Gangster Bankers: Too Big to Jail
By Matt Taibbi
How HSBC hooked up with drug traffickers and terrorists. And got away with
it
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February 14, 2013 8:00 AM ET
The
deal was announced quietly, just before the holidays, almost like the government
was hoping people were too busy hanging stockings by the fireplace to notice.
Flooring politicians, lawyers and investigators all over the world, the U.S.
Justice Department granted a total walk to executives of the British-based bank
HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they
issued a fine – $1.9 billion, or about five weeks' profit – but they didn't
extract so much as one dollar or one day in jail from any individual, despite a
decade of stupefying abuses.
People may have outrage fatigue about Wall Street, and more stories about
billionaire greedheads getting away with more stealing often cease to amaze. But
the HSBC case went miles beyond the usual paper-pushing, keypad-punching
sort-of crime, committed by geeks in ties, normally associated with Wall
Street. In this case, the bank literally got away with murder – well, aiding and
abetting it, anyway.
For at least half a decade, the storied British colonial banking power helped
to wash hundreds of millions of dollars for drug mobs, including Mexico's
Sinaloa drug cartel, suspected in tens of thousands of murders just in the past
10 years – people so totally evil, jokes former New York Attorney General Eliot
Spitzer, that "they make the guys on Wall Street look good." The bank also moved
money for organizations linked to Al Qaeda and Hezbollah, and for Russian
gangsters; helped countries like Iran, the Sudan and North Korea evade
sanctions; and, in between helping murderers and terrorists and rogue states,
aided countless common tax cheats in hiding their cash.
"They violated every goddamn law in the book," says Jack Blum, an attorney
and former Senate investigator who headed a major bribery investigation against
Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices
Act. "They took every imaginable form of illegal and illicit business."
That nobody from the bank went to jail or paid a dollar in individual fines
is nothing new in this era of financial crisis. What is different about this
settlement is that the Justice Department, for the first time, admitted why it
decided to go soft on this particular kind of criminal. It was worried that
anything more than a wrist slap for HSBC might undermine the world economy. "Had
the U.S. authorities decided to press criminal charges," said Assistant Attorney
General Lanny Breuer at a press conference to announce the settlement, "HSBC
would almost certainly have lost its banking license in the U.S., the future of
the institution would have been under threat and the entire banking system would
have been destabilized."
It was the dawn of a new era. In the years just after 9/11, even being
breathed on by a suspected terrorist could land you in extralegal detention for
the rest of your life. But now, when you're Too Big to Jail, you can cop to
laundering terrorist cash and violating the Trading With the Enemy Act, and not
only will you not be prosecuted for it, but the government will go out of its
way to make sure you won't lose your license. Some on the Hill put it to me this
way: OK, fine, no jail time, but they can't even pull their charter? Are you
kidding?
But the Justice Department wasn't finished handing out Christmas goodies. A
little over a week later, Breuer was back in front of the press, giving a cushy
deal to another huge international firm, the Swiss bank UBS, which had just
admitted to a key role in perhaps the biggest antitrust/price-fixing case in
history, the so-called LIBOR scandal, a massive interest-raterigging conspiracy
involving hundreds of trillions ("trillions," with a "t") of dollars in
financial products. While two minor players did face charges, Breuer and the
Justice Department worried aloud about global stability as they explained why no
criminal charges were being filed against the parent company.
"Our goal here," Breuer said, "is not to destroy a major financial
institution."
A reporter at the UBS presser pointed out to Breuer that UBS had already been
busted in 2009 in a major tax-evasion case, and asked a sensible question. "This
is a bank that has broken the law before," the reporter said. "So why not be
tougher?"
"I don't know what tougher means," answered the assistant attorney
general.
Also
known as the Hong Kong and Shanghai Banking Corporation, HSBC has always been
associated with drugs. Founded in 1865, HSBC became the major commercial bank in
colonial China after the conclusion of the Second Opium War. If you're rusty in
your history of Britain's various wars of Imperial Rape, the Second Opium War
was the one where Britain and other European powers basically slaughtered lots
of Chinese people until they agreed to legalize the dope trade (much like they
had done in the First Opium War, which ended in 1842).
