduced interest rate alone, courtesy of the American people.

Those loans were granted between December of 2007 and July 2010. That means the Fed was doling out billions to Barclays after it learned that the bank was lying about its LIBOR rates.

How much did the Fed know about the other banks under investigation, which it was also propping up?

Self-Policing Perps

Self-reported LIBOR figures aren't the exception, they're the rule. Deregulation and political decision-making let the banks "police themselves" in a number of areas. The Bush/Ashcroft Justice Department reduced oversight efforts and began "trusting" banks to report their own illegal behavior. The Obama/Holder DoJ has continued that practice.

Banks only "self-report" when, as seems to be the case with Barclays, the evidence is about to come out in other ways. Then, like Barclays, they"volunteer" limited evidence to the Justice Department in return for a promise they won't be prosecuted.

That's right: The Obama Justice Department promised not to prosecute anyone in the Barclays case.

When commentators say that there's no evidence of criminal wrongdoing in the LIBOR case, that just means the banks haven't volunteered any. But then, why would they?

Barclays just paid nearly half a billion dollars in fines, and its CEO and Board Chair stepped down. But nobody knows the real extent of their wrongdoing, because they're still relying on Barclays to tell the truth.

Imagine what its executives must know to agree to a deal like that.

Buy-Partisanship

The moral decay extends to the Republican Party, whose servility toward dishonest bankers would make a Tammany Hall boss blush. (Remember "Washington exists to serve the banks, not the other way around"?)

It also extends to the many officials in Administrations of both parties who keep trading their Washington authority - and the way they use it - for the riches they know they'll earn on Wall Street once they leave. And there's increasing suspicion that it extends to the Justice Department, which has refused to prosecute bankers for fraud in the face of overwhelming evidence.

The White House's opportunity to convince a skeptical public otherwise won't last much longer.

Money Talks

Sure, bankers know the Democrats will regulate them somewhat more than the Republicans will. That annoys them no end. But they also expect top Administration officials to work for them someday (see "Orzsag, Peter" or "Summers, Larry"). They'll be joking and smiling with golf partners they've enriched - partners like Bill Clinton - this weekend.

The President and the Treasury Secretary have been signalling to bankers that they're off the hook for criminal charges. In fact, the President described Jamie Dimon as "one of our smartest bankers" even as Dimon came perilously close to admitting investor fraud in Senate testimony - close enough to trigger an immediate SEC investigation.

But then, politicians depend on campaign cash from big Wall Street donors. And the biggest donors of all run the mega-banks.

The Gulfstream Gang

Leading bank executives gather each year for the Davos conference on international finance. A government committed to enforcing its laws would have posted agents at executive airports to arrest a few as their private Gulfstream and Lear jets arrived from Switzerland.

Each and every major bank CEO presides over an organization whose employees have engaged in repeated criminal acts, even as they signed legally-binding documents saying they had personally implemented effective anti-fraud procedures.

SEC documents used in multi-billion-dollar settlements document a massive Wall Street crime wave which includes bribery, forgery, investor fraud, and stock fraud. It's all on paper, right there in black and white.

It's true that bank CEOs, like everyone else, are innocent until proven guilty. But if they weren't encouraging criminal behavior, which the survey also seems to suggest, then they're utterly incompetent as managers. Unethical, or incompetent?

To be clear: The two aren't mutually exclusive.

Excuses: The Golden Oldies

As the evidence of Wall Street lawbreaking grows, the excuses for government inaction keep changing. It's hard to keep track of them all, so here's a walk down memory lane:

First the authorities and pundits said that bankers wouldn't cheat the rest of us because "Wall Street and Main Street rise and fall together."

Then they allowed that, well, yes, perhaps they did lie and cheat a lot, but in ways that weren't illegal.

Then, as the settlements and fines for illegal activity grew - from hundreds of millions to billions, and then to tens of billions of dollars - they reluctantly allowed that, yeah, laws probably did get broken here and there. But, they said, getting a jury to convict bankers on finance-based charges was just too hard.

Then, when a recent case showed that it's not any harder to convict bankers than it is to convict mobsters (if there's still a difference), they said ... well, they didn't say anything at all.

