Above the Law: Financialization's End Game

Too big to fail was a concept. Too big to indict is a policy validating that concept's power and sustainability.

As business begins to show signs of improvement it is worth contemplating where we stand as a global economy. The immediate threat has dissipated. But the longer term problem remains.

The failure of authorities to indict or convict anyone of almost anything related to the financial crisis continues to rankle world-wide. Despite legal doctrines handed down by the US Supreme Court that effectively confirm the human rights belonging to corporations, their human responsibilities remain obtuse.

The theory underpinning the decisions by governments not to seek legal recourse for financial mischief by the largest financial institutions - a belief, really, since a theory requires some scientific or economic proof - is that the economy is so dependent on banking and financial services that anything threatening their well-being is too risky to contemplate.

Governments in the US, UK, France and China have tacitly agreed to support this approach while somewhat tightening the regulatory rules governing financial management - and by turning the other way as central bankers take unprecedented action to shore up global commerce, a role that governments should be playing themselves. The net is that some of the most flagrant abuses have been curbed for now. We simply await the next generation of them to emerge. Because the authorities have essentially acknowledged they are too frightened of the potential consequences to make further changes at present, the market will assess the new environment and 'work-arounds' are sure to begin gestating as some assuredly have already.

This situation is unsustainable but it is the only course the current set of policy makers will tolerate. Ignoring reality in hopes the future will be brighter and less problematic is the sort of Magikal Thinking that guarantees a repeat. Refusing to hold institutions or people accountable because it is too hard or too complicated or too expensive reeks of capitulation. As we learned after Enron, the failure of a major accounting firm responsible for the calamity had a salutary impact on business behavior for a while. Big Finance appears to have dodged that possibility this time but the free pass on legal consequences assures there will be a next time. JL

Yves Smith reports in Naked Capitalism:

Our Treasury Secretary has a default explanation for why ordinary citizens must bend over every time banking interests are threatened. The more formal statement of this policy is the Geithner Doctrine, which is “nothing must be done that will destablize the banking system.” So “destabilize” means “hurts the profits or reputation of” and “banking system” means “any bank that is pretty big and/or well connected”. The most clear-cut example of the Geithner Doctrine in action was when New York State Banking and Financial Services Superintendent Benjamin Lawsky filed an order against Standard Chartered for violations under New York law for money laundering with Iranian banks, among other things. Astonishingly, Federal regulators went on the warpath against Lawsky. As we wrote in August:

But the Treasury and Fed are also in an uproar, although they have no one to blame but themselves for their discomfort. The Treasury (supposedly the lead actor in investigating “terrorist financing” and violations of economic sanctions; the Office of Foreign Assets Control is a Treasury operation), Fed, DoJ, District Attorney of New York and the DFS were all investigating Iran transfers at various banks, including SCB, since 2010. The others has settled; SCB was still under investigation and seemed to believe it would get a clean bill of health.

It got even better. Standard Chartered, using an analysis cooked up by Promontory Capital, claimed a miniscule $14 million in transactions were out of compliance; Lawsky found a full $250 billion. The Federal regulatory were apparently to accept the Standard Chartered/Promontory argument and Lawsky derailed that.

My impression is that the outrage didn’t result simply from a supposedly secondary regulator operating independently and aggressively; it was also due to the fact that Lawsky threatened to pull the bank’s New York branch license and end its access to dollar clearing services. From a later August post:

I have to confess I’m really enjoying the dust up between the New York Superintendent of Financial Services, Benjamin Lawsky, and his opponents, namely, his target, Standard Chartered, and the flummoxed Federal regulators that he is showing up as so deeply captured that they genuinely can’t tell regulatory theater from the real thing.

The amount of consternation directed at Lawsky is telling. It’s as if he brought a heavily tattooed and body pierced trannie to a country club. He’s flouted the rules in a way that offends his detractors deeply, and yet he also can’t be brought to heel.

And have no doubt that Geithner was likely the moving force in the Lawsky drama. He’s evidently playing a similar role in the HSBC money-laundering case, in which the facts were so bad that the normally lapdog Department of Justice was contemplating prosecuting the bank. Bill Black flagged a key section of a New York Times account:

Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.

Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter….

A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.

Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.

“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”

Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place.”

