In January 2011, a 10-member US Congressional commission chaired by former California State Treasurer Philip L. Angelides delivered a damning 662 page report that concluded, among other things, that the 2008 global financial meltdown was avoidable, the result of human action and inaction.
The report noted, in bold-faced type, that there was widespread failure in financial regulation and supervision and dramatic failures of corporate governance and risk management at important financial institutions, that a combination of excessive borrowing, risky investment and lack of transparency put the financial system on a course for crisis.
The government, the report found, was ill prepared for the crisis and there was a systemic breakdown in accountability and ethics, collapsing mortgage-lending standards and the mortgage securitization pipeline; over-the-counter derivatives contributed significantly to the crisis and credit rating agencies failed to do their jobs.
That was three and a half years ago. The report, the Financial Crisis Inquiry Report issued by the US Senate Homeland Security Permanent Subcommittee on Investigations, might well have been put onto a little boat and sailed off the end of the earth despite the anguished cries of the bankers. It is extremely well-written, containing phrases like this: “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.”
And nobody went to jail. The “captains of finance and the public stewards” were largely able to derail any meaningful financial legislation that would prevent a similar crisis from erupting again. While the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 by Congress did put some teeth into law, the lobbyists by and large won.
This is relevant to Asia because on November 12, it was announced that six banks including Hong Kong’s very own HSBC, would pay US$4.2 billion in fines for the rigging of foreign exchange benchmarks. There are expected to be negotiations over related ongoing probes that could bear much more severe consequences. But the odds are slim indeed that anybody is going to go to jail.
Nearly all of these banks are repeat offenders of various stripes. HSBC announced in December 2012 that it would pay US$1.92 billion over charges it had laundered billions of dollars for Iran and other nations and enabled Mexican drug cartels to move money illegally through its American subsidiaries. Citibank has been at it since at least 1932, when it was known as National City Bank. Charles Mitchell, then the bank’s president, acknowledged that the bank had knowingly sold shoddy investments to clients, often financed by borrowed money. Mitchell was indicted for tax evasion but was acquitted after paying a US$1 million civil fine.
The Switzerland-based UBS has been dragged in numerous times, including for a multi-billion dollar tax evasion case, for manipulation of the silver and gold markets in 2014, for conspiracy to rig bids in the municipal bond markets in the US from 2001 to 2006 and other charges.
In the current forex rigging case, according to Bloomberg, 30 other banks are being forced to revise their forex trading regimes. The first banks settled at least two years ago with US and UK regulators over allegations that they had rigged the London interbank offered rate, a benchmark interest rate used in $300 trillion of securities including swaps and home loans. A dozen firms have so far been fined at least $6.5 billion in investigations related to Libor and its derivatives. UBS was fined about $1.5 billion in that probe.
Other than a few small fish, nobody has gone to jail in any of these cases. It looks like no one will. The bankers will tell you that moral hazard would stop such fiascoes as the default on sovereign loans by Argentina, or the mortgage defaults of hapless US, Brit, Spanish and other homeowners. The poorhouse would stop them, the bankers say, and the bankruptcy laws must be tightened! Nobody seems to have mentioned the thought of the moral hazard of a few years in a US federal detention facility or a British prison, But a good time could by had by all in rubbing shoulders with the desperadoes, pantyhose over their heads, pistols in hand, who try their luck at the tellers' windows
The most egregious case was detailed by journalist Matt Taibbi, writing in the Noveber 6 esition Rolling Stone Magazine, who pointed out that while JPMorgan Chase supposedly paid a US$13 billion settlement for fraudulent activity, “$4 billion of the settlement was largely an accounting falsehood, a chunk of bogus ‘consumer relief’ added to make the payoff look bigger. What the public never grasped about these consumer-relief deals is that the ‘relief’ is often not paid by the bank, which mostly just services the loans, but by the bank's other victims, i.e., the investors in their bad mortgage securities.” The bank was able to take a tax write-off on another US$7 billion of the settlement.
Chase was allowed to sign a 10-and-a-half-page statement of facts that obfuscated its responsibility. Jamie Dimon, the head of the bank, received a raise from the board of directors and the bank’s stock rose on announcement of the settlement.
In the first half of the last century, the legendary American bank robber Willie “the Actor” Sutton stole an estimated US$2 million from US banks, was sentenced to prison multiple times and escaped at least three times to take up his career again. According to legend, he was once asked why he robbed banks. He is said to have replied “Because that’s where the money is.”