The Bankers’ Free Lunch Continues

Photo by tristan_roddis | CC BY 2.0

Photo by tristan_roddis | CC BY 2.0

In their posts in CounterPunch, the economists Michael Hudson, Rob Urie, Paul Craig Roberts, Dean Baker, and others, have long provided ample, indeed incontrovertible, evidence that non-retail banking in the US and UK is one colossal racket.

Retail banking is of course still a racket, albeit on a somewhat less egregious scale.

Many of these financial institutions refer to themselves as “investment banks”, a mischaracterization so bizarre that the queen of England might as well declare herself an ardent fan of the Sex Pistols, or a Trump casino describe itself as a children’s charity.

The overwhelming evidence provided by the above-mentioned (and other) economists is that once a particular speculative round runs its course, this “investment” is converted into “gains” directed, almost entirely, at already existing assets (primarily real estate), and so does little or nothing for the productive economy.

The mainstream media covers hardly any of this, preferring instead to give space to the bizarre tweets of the Orange Swindler or attempts at reading the mind of the sage Warren Buffett.

Instead we have to rely on CounterPunch and the British satirical magazine Private Eye, as well as online sources such as Phil Mattera’s excellent Corporate Rap Sheets to tell us what these rogue institutions have really been doing– and doing since the deregulation of the financial sector implemented by Thatcher and Reagan/Bill Clinton in their respective countries decades ago.

To be fair, sometimes a mainstream news outlet does come up with the goods.

A couple of weeks ago, for instance, the Guardian published a long investigative piece, titled the “Global Laundromat”, detailing how 17 UK banks laundered £20/$25bn, mainly for Russian oligarchs with criminal links.

The same Guardian article estimates that around £100/$125bn a year is laundered by UK banks for shadow and criminal entities.

If you are a Russian oligarch, Chinese billionaire, Gulf sheikh, or Malaysian leader wanting to park your money in a “reputable” place with little more than a nod and a wink, London is clearly a damn good option.

This though is the tip of the proverbial iceberg.

The bankers have not been held accountable for the 2008 global financial meltdown and the ensuing Great Recession.  On the contrary, the Orange Swindler, despite telling his supporters he would “drain the swamp”, has started to dismantle the tepid Dodd-Frank financial sector “reforms” intended as a corrective to the lead-up to the 2008 financial-sector collapse.

Goldman Sachs’ alumni (including that latter-day Rasputin Steve Bannon) occupy several important positions in Trump’s administration.  He’s even chosen a lawyer who’s devoted his career to representing Goldman, Jay Clayton, to be the head of the Securities and Exchange Commission (SEC), Wall Street’s regulatory body.  Clayton will have an interesting time as head of the SEC when, as inevitably happens, Goldman comes yet again within its purview.

Goldman Sachs has a long history of legal problems, with 2016 being a fairly typical year.

According to Phil Mattera, in April 2016 the Justice Department announced that Goldman would pay $5.06bn to settle allegations concerning the sale of toxic securities between 2005 and 2007.

In August 2016, the Federal Reserve imposed a $36.3m penalty on Goldman over a case involving leaked confidential government information.

In December 2016, the Commodity Futures Trading Commission fined Goldman $120m for attempted manipulation of the foreign exchange market.

Many other banks are as bad as Goldman, but few or none are as adept when it comes to placing its alums in the corridors of political power—in addition to Trump’s grey eminence Bannon, think of Treasury Secretary Robert Rubin during Bill Clinton’s term, Treasury Secretary Hank Paulson during Dubya’s, and Mark Carney, the governor of the Bank of England, Mario Draghi, the president of the European Central Bank, as well as Malcolm Turnbull, the prime minister of Australia, and Robert Zoeller, the head of the World Bank.

Theresa “the woman without qualities” May, after voting Remain in the Brexit referendum, is now saying she “stands ready” to use Brexit as an opportunity to turn the UK into a tax haven.  Despite having a husband who works in the financial sector, May seems unaware that the UK already is one!