A century and a half later, it appears not much has changed. With its strong
on-the-ground presence in many of the various ex-colonial territories in Asia
and Africa, and its rich history of cross-cultural moral flexibility, HSBC has a
very different international footprint than other Too Big to Fail banks like
Wells Fargo or Bank of America. While the American banking behemoths mainly
gorged themselves on the toxic residential-mortgage trade that caused the 2008
financial bubble, HSBC took a slightly different path, turning itself into the
destination bank for domestic and international scoundrels of every possible
persuasion.
Three-time losers doing life in California prisons for street felonies might
be surprised to learn that the no-jail settlement Lanny Breuer worked out for
HSBC was already the bank's third strike. In fact, as a mortifying 334-page
report issued by the Senate Permanent Subcommittee on Investigations last summer
made plain, HSBC ignored a truly awesome quantity of official warnings.
In April 2003, with 9/11 still fresh in the minds of American regulators, the
Federal Reserve sent HSBC's American subsidiary a cease-and-desist letter,
ordering it to clean up its act and make a better effort to keep criminals and
terrorists from opening accounts at its bank. One of the bank's bigger
customers, for instance, was Saudi Arabia's Al Rajhi bank, which had been linked
by the CIA and other government agencies to terrorism. According to a document
cited in a Senate report, one of the bank's founders, Sulaiman bin Abdul Aziz Al
Rajhi, was among 20 early financiers of Al Qaeda, a member of what Osama bin
Laden himself apparently called the "Golden Chain." In 2003, the CIA wrote a
confidential report about the bank, describing Al Rajhi as a "conduit for
extremist finance." In the report, details of which leaked to the public by
2007, the agency noted that Sulaiman Al Rajhi consciously worked to help Islamic
"charities" hide their true nature, ordering the bank's board to "explore
financial instruments that would allow the bank's charitable contributions to
avoid official Saudi scrutiny." (The bank has denied any role in financing
extremists.)
2.
In January 2005, while under the cloud of its first double-secret-probation
agreement with the U.S., HSBC decided to partially sever ties with Al Rajhi.
Note the word "partially": The decision would only apply to Al Rajhi banking
and not to its related trading company, a distinction that tickled executives
inside the bank. In March 2005, Alan Ketley, a compliance officer for HSBC's
American subsidiary, HBUS, gleefully told Paul Plesser, head of his bank's
Global Foreign Exchange Department, that it was cool to do business with Al
Rajhi Trading. "Looks like you're fine to continue dealing with Al Rajhi," he
wrote. "You'd better be making lots of money!"
But this backdoor arrangement with bin Laden's suspected "Golden Chain"
banker wasn't direct enough – many HSBC executives wanted the whole shebang
restored. In a remarkable e-mail sent in May 2005, Christopher Lok, HSBC's head
of global bank notes, asked a colleague if they could maybe go back to fully
doing business with Al Rajhi as soon as one of America's primary banking
regulators, the Office of the Comptroller of the Currency, lifted the 2003
cease-and-desist order: "After the OCC closeout and that chapter is hopefully
finished, could we revisit Al Rajhi again? London compliance has taken a more
lenient view."
After being slapped with the order in 2003, HSBC began blowing off its
requirements both in letter and in spirit – and on a mass scale, too. Instead of
punishing the bank, though, the government's response was to send it more angry
letters. Typically, those came in the form of so-called "MRA" (Matters Requiring
Attention) letters sent by the OCC. Most of these touched upon the same theme,
i.e., HSBC failing to do due diligence on the shady characters who might be
depositing money in its accounts or using its branches to wire money. HSBC
racked up these "You're Still Screwing Up and We Know It" orders by the dozen,
and in just one brief stretch between 2005 and 2006, it received 30 different
formal warnings.
Nonetheless, in February 2006 the OCC under George Bush suddenly decided to
release HSBC from the 2003 cease-and-desist order. In other words, HSBC
basically violated its parole 30 times in just more than a year and got off
anyway. The bank was, to use the street term, "off paper" – and free to let the
Al Rajhis of the world come rushing back.