The Financial/Industrial Complex

Bankers used their wealth to purchase deregulation from the political system, then used deregulation to seize an ever-increasing percentage of our wealth. Banking profits grew from their traditional levels - in the low 20's as a percentage of total corporate profits - to 40 percent of profits before the 2008 financial crisis.

Then we bailed them out, rescuing their industry and saving executives who were as inept at their profession as they were lax in their morals. Did we use that as an opportunity to slow the growth of the Financial/Industrial Complex?

No. Financial institutions take up a larger percentage of our country's GDP than they did before the crisis they created, and before we bailed them out. (We're still baling them out - and pumping up their profits - through a variety of Treasury and Federal Reserve actions.)

A new Working Paper for the International Monetary Fund provides rigorous analysis to back up what many have long suspected: "(A)t high levels of ﬁnancial depth, more ﬁnance is associated with less growth."

In other words, once you get past a reasonable size a simple principle takes effect: The richer they get, the poorer we get. And they keep getting richer.

Honorable Gentlemen and Ladies

Although the Financial/Industrial Complex remains remain untouchable, smaller players aren't immune. That's led to indictments and/or investigations for Bernie Madoff, MF Global, and now PFGBest. But the tragic suicide attempt of PFGBest's Chairman only underscores how times have changed. In Olde England the "right people" knew what to do when there was a scandal: Friends led a "gentleman" into his study, where his pistol hung on the wall or lay in a desk drawer, and "expected him to do the honorable thing."

But nobody expects honor from the men and women of Wall Street anymore - not even that misplaced sense of honor that leads a person to the devastation of suicide rather than the healing process of punishment, amends and restitution.

Nowadays, bankers frustrated by their profession's justly tarnished reputation merely wait for the next journalist to write a flattering profile of them. (I'm talking to you, Roger Lowenstein.) And even as they conceal their latest hapless (and possibly illegal) blunder, bankers shamelessly appear on television to pontificate about why the poor and elderly must sacrifice to pay for their misdeeds. Then they schedule their next golf date with an ex-President or two.

That's how the Financial/Industrial Complex works. Until the public demands prosecutions, bankers never have to worry paying the price for their crimes. They don't even have to worry about being revealed for what they really are:

Corrupt to the core.

Banksters Go Wild - and "The Economist" Joins the Revolution

Richard Eskow — Fri, 06 Jul 2012 11:18:36 -0400

In the ongoing scandal about Barclays' employees tampering with the "LIBOR," or London interbank lending rate - which is to say, bank fraud - The Economist offers this brilliant cover. It's not just the word "banksters," or the fact that it shows bank executives dressed like the guys in Reservoir Dogs. It's the little things, like the two guys whispering to each other, the two others on their cell phones, and - best of all - the fact that they're wearing typical bankers' power ties.

An accompanying piece in the magazine is entitled "The rotten heart of finance." If this were a movie, this is the point where the Keanu Reeves character says: Whoa.

When The Economist joins the revolution, the world may very well be seeing one of those "tipping points" we keep hearing about. The magazine, while very well written and researched, has always represented the conservative mainline of economic thinking. It spent years mocking Paul Krugman, for example, for Krugman's prophetic warnings about a housing bubble and imminent collapse.

Now it writes that the new revelations"not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right the way round the globe. This could well be global finance’s 'tobacco moment'."

The world's most prestigious, mainstream financial publication is drawing a parallel between today's banking scandals and the wave of revelations and multimillion dollar settlements that turned the public against an entire industry, eventually forcing the industry's Tobacco Institute to disband and make its records public.

Whoa.

Word to the bankers: When you've lost The Economist, you've lost pretty much everyone. There's a parallel between the magazine's blunt condemnations and the International Monetary Fund's change of heart toward austerity programs. Both The Economist and the IMF are essentially conservative, and they're typically friendly (in the IMF's case, much more than that) toward financial institutions.

But things have gone too far. Conservative or not, both The Economist and the IMF are somewhat reality-based, too,and they're rightfully concerned that greed and short-sightedness are destroying the world economy.

We owe our friend Mary Bottari an apology, too. We told her a while back that we thought "Bankster USA" wasn't the best name for the very informative website she manages. Sounds too marginal, we said.

But it's not too marginal for The Economist. Maybe this really is a "tobacco moment." Let's hope so. That moment is long overdue.

In the meantime, as Jamie Dimon said to Bob Diamond: "Why am I Mr. Pink? Why can't we pick our own colors?"

