Deemed Too Big for Jail, Banks Just Write Checks

There was once a time when criminals like John Dillinger and Willie Sutton made headlines and won fame for robbing dozens of banks. This last decade has seen a reversal of roles. Now dozens of banks have been robbing us.

They played a major role in triggering the worst recession since the Great Depression by selling mortgages that could never be repaid and bundling them into putrescent securities peddled around an unsuspecting world. They have been caught reporting false interest rate data for years to rig LIBOR — the overnight interbank lending rate used around the globe as a basis for every transaction with an interest component. And most recently a passel of banks have been caught laundering billions of dollars for Mexican drug cartels and in violation of sanctions against Iran.

And yet, as the media keeps reminding us, not a single bank executive has gone to jail. They must be laughing all the way to their banks. The authorities tell us nothing to see. Just move along.

Attorney General Eric Holder said that the Obama Administration’s “record of success has been nothing less than historic”. What he failed to clarify was that he didn’t mean criminal prosecutions. Instead, the Justice Department, the Securities and Exchange Commission (SEC) and other regulators have acquired a pronounced preference for money. Prosecution is too complicated.

And they’ve been bought off cheap. The amounts sound staggering, but they usually represent just a month or two of profits for the behemoth banks, which find it effortless to write checks that make the problem go away.

It doesn’t make for thrilling reading, but we thought to present something of scorecard of all the more recent bank malefactions, in rough chronological order. Here goes:

In July of 2010 Goldman Sachs agreed to pay what was then a record $550 million to settle SEC charges related to a subprime mortgage collateralized debt obligation (CDO) known as Abacus. Hedge fund Paulson & Co. was allowed to design the security, deliberately choosing the worst mortgages. Goldman sold the junk to trusting customers while at the same both Goldman and and Paulson placed huge sure-thing bets that the portfolio would fail.

Wells Fargo, in a quarter in which the bank’s revenues were $20 billion, was fined $85 million in July of 2011 and was ordered to “compensate customers it had unfairly — indeed illegally — taken advantage of during the subprime bubble” but, as had become standard practice by the Obama government, was not required to admit guilt.

Washington Mutual collapsed in 2008 — the largest bank failure in U.S. history. In December of 2011 a settlement was reached between the Federal Deposit Insurance Corporation and three former executives for $64.7 million. Most was paid from the bank’s directors and officers liability insurance. But the FDIC required that the three pay something. One of them, for example, had to pony up $275,000 in cash and give up $7.5 million of his retirement account. Not to worry about him: he was paid $88 million across eight years and, of course, there were no criminal charges.

A $25 billion settlement was struck in February of 2012 that forced five of the nation’s largest banks — Ally, Bank of America, Citigroup, JPMorgan and Wells Fargo –to reduce loan balances for many borrowers who owed more than their houses were worth. The banks had had used assembly line practices to speed foreclosures, most infamously signing documents with fake names in a practice that became known as “robo-signing”.

Deutsche Bank agreed in May 2012 to pay above $200 million to the U.S. government to quell accusations that it deliberately misled the Department of Housing and Urban Development (HUD) about the quality of mortgages one of the bank’s traders described as “pigs”. The mortgages would later default, costing taxpayers about $368 million.

June saw Dutch bank ING pay a $619 million fine to the Treasury Department for altering records and secretly transferring more than $2 billion on behalf of entities trading with sanctioned countries Iran, Cuba, Myanmar, Sudan and Libya prior to 2007. The Justice Department has signed similar agreements with Wachovia, Union Bank of California, Lloyds, Credit Suisse, ABN Amro Holding, Barclays and Standard Charter to quash accusations that they facilitated prohibited financial transactions.

Also in June, Barclays the U.K.’s 2nd largest bank, admitted that between 2005 and 2009 it had deliberately fabricated the borrowing costs it reported to influence the nightly setting of LIBOR, the benchmark that reports the composite rate at which banks lend to each other and which influences the continuous valuations of the approximately $450 trillion in derivative contracts around the world. Barclays was fined $450 million and secured what is called a non-prosecution agreement, guaranteeing that no one would face criminal charges, because of what the Justice Department called its “extraordinary” cooperation. It was then discovered that in 2008, when Timothy Geithner was its chief, the Federal Reserve Bank of New York had been told of interest rate manipulation by a Barclay employee, but nothing was done about it.