After HSBC fully restored its relationship with the apparently
terrorist-friendly Al Rajhi Bank in Saudi Arabia, it supplied the bank with
nearly 1 billion U.S. dollars. When asked by HSBC what it needed all its
American cash for, Al Rajhi explained that people in Saudi Arabia need dollars
for all sorts of reasons. "During summer time," the bank wrote, "we have a high
demand from tourists traveling for their vacations."
The Treasury Department keeps a list compiled by the Office of Foreign Assets
Control, or OFAC, and American banks are not supposed to do business with anyone
on the OFAC list. But the bank knowingly helped banned individuals elude the
sanctions process. One such individual was the powerful Syrian businessman Rami
Makhlouf, a close confidant of the Assad family. When Makhlouf appeared on the
OFAC list in 2008, HSBC responded not by severing ties with him but by trying to
figure out what to do about the accounts the Syrian power broker had in its
Geneva and Cayman Islands branches. "We have determined that accounts held in
the Caymans are not in the jurisdiction of, and are not housed on any systems
in, the United States," wrote one compliance officer. "Therefore, we will not be
reporting this match to OFAC."
Translation: We know the guy's on a terrorist list, but his accounts are in a
place the Americans can't search, so screw them.
Remember, this was in 2008 – five years after HSBC had first been caught
doing this sort of thing. And even four years after that, when being grilled by
Michigan Sen. Carl Levin in July 2012, an HSBC executive refused to absolutely
say that the bank would inform the government if Makhlouf or another OFAC-listed
name popped up in its system – saying only that it would "do everything we
can."
The Senate exchange highlighted an extremely frustrating dynamic government
investigators have had to face with Too Big to Jail megabanks: The same thing
that makes them so attractive to shady customers – their ability to
instantaneously move money around the world to places like the Cayman Islands
and Switzerland – makes it easy for them to play dumb with regulators by hiding
behind secrecy laws.
When it wasn't banking for shady Third World characters, HSBC was training
its mental firepower on the problem of finding creative ways to allow it to do
business with countries under U.S. sanction, particularly Iran. In one memo from
HSBC's Middle East subsidiary, HBME, the bank notes that it could make a lot of
money with Iran, provided it dealt with what it termed "difficulties" – you
know, those pesky laws.
"It is anticipated that Iran will become a source of increasing income for
the group going forward," the memo says, "and if we are to achieve this goal we
must adopt a positive stance when encountering difficulties."
The "positive stance" included a technique called "stripping," in which
foreign subsidiaries like HSBC Middle East or HSBC Europe would remove
references to Iran in wire transactions to and from the United States, often
putting themselves in place of the actual client name to avoid triggering OFAC
alerts. (In other words, the transaction would have HBME listed on one end,
instead of an Iranian client.)
For more than half a decade, a whopping $19 billion in transactions involving
Iran went through the American financial system, with the Iranian connection
kept hidden in 75 to 90 percent of those transactions. HSBC has been
headquartered in England for more than two decades – it's Europe's largest bank,
in fact – but it has major subsidiary operations in every corner of the world.
What's come out in this investigation is that the chiefs in the parent company
often knew about shady transactions when the regional subsidiary did not. In the
case of banned Iranian transactions, for instance, there are multiple e-mails
from HSBC's compliance head, David Bagley, in which he admits that HSBC's
American subsidiary probably has no clue that HSBC Europe has been sending it
buttloads of banned Iranian money.
"I am not sure that HBUS are aware of the fact that HBEU are already
providing clearing facilities for four Iranian banks," he wrote in 2003. The
following year, he made the same observation. "I suspect that HBUS are not aware
that [Iranian] payments may be passing through them," he wrote.
What's the upside for a bank like HSBC to do business with banned
individuals, crooks and so on? The answer is simple: "If you have clients who
are interested in 'specialty services' – that's the euphemism for the bad stuff
– you can charge 'em whatever you want," says former Senate investigator Blum.
"The margin on laundered money for years has been roughly 20 percent."
Those charges might come in many forms, from upfront fees to promises to keep
deposits at the bank for certain lengths of time. However you structure it, the
possibilities for profit are enormous, provided you're willing to accept money
from almost anywhere. HSBC, its roots in the raw battlefield capitalism of the
old British colonies and its strong presence in Asia, Africa and the Middle
East, had more access to customers needing "specialty services" than perhaps any
other bank.
