In Banking, Crime Pays — And Pays Well

”A criminal is a person with predatory instincts without sufficient capital to form a corporation.”

-Clarence Darrow

“The only difference between a bank burglar and a bank president is that one works at

night.”

-Chicago Tribune, February 24, 1933

In Part I, I explained that it was possible for Boeing executives to approve of an obviously risking software solution that caused a crash killing 147 people, cover up that solution allowing another crash to kill an additional 157 people and not get charged with criminal negligence.

Here, in Part II, I explain that the precedent for targeting the corporation — but never the executives — goes back to a Democrat administration and Democrat appointee to the Department of Justice. If the Democrats want to clear the swamp in Washington, that will require patient delving into a bit of history.

In 2008, the criminal branch of the DOJ faced a serious problem. Wachovia (named after a German province), the fourth largest bank holding company in the US, was caught money laundering for Mexican and South American drug cartels. A whistleblower, Martin Woods, had leaked condemning information to the Drug Enforcement Administration that Wachovia had not reported suspicious activities for $378.4 billion of money transfers. An example of a suspicious transaction would be the purchase of an airplane using travellers’ checks. People don’t buy airplanes when they’re traveling.

Lenny Breuer, head of the criminal division of the DOJ, pronounced the new doctrine of too-big-to-fail. Quite correctly, charging a bank of this size criminally would mean the bank would lose its license and that could be a serious blow to the US financial system. But it does not follow that any executive is too big to fail. Yet, that seems to be the non sequitur that was accepted in the media. The media was dazzled at the size of the fines paid by the corporations and did not question why executives, who did the crimes, were not charged, and why these executives were allowed to keep every cent they made doing so.

Breuer gave Wachovia a non-prosecution agreement, meaning it would not be charged criminally. Instead, Wachovia agreed to pay a civil fine of $110 million — that was less than 2% of its profit in 2009. (The Guardian, Ap 3, 2011).

The Drug Lords Had Another Bigger Banker in the Wings

The shutdown of Wachovia’s money laundering for Mexican drug cartels was not a serious problem for them. They had an alternative even larger bank, HSBC, operating in 80 countries — with 470 branches in the US.

A Senate investigation report into HSBC disclosed its billion dollar money laundering business (Permanent Subcommittee on Investigations, July17, 2012). HSBC’s service was extended not only to drug lords, but also to organized crime, Russian oligarchs, sanction invaders and terrorists.

The DOJ gave HSBC another non-prosecution agreement with a fine of $2 billion. Lanny Breuer announced this result as a great punishment. With regard only to HSBC’s lucrative work for the Mexican druglords, Breuer admitted that:

“In total, HSBC Bank USA failed to monitor over $670 billion in wire transfers from HSBC Mexico between 2006 and 2009 and failed to monitor over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico over that same period”.

That’s 9.4 billion. Imagine if a poor black kid had robbed a bank of $1000. What would happen to him.

J P Morgan

In 2014, a memo written in 2007 by a whistleblower at JP Morgan , Alayne Fleischmann, surfaced. Being a lawyer, Fleishmann had described in detail the evidence necessary to prove that JP Morgan knew it was including a substantial number of junk mortgages in packages it rated as above subprime contributing to the 2008 financial crisis.

Fleishmann, as happens with all whistleblowers, was quickly fired. But a copy of the memo was left on a file and was spotted by an observant lower-level attorney in the DOJ during an unrelated probe.

The memo led to the investigation of all the major banks in the US. The investigation uncovered evidence of another 17 of these major US banks doing the same. (NYT Deal Book, Sept 22, 2014).

Holder took charge of the matter. He issued civil statements of claim setting out the details of fraudulent activity drafted against 18 banks but kept them secret.

As an example, the claim against JP Morgan stated, “the United States seeks to recover civil penalties”…“for a fraudulent and deceptive scheme to package and sell residential mortgage-backed securities” that the bank “knew contained a material amount of materially defective loans.” (Vanity Fair, 2017, 09).

Upon learning of the draft statements of claim, JP Morgan CEO, Democrat Jamie Dimon, went to the Democrat appointees at the DOJ and negotiated a settlement that included first and foremost that the DOJ would not release the statement of claim but instead would agree to a much-sanitized statement of facts that replaced ‘fraudulent and deceptive’ with more neutral sounding language such as ‘serious misrepresentations’ (DOJ Nov 19, 2013).

The other 17 banks got similar deals and the statements of claim were kept confidential.

In Banking, Crime Pays — And Pays Well.

As economist William Lasonick has pointed out, these monumental fines to the banks are penalties that do not punish.

• JP Morgan agreed to pay an apparently mind-boggling fine of $13 billion composed of a number of components about half of which could be tax deducted — meaning taxpayers paid a good part of the fine. (NPR, Nov 19, 2013).

• Dimon got a 74% raise the year of the settlement to $20 million. (Vanity Fair, Sept 6, 2017).

• On the announcement of the settlement, JP Morgan stock rose to a 10 year high. (BBC News, Nov 20, 2013).

This all came about because the department of justice helped keep the fraud allegations under wraps. The bankers kept every cent of their bonuses made on selling the CDOs stuffed with the toxic mortgages.

Fleishman was horrified at the cover-up. Although she knew of the persecution of whistleblowers, she felt she had to act. “I could lose everything. But if we don’t start speaking up, we’re going to get the biggest financial cover-up in history,” (Rolling Stone, Nov 6, 2014).

Only Rolling Stone and a few independent media carried her story in 2014. It was completely ignored by the mainstream media. (Rolling Stone, Nov 6, 2014).

It took another three years for those incriminating statements of claim to be made public due to a Freedom of Information request by a plaintiffs’ lawyer in an unrelated lawsuit. The news cycle had passed. Again, only one news outlet, Vanity Fair, covered the revelation. (Vanity Fair, Sept 6, 2017).

What was in it for Eric Holder, and Lanny Breuer, for giving the banks their sweetheart deals? They returned to Wall Street and corporate defence firm Covington and Burling where they came from. Within a short time, they were defending the very banks and corporations that they had formerly regulated — but now against their successors in the DOJ.

The banks’ false narrative that bankers had just been innocently foolish in lending to the undeserving poor remains the public’s belief about the 2008 financial crisis. Despite her efforts, as Fleischmann feared, the DOJ and the bankers achieved, “the biggest financial cover-up in history.” But does anyone care or is it all just ancient history.

Acknowlegement: Money image by Pexels.