UK bankers have been emboldened by repeated signals from the Tories since 2010 that any regulation proposed by them will be merely cosmetic.  As a result, the banks are now trying to postpone the 2019 deadline to have a firewall between retail-banking deposits and speculative “investment” banking.

Also being resisted by the UK banks is a proposed increase in the amount of deposit-capital they have to hold as security.  Over-leveraging by banks was a major contributor to the 2008 financial crisis, but the major UK banks want this all over again.

The UK banks are also pushing against efforts to get them to adopt more reliable instruments for risk-calculation.  The banks would rather retain the pretend methods of calculation (aka “postmodern accounting”) that failed so spectacularly in the past, but which netted them massive gains.

According to Private Eye (Feb 10, 2017), UK banker remuneration is doing extremely well.  European Banking Authority data from that month “showed how the UK still leads the way: it is home to 4,133 of the 5,124 (up from 3,865) high earners paid at least €1m in 2015.  One UK banker received an €8m bonus on top of an €11m salary”.

The UK economy has of course been flatlining most of the time since 2010, and some of these banks have still to repay the UK government for bailout rescues they received during the financial crisis.  Meanwhile British workers are suffering their biggest pay squeeze for nearly 70 years.

The US economy gives the appearance of “recovery”, but it has been a recovery for the top 5% and no one else.

While Iceland, Ireland, and Spain have found a way to jail or charge their aberrant top bankers, the US and UK have focused on a few small fry.  To quote Private Eye:

A Wall Street Journal analysis last year revealed that in 156 criminal and civil cases brought by US prosecutors and regulators against the ten largest Wall Street banks, only one boardroom-level executive (at Citibank, and whose wrist was gently slapped) had been charged or sued.  Most of the 47 individuals pleaded guilty or settled: only five were convicted at trial.  One Credit Suisse trader went to jail.  A clue, perhaps, as to why there were no “perp” walks for Wall Street bankers.  The US savings and loan scandal of the Eighties, by contrast, saw more than 1,000 prosecutions.

The situation in the UK is similar, and only the UBS Libor trader Tom Hayes has received a jail sentence, of 11 years, for Libor-rigging.  UBS paid $1.5bn in 2012 to settle Libor-rigging charges.

It was determined that Hayes acted on his own, though he’s always maintained that his senior managers knew about the Libor scam.  One of these, Carsten Kengeter (another Goldman alum), was mentioned at Hayes’ 2015 trial when the later tried to make a deal with prosecutors.

Hayes said Kengeter was present at a meeting in Tokyo when Libor-rigging was discussed, but Kengeter has not accused of any wrong-doing, and is now chief executive of Deutsche Börse.  According to CNN Money, Kengeter is currently under investigation by German authorities for insider trading at the Börse.

Another banker not accused of any wrong-doing is Sajid Javid, who was managing director of Deutsche Bank when he left in 2009 to enter politics.  Javid is now Theresa May’s Minister for Communities and Local Government.  Banking served Javid very well.  To quote the Guardian:

During 20 years in banking, Javid became rich. According to unconfirmed reports, he made up to £3m a year through the years of boom and bust and he now owns a £4m home in Fulham and another worth £2m in Chelsea. He sends his children to private schools.

According to the right-wing tabloid, the Daily Mail (always slavishly beholden to the Conservatives), Javid was a senior executive at DB in 2004 when it funnelled bonuses through the Cayman Islands to enrich 300 senior staff in London.

In March 2017, DB (and UBS) were ordered by the UK Supreme Court to pay back £135m, after losing a drawn-out battle with the UK tax authorities.

Javid maintains through “advisers” that he did not benefit from this dodge, but has been unable to specify what role (if any) he had in DB’s Cayman Island tax ruse.

Was he (gasp!) the only DB top executive not to hop on the Cayman Island gravy train whose passengers included 300 of his fellow DB executives?  If so, surely we’d love to give him credit for so virtuous a deed, if only he’d be more forthcoming about the plot involved, and how it really had nothing to with him.