And it worked hard to satisfy those customers. In perhaps the pinnacle
innovation in the history of sleazy banking practices, HSBC ran a preposterous
offshore operation in Mexico that allowed anyone to walk into any HSBC Mexico
branch and open a U.S.-dollar account (HSBC Mexico accounts had to be in pesos)
via a so-called "Cayman Islands branch" of HSBC Mexico. The evidence suggests
customers barely had to submit a real name and address, much less explain the
legitimate origins of their deposits.
If you can imagine a drive-thru heart-transplant clinic or an airline that
keeps a fully-stocked minibar in the cockpit of every airplane, you're in the
ballpark of grasping the regulatory absurdity of HSBC Mexico's "Cayman Islands
branch." The whole thing was a pure shell company, run by Mexicans in Mexican
bank branches.
At one point, this figment of the bank's corporate imagination had 50,000
clients, holding a total of $2.1 billion in assets. In 2002, an internal audit
found that 41 percent of reviewed accounts had incomplete client information.
Six years later, an e-mail from a high-ranking HSBC employee noted that 15
percent of customers didn't even have a file. "How do you locate clients when
you have no file?" complained the executive.
It wasn't until it was discovered that these accounts were being used to pay
a U.S. company allegedly supplying aircraft to Mexican drug dealers that HSBC
took action, and even then it closed only some of the "Cayman Islands branch"
accounts. As late as 2012, when HSBC executives were being dragged before the
U.S. Senate, the bank still had 20,000 such accounts worth some $670 million –
and under oath would only say that the bank was "in the process" of closing
them.
Meanwhile, throughout all of this time, U.S. regulators kept examining HSBC.
In an absurdist pattern that would continue through the 2000s, OCC examiners
would conduct annual reviews, find the same disturbing shit they'd found for
years, and then write about the bank's problems as though they were being
discovered for the first time. From the 2006 annual OCC review: "During the
year, we identified a number of areas lacking consistent, vigilant adherence to
BSA/AML policies. . . . Management responded positively and initiated steps to
correct weaknesses and improve conformance with bank policy. We will validate
corrective action in the next examination cycle."
Translation: These guys are assholes, but they admit it, so it's cool and we
won't do anything.
A year later, on July 24th, 2007, OCC had this to say: "During the past year,
examiners identified a number of common themes, in that businesses lacked
consistent, vigilant adherence to BSA/AML policies. Bank policies are
acceptable. . . . Management continues to respond positively and initiated steps
to improve conformance with bank policy."
Translation: They're still assholes, but we've alerted them to the problem
and everything'll be cool.
By then, HSBC's lax money-laundering controls had infected virtually the
entire company. Russians identifying themselves as used-car salesmen were at one
point depositing $500,000 a day into HSBC, mainly through a bent
traveler's-checks operation in Japan. The company's special banking program for
foreign embassies was so completely fucked that it had suspicious-activity
alerts backed up by the thousands. There is also strong evidence that the bank
was allowing clients in Sudan, Cuba, Burma and North Korea to evade
sanctions.
When one of the company's compliance chiefs, Carolyn Wind, raised concerns
that she didn't have enough staff to monitor suspicious activities at a board
meeting in 2007, she was fired. The sheer balls it took for the bank to ignore
its compliance executives and continue taking money from so many different shady
sources while ostensibly it had regulators swarming all over its every move is
incredible. "You can't make up more egregious money-laundering that permeated an
entire institution," says Spitzer.
By the late 2000s, other law enforcement agencies were beginning to catch
HSBC's scent. The Department of Homeland Security started investigating HSBC for
laundering drug money, while the attorney general's office in West Virginia
snooped around HSBC's involvement in a Medicare-fraud case. A federal
intra-agency meeting was convened in Washington in September 2009, at which it
was determined that HSBC was out of control and needed to be investigated more
closely.
The bank itself was then notified that its usual OCC review was being
"expanded." More OCC staff was assigned to pore through HSBC's books, and, among
other things, they found a backlog of 17,000 alerts of suspicious activity that
had not been processed. They also noted that the bank had a similar pileup of
subpoenas in money-laundering cases.