Black’s recap:

To sum it up: the regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes. They warned that such a guilty plea could cause a systemic crisis because HSBC was an SDI. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged Holder to meet personally with Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, Breuer emphasized that DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.

Note the disingenuous statement made by the Treasury to the press. Yes, DOJ makes the “decision” whether to prosecute, but if DOJ were to prosecute in a case where Treasury had warned that the sky would fall if there were a prosecution – and the sky did fall – then the DOJ’s leaders would be the idiots who ignored Treasury and blew up the world’s economy.

And Black flagged the lengths Treasury will go to in order to shift responsibility for Geithner’s actions to others. It was Lanny Breuer of the Department of Justice (admittedly, a charter member of the “Be Nice to Banks Club”) who was the official spokesperson for the decision not to prosecute HSBC. That bit is understandable, but serves to hide Treasury’s role. And get a load of this, again from Black:

The Treasury statement completes setting the stage for the tale I promised to complete about Geithner’s sensitivity to his role in blocking prosecutions becoming better known. Breuer and I were interviewed by NPR about the HSBC settlement. …

When the NPR story ran originally it contained a quotation from me noting Geithner’s long-standing opposition to prosecuting SDIs and the government’s incentive to reduce greatly the penalties on HSBC because it was an SDI. My quotation mentioning Geithner was removed from the NPR story at the request of Treasury and replaced with this “Clarification.”

Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department that made the decision to defer prosecution of HSBC.

I was not “speculating” that “Geithner did not want to put HSBC out of business.” My statement was not only factual; it wasn’t controversial given the many insider exposes that have confirmed Geithner’s position on SDIs. (A position now parroted by Breuer.) The statement that Treasury got placed in the “clarification” is the same carefully crafted disingenuous statement that Treasury is using to obscure the continuing success of Geithner’s efforts to prevent prosecutions of the SDIs. What we now know definitively is how hyper-sensitive Geithner is to anything that brings to greater public attention his pusillanimous role in ensuring that fraudulent SDIs and the banksters that control them can commit their crimes with impunity from the criminal laws.

If you’ve been paying close attention to Our Fearless Treasury Secretary, Geithner’s conduct is true to established form. But we learned of a new wrinkle tonight. The Financial Times has a update on the Libor scandal, but its headline, “Geithner was told of Libor fears in 2008,” might lead readers to skip the piece. It making it sound as if the issue was that Geithner knew about the mismarking earlier than he’d previously indicated. But recall how the plot went, at least for Barclays, the bank most in the spotlight on Libor: from 2005 to 2007, it was gaming Libor to increase profits, which could result in Libor being higher or lower than what a true market rate would have been, and during the crisis, Barclays and pretty much every other bank were putting up artificially low Libor postings to make them look healthier than they were.

The key bit here, which the article assumes readers know, is that Geithner’s position has been that he told UK officials about Libor manipulation not long after he learned about it, and that it was due to managing appearances during market upheavals. And according to the Geithner Doctrine that would warrant doing nothing about it, since anything banks do to preserve stability is ever and always correct.

But the FT account makes clear that Geither had been told that the banks were manipulating the market to make money, not out of safety concerns:

The Federal Reserve Bank of New York was warned as early as mid-2008 that banks may have been misreporting their Libor borrowing rate to aid their own trading positions, much earlier than previously known.
Tim Geithner, then president of the New York Fed and now US Treasury secretary, was told by a senior colleague in a May 2008 email of her concerns about banks’ deliberate misreporting.

The email was part of an internal push among some at the New York Fed to press the Bank of England and the British Bankers’ Association to reform the benchmark lending gauge, known as the London Interbank Offered Rate.

It is the first indication that officials at the New York Fed had grown suspicious that banks may have been misreporting Libor to improve their trading results…

The email from Hayley Boesky to Mr Geithner – with three senior colleagues, Meg McConnell, Matthew Raskin and William Dudley, copied in – are among unreported emails seen by the FT that show New York Fed officials linking the incentive for banks to misreport borrowing rates to the bank’s derivatives positions.

The plea by Ms Boesky, sent a few days before Mr Geithner made Libor reform recommendations to Sir Mervyn King, governor of the BoE, is perhaps the first indication that senior US officials suspected traders may have been influencing banks’ Libor submissions.