Phil Mattera casts the following piercing light on DB’s rap sheet in the period (2000-2009) when Sajid Javid served on its board (while being blissfully unaware of any of the trickery detailed below):

In 2004 investors who purchased what turned out to be abusive tax shelters from DB sued it in US federal court, alleging they had been misled (the dispute was later settled for an undisclosed amount).

This case, as well as a US Senate investigation produced extensive documentation of DB’s role in tax avoidance.  In the 2000s, DB was cited numerous times by financial regulators for violations.

In 2002, 3 US agencies—the SEC, the NY Stock Exchange and NASD (the US industry regulator now known as FINRA)—fined DB Securities $1.65m for not preserving e-mail archives so they could be scrutinized in enforcement actions.

In 2003 the SEC fined DB $750,000 for violating conflict of interest rules by not disclosing its role in advising Hewlett-Packard on the acquisition of Compaq Computer while DB’s asset management unit was voting its clients’ proxies in favour of the deal.

In 2004 the UK Financial Services Authority fined DB’s Morgan Grenfell unit £190,000 for violating rules relating to programme trading.  That year, NASD fined DB $5.29m for taking excessive commissions in the allocation of shares of initial public offerings.  Later that year NASD fined DB $5m for corporate high-yield bond trading violations.

Also in 2004, the SEC announced that DB would pay $87.5m to settle charges of conflicts of interest between its investment-banking and its research wings.

In 2006 the UK FSA fined DB £6.3m for “failing to observe proper standards of market conduct” in transactions involving shares of Scania and Cytos Biotechnology. That same year, DB agreed to pay $208m to US federal and state agencies to settle charges of market timing violations.

During this period, DB CEO Jose Ackermann personally paid €3.2m to settle criminal charges that he and other directors of the German telecommunications giant Mannesmann awarded excessive bonuses to Mannesmann executives.

In 2007 DB agreed to pay $25m (and give up $416m in unsecured claims) to settle litigation over its dealings with the defunct Enron Corporation.

In 2009 the SEC announced that DB would provide $1.3bn in liquidity to investors alleged by the SEC to have been misled by DB about the risks associated with auction rate securities.

In December 2014 federal prosecutors charged that DB had fraudulently used shell companies to evade taxes on a transaction that had taken place in 2000. The suit claimed that DB owed the federal government $190 million in taxes, penalties, and interest.

In May 2015 the SEC announced that DB would pay $55m to settle allegations that it overstated the value of its derivatives portfolio during the height of the 2008 financial meltdown.

This is criminality, on a gigantic scale, by just one major bank.  As for the rest:

The Bank of England reports that UK banks “have paid £35bn in fines, costs and extra capital since 2009 as a result of their ‘ethical drift’, … and the UK payment protection insurance bill could exceed £30bn” (according to Private Eye in 2017).

The tally worldwide for similar infractions was $275bn and rising.

US Department of Justice fines for mis-selling subprime instruments already total $58bn.

The big crooks of the financial-sector opt for penalties and settlements, as opposed to court proceedings, because the former doesn’t ensue in jail time for the guilty (unlike the court cases), and also because, unlike fines imposed for criminal convictions, these penalties and settlements qualify for a tax write-off.  Also, the payment of the sums involved is a burden falling collectively on shareholders, and not individual bankers, who in essence get off scot free.

For these fine people it’s just the price of doing business, which is really no price all.

If their banks fail, the hapless taxpayer forks out in the name of “too big to fail”, the reckless bankers still keep their bonuses and their jobs, or they move on to other financial houses for equally stupendous salaries where they can get up to pretty much the same old shenanigans all over again.

Or, having made their mega-millions, there is the constant revolving door between their banks and government ministries, the offices of presidents, and the world’s central banks.

It truly is “a wonderful life” (the title of Sajid Javid’s favourite film)!

Kenneth Surin teaches at Duke University, North Carolina.  He lives in Blacksburg, Virginia.