Finally it seemed the government was on the verge of becoming genuinely
pissed off. In March 2010, after seeing countless ultimatums ignored, they
issued one more, giving HSBC three months to clear that goddamned 17,000-alert
backlog or else there would be serious consequences. HSBC met that deadline, but
months later the OCC again found the bank's money-laundering controls seriously
wanting, forcing the government to take, well . . . drastic action, right?
Sort of! In October 2010, the OCC took a deep breath, strapped on its big-boy
pants and . . . issued a second cease-and-desist order!
In other words, it was "Don't Do It Again" – again. The punishment for all of
that dastardly defiance was to bring the regulatory process right back to the
same kind of double-secret-probation order they'd tried in 2003.
Not to say that HSBC didn't make changes after the second Don't Do It Again
order. It did – it hired some people.
No. 3
In
the summer of 2010, 25-year-old Everett Stern was just out of business school,
fighting a mild case of wanderlust and looking for a job but also for adventure.
His dream was to be a CIA agent, battling bad guys and snatching up Middle
Eastern terrorists. He applied to the agency's clandestine service, had an
interview even, but just before graduation, the bespectacled, youthfully
exuberant Stern was turned down.
He was crushed, but then he found an online job posting that piqued his
interest. HSBC, a major international bank, was looking for people to help with
its anti-money-laundering program. "I thought this was exactly what I wanted to
do," he says. "It sounded so exciting."
Stern went up to HSBC's offices in New Castle, Delaware, for an interview,
and that October, just days after the OCC issued the second Don't Do It Again
letter, he started work as part of HSBC's "expanded" antimoney-laundering
program.
From the outset, Stern knew there was something weird about his job. "I had
to go to the library to take out books on money-laundering," Stern says now,
laughing. "That's how bad it was." There were no training courses or seminars on
money-laundering – what it was, how to detect it. His work mainly consisted of
looking up the names of unsavory characters on the Internet and then running
them through the bank's internal systems to see if they popped up on any account
names anywhere.
Even weirder, nobody seemed to care if anybody was doing any actual work. The
Delaware office was mostly empty for a long while, just a giant unpainted room
with a few hastily arranged cubicles and only a dozen or so people in it, and
nobody really watching any of the workers. Stern and a fellow co-worker would
routinely finish all their work by 10:30 in the morning, then spend a few hours
throwing rocks into a quarry located behind the bank offices. Then they would go
back to their cubicles and hang out until 3 p.m. or so, or until it was at least
plausible that they'd put in a real workday. "If we asked for any more work,"
Stern says, "they got angry."
Stern earned a starting salary of $54,900.
Soon enough, though, out of boredom and also maybe a little bit of
patriotism, Stern started to sift through some of the backlogged alerts and
tried to make sense of them. Almost immediately, he found a series of deeply
concerning transactions. There was an exchange company wiring large sums of
money to untraceable destinations in the Middle East. A Saudi fruit company was
sending millions, Stern found with a simple Internet search, to a high-ranking
figure in the Yemeni wing of the Muslim Brotherhood. Stern even learned that
HSBC was allowing millions of dollars to be moved from the Karaiba chain of
supermarkets in Africa to a firm called Tajco, run by the Tajideen brothers,
who had been singled out by the Treasury Department as major financiers of
Hezbollah.
Every time Stern brought one of these discoveries to his bosses, they rolled
their eyes at him, if not worse. When he alerted his boss that a shipping
company with ties to Iran was doing a lot of business with the bank, he blew up.
"You called me over for this?" the boss snapped.
Soon after, the empty office started to fill up. What HSBC did in the way of
hiring new staff was actually pretty clever. It liquidated its
credit-card-collections unit and moved the bulk of the employees over to the
anti-money-laundering department. Again, without really training anyone at all,
it put hundreds of loud, gum-chewing, mostly uneducated, occasionally rowdy
call-center workers on a new gig, turning them into money-laundering
investigators.
Stern says his co-workers not only sucked at their jobs, they didn't even
know what their jobs were. "You could walk into that building today," he says,
"and ask anyone there what moneylaundering is – and I guarantee you, no one
will know."
When something fishy pops up in connection with a bank account, the bank
generates an alert. An alert can be birthed by almost anything, from someone
wiring $9,999 (to keep under the $10K reporting level) to someone wiring large
sums in round numbers to someone else opening an account with a phony-sounding
name or address.