“These individuals report to the head of [the] money markets desk, who often reports to the same person who oversees the derivatives book. They verify the posting with the boss to make sure it suits their derivatives position,” Ms Boesky wrote on May 23 2008.

The US Congress has launched an inquiry into Libor. In July, the New York Fed made public selected documents related to alleged Libor-rigging by Barclays, which had just reached a $450m settlement with US and UK authorities. Barclays admitted to taking requests from its own derivatives traders and those at other banks into account when making submissions to Libor and Euribor, the euro equivalent, from 2005 to 2007.

The New York Fed documents played down the possibility of a link between alleged rate manipulation to traders’ derivatives positions. Rather, in those documents New York Fed officials linked Libor misreporting to banks’ fears of appearing financially weak.

So get this: Fed staffers tried to make sure that Geithner understood profit gaming was a real issue, which suggests they knew or suspected he didn’t know about that aspect of bank behavior, or worse, was ignoring it. More details of the internal discussions:

Other emails seen by the FT at the New York Fed raised concerns about the possible influence of derivatives traders.

On May 1 2008, Deborah Leonard, a senior New York Fed official, speculated in an email to colleagues about what she referred to as the “lying premium” theory about Libor submissions. She said there could be an “incentive to lie” by banks if a large number of derivatives used a particular Libor rate as a reference.

In a June 3 2008 email, Matthew Raskin of the New York Fed noted to colleagues that a pending BBA proposal on Libor best practice stated that rates should be “submitted by members . . . with responsibility for management of a bank’s cash, rather than a bank’s derivatives book”, and that “rates must . . . not [be] set in reference to information given by brokers”.

Mr Raskin wrote in his email: “While these statements are meant to describe the current state of Libor, they are not consistent with practices described by panel members we’ve spoken with, nor with market perceptions of the process.”
Other authorities seem to have shared these concerns. In a July 14 2008 email, one Fed official noted that the “principal concern” at the International Monetary Fund “centred on who at the banks provided the Libor quotes – ie making sure the rates come from funding desks as opposed to derivatives traders”.

It’s important to recognize the timeframe. After the Bear Stearns rescue, the officialdom went into “Mission Accomplished” mode. The stock and bond markets rallied and business reporting was generally chipper. Even though Fannie and Freddie were a lingering worry (and the Lehman melodrama kept rattling on), Hank Paulson made his famous bazooka quote in July as he set forth the Administration plan to stabilize the mortgage giants. Even though this period now looks like a brief hiatus, the consensus was that the market upheavals were pretty much over and only some cleanup remained. So the warnings about market manipulation would have been seen as more serious given the then-current prevailing belief that the worst of the crisis was past than they appear given what followed.

The New York Fed contends it did address these issues, even thought its Congressional testimony indicated otherwise:

A New York Fed spokeswoman said it had determined by “early 2008” that Libor was unreliable, and briefed officials in the US and UK in an effort to address the flawed rate-setting process in London and possible “conflicts of interest” at the banks.

“The New York Fed developed tough reform proposals including plans for independent audit of Libor submissions to prevent Libor misreporting, whatever the reason, and pressed the UK authorities to adopt them.”

But let’s consider the related issue. Geithner’s focus in his previous remarks on Libor manipulation focused on bank trying to pretend they were healthier than they were. Geithner’s failure to acknowledge publicly that the banks were also gaming Libor for fun and profit, whether or not he discussed this with the Bank of England, is yet another cover-up for them.

And it’s an even more pernicious manifestation of the Geithner Doctrine. Not only does it entail refusing to mete out fitting punishment to banks and their executives, it also apparently entails hiding their misdeeds to avoid the annoying game of having to discipline them. After all, if you’re not going to do anything about bad behavior, why do you need to acknowledge that it exists? It’s so much more convenient to maintain the fiction that banks can be relied upon to do the right thing because they’d never want to suffer the reputational damage of being caught out. But with enablers like him, bank criminality would never come to light, by design, ending the fear of reputational harm.

I had assumed the insufferable arrogance of top bankers, which was a pronounced shift from their fearful state in late 2008 and early 2009, was the result of the Administration’s body language that it was fully committed to throwing its weight behind boosting their profit and their asset prices. But it may have had at least as much to do with their recognition that Geithner would make sure that none of their bad deeds would be punished.