When will shareholders (and taxpayers) stop paying for bank managers’ mistakes and potentially criminal activity?
Imagine you come home one evening to find the back door kicked in with the door and the doorframe completely destroyed. Inside, everything is in disarray, furniture badly damaged and plenty of valuables stolen. When the policemen arrive they are completely stoic. They have seen it all before, recognise the methodology and are more or less sure who did it. The friendly policeman in charge tells you that by the time they get around to arrest the culprits the stolen goods – your things – will have been sold off. Sorry, no chance of recovering any of it. The thieves move too quickly, the police too slowly though the thieves will no doubt eventually be caught.
“When can I expect to be called in as a witness,” you ask. “Well, not so sure the case will come court. We negotiate with the thieves. They will pay a fine and that’s it. Quite a hefty fine because there is a lot of damage, apart from the stolen goods, of course.” You can’t believe your own ears: the thieves have committed a criminal act – and they will sell your property to pay the fine. Dismayed, you point this out to the friendly policeman. He shrugs his shoulders. “This is the new order. Prison is only for petty street crime. The serious criminals, we negotiate with them.”
Shareholders in banks involved in LIBOR swindle, such as Barclays and others banks soon to be named, and in HSBC, which allowed itself to be used as a conduit for money laundering by Mexican drug lords, dodgy Russian and entities with ties to terrorist organisations (see earlier Icelog here), are more or less in the situation of the house-owner in the story above. This is what’s been going on for the last many years when it comes to certain actions of those who operate from the management suites of big banks. With ever rising salaries, no matter if the banks lose or not, top managers have been allowed to let the company pay the fines resulting from their lack of oversight, corrupt company culture and potential criminal acts.
HSBC has just set aside $2bn to cover potential money-laundering fines and mis-selling claims. Barclays has just paid £290m to UK and US authorities for the LIBOR rigging. In addition, Barclays is now under investigation related to its fund-raising in the Middle East in 2008. The bank has just announced its pre-tax profits, £759m – down 71% from last years £2.6bn and potentially more fines in sight for Barclays.
This might – just might – be changing though. Recently, the Serious Fraud Office announced that its new director, David Green, “is satisfied that existing criminal offences are capable of covering conduct in relation to the alleged manipulation of LIBOR and related interest rates. The investigation, announced on 6 July, involves a number of financial institutions.”
This means that the SFO is now investigating the LIBOR rigging as a potentially criminal act, in the belief laws have been broken. Part of the rigging involved portraying the bank stronger than it indeed was, in the financial turmoil of autumn 2008. If that isn’t market manipulation I find it difficult to understand that concept.
In the US, some senators have introduced a bipartisan bill to give US regulators the authority to seek tougher fines from the financial sector. The understanding is that although the fines posed on Barclays are record high it’s still decimal dust in the grand scheme of the bank’s balance sheet. The bill proposes raising the maximum penalty from up to $150,000 per violation for individuals and $725,000 per entity to respectively $1m and $10m. Crucially, the SEC could seek fines of three times the amount of ill-gotten gains – or investor losses.
Interestingly, last November, US District Judge Jed Rakoff refused to rubber-stamp a $285m settlement the SEC had posed on Citigroup. Rakoff’s reasoning was that the fine was “pocket change” and investors had been “short-changed.” To put the fines in perspective re ill-gotten gains and losses, the SEC alleged investors lost $700m from the underlying scheme while Citigroup had estimated its gain $160m. In 2009, Rakoff did the same and forced the SEC to increase its settlement with Bank of America.
None of the things that happened in banks now being fined happened because of some laws of nature but because of one decision after another, leading in the same direction. Decision taken by individuals with the power to make these things happen. If accountability is to be a word be counted on, the individuals who took the decisions have to be made accountable, instead of just using their power make shareholders pay.
Regulators still seem to believe that mild words of warning are enough. President Barack Obama says he’s in favour of making “penalties count.” If the penalties just count for the shareholders and not for those who actually condone – or carry out – what’s being penalised that’s just not enough. Seeing Raj Rajaratnam sentenced to eleven years in prison for insider trading might awake more fear of the law than letting the company pay fines and seeing shareholders lose out on dividends.
As I’ve pointed out earlier, the correlation between corruption and the recession is to my mind a clear one. Corrupt business practices played its part in the financial collapse in the autumn of 2008. Both European countries and the US are still smarting from the aftermath and the ensuing recession has led to job losses and expensive bail-outs, paid by tax payers in these countries. In that sense, tax payers are paying for potential financial crimes.
Apart from corrupt business practices and the bail-outs there are three issues at stake here. The fines are ridiculously low, compared to the balance sheets of these gigantic banks. Secondly, is it fair that managers, on whose watch these breaches occur, can just dry the losses off on shareholders? And thirdly, is it fair that those who break the law out of luxurious suites with perks such as private toilets and paid-for taxes are treated any differently than criminals operating on the high street?
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