When an alert gets generated, the bank is supposed to promptly investigate
the matter. If the bank doesn't clear the alert, it creates a "Suspicious
Activity Report," which is handed over to the Treasury Department to be
investigated.
Stern then found himself in the middle of a perverse sort-of anticompliance
mechanism. HSBC had "complied" with the government's Don't Do It Again, Again
order by hiring hundreds of bodies whom it turned into an army for whitewashing
suspicious transactions. Remember, the complaint against HSBC was not so much
that it had specifically allowed terrorist or drug money through, but that it
had allowed suspicious accounts to pile up without being checked.
The boss at Stern's Delaware office gave his new team goals: Everyone was to
try to clear 72 alerts a week. For those of you keeping score at home, that's
nearly two alerts investigated and cleared every hour. According to Stern,
almost any kind of information was good enough to clear an alert. "Basically, if
a company had a website, you could clear them," he says.
Soon enough, HSBC's compliance executives were circulating cheery e-mails.
"Great job by some Delaware professionals in the early part of the week," wrote
Stern's boss on June 30th, 2011. The e-mail was subject-lined, "The 60-plus
crowd," signifying accolades to employees who had cleared more than 60
suspicious transactions that week.
After trying in vain to convince his bosses to at least let him do his job
and look for money-laundering, Stern decided to turn whistle-blower, telling the
FBI and other agencies what was going on at the bank. He left work at HSBC in
2011, fully expecting that the government would drop the hammer on his former
employers.
By that time, numerous agencies, including the Department of Homeland
Security, had crawled all the way up HSBC's backside, among other things
examining it as part of a major international narcotics investigation. In one
four-year period between 2006 and 2009, an astonishing $200 trillion in wire
transfers (including from high-risk countries like Mexico) went through without
any monitoring at all. The bank also failed to do due diligence on the purchase
of an incredible $9 billion in physical U.S. dollars from Mexico and played a
key role in the so-called Black Market Peso Exchange, which allowed drug cartels
in both Mexico and Colombia to convert U.S. dollars from drug sales into pesos
to be used back home. Drug agents discovered that dealers in Mexico were
building special cash boxes to fit the precise dimensions of HSBC teller
windows.
Former bailout inspector and federal prosecutor Neil Barofsky, who has helped
secure numerous foreign money-laundering indictments, points out that the people
HSBC was doing business with, like Colombia's Norte del Valle and Mexico's
Sinaloa cartels, were "the worst trafficking organizations imaginable" – groups
that don't just commit murder on a mass scale but are known for beheadings,
torture videos ("the new thing now," he says) and other atrocities, none of
which happens without money launderers. It's for this reason, Barofsky says,
that drug prosecutors are not shy about dropping heavy prison sentences on
launderers. "Frankly, our view of money-laundering was that it was on par with,
and as significant as, the traffickers themselves," he says.
Barofsky was involved in the first extradition of a Colombian national (Pablo
Trujillo, a member of the same cartel that HSBC moved money for) on
moneylaundering charges. "That guy got 10 years," says Barofsky. "HSBC was
doing the same thing, only on a much larger scale than my schmuck was
doing."
Clearly, HSBC had violated the 2010 Don't Do It Again, Again order. Everett
Stern saw it with his own eyes; so did the OCC and the U.S. Senate, whose
Permanent Subcommittee on Investigations decided to target the company for a
yearlong investigation into global money-laundering. The bank itself, in
response to the Senate investigation, acknowledged that it had "sometimes failed
to meet the standards that regulators and customers expect." It would later go
on to say that it was even "profoundly sorry."
A few days after Thanksgiving 2012, Stern heard that the Justice Department
was about to announce a settlement. Since he'd left HSBC the year before, he'd
had a rough time. Going public with his allegations had left him emotionally and
financially devastated. He'd been unable to find a job, and at one point even
applied for welfare. But now that the feds were finally about to drop the hammer
on HSBC, he figured he'd have the satisfaction of knowing that his sacrifice had
been worthwhile.
So he went to New York and sat in a hotel room, waiting for reporters to call
for his comments. When he heard the news that the "punishment" Breuer had
announced was a deferred prosecution agreement – a Don't Do It Again, Again,
Again agreement, if you will – he was flabbergasted.