Standard Charter, a British bank, agreed in August to pay New York’s regulator $340 million for laundering hundreds of billions of dollars in tainted money for Iran.

Also in August, Citigroup was forced to pay $590 million for deceiving investors by hiding from them the extent of its dealings in the toxic subprime market. Citi denied the charge. They were settling solely “to eliminate the uncertainties, burden and expense of further protracted litigation”.

Come October of last year, the U.S. accused Bank of America of “brazen” mortgage fraud. Federal prosecutors in New York sought at least $1 billion for the mortgage pump and dump scheme operated by its subsidiary Countrywide Financial. Before BofA bought it in 2008, Countrywide had churned out mortgages for years without regard for whether borrowers could repay, and then resold them, principally to Fannie Mae, thus forcing taxpayers to guarantee billions in bad loans. Angelo Mozilo, the former chief executive of Countrywide, paid $67.5 million to settle a civil fraud case brought by the SEC but he never faced criminal charges.

Bank of America is required to reimburse Fannie Mae $11.6 billion over loans sold them by Countrywide.

Last November JPMorgan Chase and Credit Suisse agreed to a settlement of $417 million with the SEC for bundling troubled mortgages into complex securities to conceal their poor quality and then selling them to investors.

Swiss bank UBS was given a deferred prosecution agreement in December for conspiring to defraud the U.S. with its stash of 17,000 secret accounts for Americans to hide income to avoid taxes. A repeat offender, UBS in 2011 admitted employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five year period. In 2008, it had had to agree to reimburse clients $22.7 billion over charges that it had defrauded them by misrepresenting auction rate securities as ultra-safe cash equivalents at the same time the market for them was collapsing. Add to that a $100 million fine for felony wire fraud committed by its Japan subsidiary.

Britain’s HSBC Holdings, one of the world’s largest banks, was found, in a multi-agency investigation by the Justice Department, the Manhattan district attorney’s office, bank regulators and the Treasury Department that spanned years, to have been laundering money linked to terrorism and drug trafficking. Despite flagrant criminal activity, in December a settlement of $1.92 billion in return for another deferred prosecution agreement was the outcome. HSBC was deemed too big to indict on the theory — or so we are asked to believe — that criminal charges against the bank could destabilize the global financial system. The laundering was no accident. HSBC had even instructed a bank in Iran how to format payment messages so that transactions would not be blocked by the U.S.

A dozen U.S. banks — Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, MetLife Bank, PNC, Sovereign, Sun Trust, U.S. Bank, Aurora, Morgan Stanley and Goldman Sachs — agreed this January to pay $8.5 billion in a complaint brought by the Comptroller of the Currency. The banks will pay $5.2 billion in mortgage loan reductions and $3.3 billion in direct payments to borrowers who went through foreclosure in 2009 and 2010 at t he hand of the banks, guilty of employing shady practices such as robo-signing foreclosure papers. Originally, regulators had vowed a minimum of $125,000 to each homeowner foreclosed on the basis of violations. Instead, they settled with the banks because case-by-case review of foreclosures “had proven too cumbersome and expensive”. But how to identify a wronged borrower if they abandon review? Their difficult to believe solution was to make everyone eligible, wronged or not, which comes to a paltry $875 each.

A late January report said that Goldman Sachs is in settlement talks with the U.S. Commodity Futures Trading Commission, which regulates U.S. futures and options markets, about an $8.3 billion position that one of the investment bank's traders had concealed five years ago.

HSBC again. It will pay $249 million for its part in the foreclosure scandal to settle federal complaints that its U.S. division used wrongful practices to foreclose on homeowners.

These deals announced this month are separate from a $25 billion settlement struck last February with five major banks by the federal government and 49 states.

It’s quite a roster. And quite a change from several years ago when we saw the Justice Department prosecute Kenneth Lay of Enron and send Enron’s Jeffrey Skilling to jail, as well as Bernard Ebbers of WorldCom and Dennis Koslowski of Tyco. That was the Bush Administration. They had a policy of punishing the bad guys with prison terms. Bankers have learned that with the Obama Administration, it’s only a matter of money.

And as for money, one other point. These fines won’t cost what the numbers say. Some or all are tax deductible, considered “business expense”.