Yes Megan, Bankers Break The Law

Zach Carter — Wed, 01 Dec 2010 09:44:14 -0500

I frequently disagree with Megan McArdle, but her WikiLeaks post yesterday on struck me as simply delusional. The basic argument: megabank financiers haven’t committed any crimes, because if they had, we’d already know about it. There’s a kind of efficient-market-hypothesis ring to this, and like the efficient-market-hypothesis, it has no basis in reality. As a result of this reasoning, McArdle doesn’t think that the upcoming WikiLeaks release of bank documents will spark much in the way of criminal prosecutions. Here’s Megan:

Prosecutors have been trawling through their internal documents pretty heavily, looking for something that might help them run for higher office make a case against malfeasant bankers. They haven't found much, which is why one of their most high profile cases fell apart. You can decide for yourself whether this is because there was no criminal activity, or because bankers have had a decade of prosecutorial aggression to learn not to write anything down.

This is just wrong. Prosecutors are not trawling heavily through the internal documents of major banks. Most prosecutors aren’t white-collar crime experts, much less financial crime experts. To nail a bank, they need help from federal banking regulators. And while the SEC has slightly stepped up its enforcement game, it isn’t recommending cases for prosecution. Literally. It has recommended a grand total of zero cases for prosecution against big banks and their executives—even though the SEC itself believes that banking executives have committed some truly egregious crimes.

How do we know? From the SEC’s civil fraud suits. In finance, criminal fraud is essentially identical to civil fraud—you just need more evidence for a criminal conviction than you do to win a civil lawsuit. The SEC has brought civil cases against Goldman Sachs, Citigroup, Bank of America and Barclays and settled them all with slap-on-the-wrist zealotry. The Bear Stearns hedge fund case that McArdle links to is small potatoes compared to the accusation the SEC levied against Citigroup: lying to its shareholders about billions of dollars in subprime exposure at the height of the subprime meltdown. The penalty for Citi CFO Gary Crittenden was $100,000—roughly one-half of one percent of his $19.4 million pay in 2007.

The SEC is not alone in its inaction. As of March 3, 2010 bank regulators at the Office of the Comptroller of the Currency and the Office of Thrift Supervision have also failed to recommend a single case for criminal prosecution.

And what happens when regulators actually do turn over cases to the Justice Department? Well, the banks get away with it anyway. Wachovia got caught laundering $380 billion in Mexican drug money, a clear violation of federal law. But what happened to Wachovia? A “deferred prosecution agreement” in which the too-big-to-fail behemoth escaped indictment in exchange for a $160 million fine. No individual is currently being prosecuted in the case. And the U.N. thinks that several other major banks were doing the exact same thing in 2008 as liquidity dried up.

We’ve also had congressional hearings on Lehman Brothers’ Repo 105 scam, mortgage fraud at Washington Mutual, a damning ProPublica investigation into self-dealing in the CDO market, and Felix Salmon’s discovery of abuses in mortgage bond due diligence and disclosure. How can anybody stare at these cases and really, truly believe that banks just never actually committed any crimes? After the savings and loan crisis, more than 1,100 bankers went to jail for financial crime. Can anybody seriously believe that after a crisis several orders of magnitude greater, no major banks or their executives engaged in criminal fraud? Apparently McArdle can.

What’s more, the Government Accountability Office says that bank regulators weren’t even looking at the foreclosure process until this fall, when massive frauds began to be uncovered. If regulators aren’t even looking, they can’t recommend cases to prosecutors.

So essentially, McArdle has assumed away the problem, and in order to do so, she’s ignored dozens of major financial headlines from the past couple of years. For a financial blogger, that’s a case of massive self-delusion.

Sure, prosecutors can make a name for themselves by going after big banks. But they can also have their careers and personal lives totally destroyed by doing so. Sometimes aggressive prosecutors end up like Eliot Spitzer. Just as often, they end up like Eliot Spitzer. It’s much, much safer to target individuals and institutions with less political and economic clout than a major bank or its executives.

None of this proves that WikiLeaks has a set of smoking guns that will take down Bank of America. They might, and they might not. But to believe that a political system almost entirely captured by Big Finance has performed rigorous criminal investigations into Big Finance is ferociously naive.