"I thought, 'All that, for nothing?' " he says. "I couldn't believe it."
The
writer Ambrose Bierce once said there's only one thing in the world worse than a
clarinet: two clarinets. In the same vein, there's only one thing worse than a
totally corrupt bank: many corrupt banks.
If the HSBC deal showed how much dastardly crap the state could tolerate from
one bank, Breuer was back a week later to show that the government would go just
as easy on banks that team up with other banks to perpetrate even bigger
scandals. On December 19th, 2012, he announced that the Justice Department was
essentially letting Swiss banking giant UBS off the hook for its part in what is
likely the biggest financial scam of all time.
The so-called LIBOR scandal, which is at the heart of the UBS settlement,
makes Enron look like a parking violation. Many of the world's biggest banks,
including Switzerland's UBS, Britain's Barclays and the Royal Bank of Scotland,
got together and secretly conspired to manipulate the London Interbank Offered
Rate, or LIBOR, which measures the rate at which banks lend to each other. Many,
if not most, interest rates are pegged to LIBOR. The prices of hundreds of
trillions of dollars of financial products are tied to LIBOR, everything from
commercial loans to credit cards to mortgages to municipal bonds to swaps and
currencies.
If you can imagine executives at Ford, GM, Mitsubishi, BMW and Mercedes
getting together every morning to fix the prices of aluminum and stainless
steel, you have a rough idea of what the LIBOR scandal is like, except that in
the car-company analogy, you'd be dealing with absurdly smaller numbers. These
are the world's biggest banks getting together every morning to essentially fix
the price of money. Low LIBOR rates are an indicator that banks are strong and
healthy. These banks were faking the results of their daily physicals. In
banking terms, they were juicing.
No. 4
Two different types of manipulation took place. In 2008, during the heat of
the global crash, banks artificially submitted low rates in order to present an
image of financial soundness to the markets. But at other times over the course
of years, individual traders schemed to move rates up or down in order to profit
on individual trades.
There is nobody anywhere growing weed strong enough to help the human mind
grasp the enormity of this crime. It's a conspiracy so massive that the lawyers
who are suing the banks are having an extremely difficult time figuring out how
to calculate the damage.
Here's how it works: Every morning, 16 of the world's largest banks submit
numbers to a Londonbased panel indicating what interest rates they're charging
other banks to borrow money and what they themselves are charged. The LIBOR
panel then takes those 16 different interest rates, tosses out the four highest
and the four lowest, and averages out the remaining eight to create that day's
LIBOR rates – the basis for interest rates almost everywhere in the world.
The fact that the LIBOR panel tosses out the four highest and lowest numbers
every day is an important detail, because it means that it is difficult to
artificially influence the final rate unless multiple banks are conspiring with
each other. One bank lying its ass off and reporting that banks are lending
money to each other basically for free doesn't move the needle much. To really
be sure you're creating an artificially low or high interest rate, you need a
bunch of banks on board – and it turns out that they were.
For perhaps as far back as 20 years, banks have been submitting phony
numbers, often in concert with other banks. They did it for a variety of
reasons, but the big one, typically, is that a bank trader is holding some
investment tied to LIBOR – bundles of currencies, municipal bonds, mortgages,
whatever – that would earn more money if the interest rate was lower. So what
would happen is, some schmuck trader at Bank X would call the LIBOR submitter
and offer him cash, booze, a blow job or just a pat on the back to get him to
submit a fake number that day.
The scandal first blew up last year when the British megabank Barclays
admitted to its part in the fixing of LIBOR rates. British regulators released a
cache of disgusting e-mails showing traders from many different banks cheerfully
monkeying around with your credit-card bills, your mortgage rates, your tax
bill, your IRA account, etc., so that they could make out better on some sordid
trade they had on that day. In one case, a trader from an unnamed bank sent an
e-mail to a Barclays trader thanking him for helping to fix interest rates and
promising a kickass bottle of bubbly for his efforts:
"Dude. I owe you big time! Come over one day after work, and I'm opening a
bottle of Bollinger."
UBS was the next bank to confess, and its settlement – $1.5 billion in fines
– was much the same, only the e-mails released were, if anything, more
disgusting and damning. The British Financial Services Authority – equivalent to
our SEC – discovered thousands of requests to fudge rates over a period of years
involving dozens of different individuals and multiple banks. In many cases, the
misdeeds were committed more or less openly, in writing, with traders and
brokers baldly offering bribes in texts and e-mails with an obvious unconcern
for punishment that later, sadly, proved justified.
"I will fucking do one humongous deal with you," begged one UBS trader who
wanted a broker to fix the rate. "I'll pay, you know, $50,000, $100,000."
British regulators aren't hiding the size of the scandal. The UBS settlement
demonstrated, without a doubt, that the LIBOR scandal involved more than just
one or two banks, and probably involved hundreds of people at many of the
world's largest and most prestigious financial institutions – in other words, a
truly epic case of anti-competitive collusion that called into question whether
the world's biggest banks are innovating a new, not-entirely capitalist form of
high finance. "We have said there are five further institutions under
investigation," says Christopher Hamilton of the FSA. "And there is a large
number of individuals as well." (At press time, another bank, the Royal Bank of
Scotland, also settled for LIBOR-related offenses.)
This dovetailed with what Bob Diamond, the former head of Barclays, told the
British Parliament the day after he stepped down last year. "There is an
industrywide problem coming out now," he said. Michael Hausfeld, a famed
class-action lawyer who is suing the banks over LIBOR on behalf of cities like
Baltimore whose investments lost money when interest rates were lowered, says
the public still hasn't grasped the importance of comments like Diamond's.
"Diamond essentially said, 'This is an industrywide problem,'" Hausfeld says.
"But nobody has defined what
this is yet."
Hausfeld's point – that Diamond's "industrywide problem" might be more than
just a few guys messing with rates; it could be a systemic effort to pervert
capitalism itself – underscores the extreme miscalculation of both recent
no-prosecution deals.
At HSBC, the bank did more than avert its eyes to a few shady transactions.
It repeatedly defied government orders as it made a conscious, years-long effort
to completely stop discriminating between illegitimate and legitimate money. And
when it somehow talked the U.S. government into crafting a settlement over these
offenses with the lunatic aim of preserving the bank's license, it succeeded,
finally, in making crime mainstream.
UBS, meanwhile, was a similarly elemental case, in which the offenses didn't
just violate the letter of the law – they threatened the integrity of the
competitive system. If you're going to let hundreds of boozed-up bankers spend
every morning sending goofball e-mails to each other, giving each other
superhero nicknames while they rigged the cost of money (spelling-challenged
UBS traders dubbed themselves, among other things, "captain caos," the "three
muscateers" and "Superman"), you might as well give up on capitalism entirely
and just declare the 16 biggest banks in the world the International Bureau of
Prices.
Thus, in the space of just a few weeks, regulators in Britain and America
teamed up to declare near-total surrender to both crime and monopoly. This was
more than a couple of cases of letting rich guys walk. These were major policy
decisions that will reverberate for the next generation.
Even worse than the actual settlements was the explanation Breuer offered for
them. "In the world today of large institutions, where much of the financial
world is based on confidence," he said, "a right resolution is to ensure that
counter-parties don't flee an institution, that jobs are not lost, that there's
not some world economic event that's disproportionate to the resolution we
want."
In other words, Breuer is saying the banks have us by the balls, that the
social cost of putting their executives in jail might end up being larger than
the cost of letting them get away with, well, anything.
This is bullshit, and exactly the opposite of the truth, but it's what our
current government believes. From JonBenet to O.J. to Robert Blake, Americans
have long understood that the rich get good lawyers and get off, while the poor
suck eggs and do time. But this is something different. This is the government
admitting to being afraid to prosecute the very powerful – something it never
did even in the heydays of Al Capone or Pablo Escobar, something it didn't do
even with Richard Nixon. And when you admit that some people are too important
to prosecute, it's just a few short steps to the obvious corollary – that
everybody else is unimportant enough to jail.
An arrestable class and an unarrestable class. We always suspected it, now
it's admitted. So what do we do?
This story is from the February 28th, 2013 issue of Rolling
Stone.
Read more:
http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214page=4#ixzz2qLGoURcz
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