Abstract: Two “new” major, multi-bank scandals have gotten attention recently: the manipulation of the LIBOR interest rate index from 2005 – 2009 and the rigging of interest rates on municipal deposits over at least ten years. These far-reaching scandals are but the tip of the iceberg, which includes the endemic fraudulent mortgage practices that led to the 2008 financial collapse and more. JPMorgan Chase, among others, is involved in all of the above. It has also paid a $153 million fine for fraud in securities trading and a $700 million penalty for its misbehavior in municipal finance.
Despite overwhelming evidence of serious, chronic criminal behavior at the big banks, penalties are mere slaps on the wrist, no senior executive has been prosecuted, and the banks continue to do business as if they had done nothing wrong. This behavior and the unhealthy economic and political power of the big banks must be stopped. The only way to do so is to prosecute bankers and send some of them to jail.
Full post: On the heels of the large trading losses at JPMorgan Chase (somewhere between $2 and $9 billion) comes news of two major, multi-bank scandals: the manipulation of the LIBOR interest rate and the rigging of interest rates on municipal deposits.
Barclays Bank, based in London, has paid British and American regulators a fine of $450 million for rigging the London Inter-Bank Offered Rate (LIBOR) from 2005 through 2009. This is a big deal because LIBOR is used worldwide to set the variable interest rates on an estimated $500 trillion worth of financial contracts, including mortgages, credit cards, and many commercial and personal loans. The rate rigging helped Barclays’ traders make more money and made their bank look stronger in the midst of the financial crisis. Other banks were clearly involved in the scheme and more penalties are expected. [1]
The second scandal, rigging interest rates on municipal deposits, has, at least so far, received far less attention. Three low level employees at GE Capital (the financial services subsidiary of General Electric) have been convicted in a scheme that involved virtually every major bank and finance company on Wall St. They conspired to skim billions from cities and towns across the country by paying them lower interest rates on their deposits. The cities and towns are generally legally required to get competitive bids from at least three banks. The bidding is managed by a broker. In this scheme, the banks divvied up the business so there was a prearranged winner of the bidding. The broker was bribed to tell the prearranged winner what the other two bids were, so it could come in just over those bids. [2]
This conspiracy had been going on for at least ten years. The municipalities’ deposits were the multi-million proceeds of bonds that were sold to finance major projects and were spent over the multiple years those projects, such as building a school or sewer system, took to complete. Therefore, lowering the interest rate the municipality is paid by just a 100th of a percent (e.g., 5.00% instead of 5.01%) could cheat a city or town out of tens of thousands of dollars, and save the bank the same amount. Overall, municipalities lost tens of millions of dollars on tens of billions of dollars of municipal deposits. To-date, four banks – UBS, Bank of America, JPMorgan Chase, and Wells Fargo – have admitted involvement and have paid $673 million in restitution and fines.
These two new scandals, amazingly, are but the tip of the iceberg in terms of fraud in the financial industry. Fraudulent writing of mortgages, fraudulent packaging and selling of them as supposedly safe AAA-rated securities, and fraudulent mortgage foreclosures (see blog post / newsletter issue #19, 2/20/12) led to the 2008 financial collapse.
JPMorgan Chase, to focus on one of the big banks, is involved in all of the wrongdoing mentioned above. It has also paid a $153 million fine for fraud in the trading of collateralized debt obligations (CDOs) and a $700 million penalty for its misbehavior in the funding of a $300 million sewer system in Birmingham and Jefferson County Alabama. In this latter scandal, it bribed Goldman Sachs with $3 million not to compete with it and bribed local officials (some of whom are now in jail) to accept a complex financial deal that means the $300 million sewer system will cost $3 billion. This provided profits to JPMorgan while saddling local households, some of them quite poor, with sewer bills of at least $50 month. [3]
The pattern of repeated misbehavior in the financial system is clear. Our big banks’ executives are more interested in their profits and bonuses than serving their customers or playing by the rules. The fines and penalties they’ve paid are mere slaps on the wrist given their size and profitability. None of these payments have meant even one quarter where a bank reported a loss instead of a profit. Despite the overwhelming evidence of serious, repeated criminal behavior, there has been no prosecution of any senior official – not a one, and the banks continue to do business, including with local, state, and the federal governments, as if they had done nothing wrong. [4] (In the Savings and Loan collapse, which was truly miniscule by comparison, over 1,000 senior officials were convicted of felonies.)
Joseph Stiglitz, a Nobel Prize winner and former World Bank economist, believes we must break the unhealthy economic and political power of the financial sector in order to have a more just and prosperous society. He believes the only way to do this is to prosecute bankers and send some of them to jail. [5]
[1] Morgenson, G., 7/7/12, “The British, at least, are getting tough,” The New York Times
[2] Taibbi, M., 7/5/12, “The scam Wall Street learned from the Mafia,” Rolling Stone
[3] Moyers & Company, 6/22/12, “How big banks victimize our democracy,” Public Affairs Television, Inc.
[4] Eskow, R., ???, “Wall Street’s unpunished crimes,” Huffington Post
[5] Common Dreams staff, 7/2/12, “Following Barclays’ scandal, Stiglitz says, ‘Send bankers to jail’,” http://www.commondreams.org/headline/2012/07/02-4
Lippitt's Policy and Politics Blog 
To further the case I make in this post, the The Boston Globe’s 7/13/12 Business Section had 3 articles on the big banks. First, there’s a column by Steven Syre on the LIBOR scandal where he writes,”bankers allegedly acted in their own interest and created collateral damage on a global scale. … A standard the entire world relied upon to make decisions about money may have been manipulated by a small group for their own purposes. As corruption scandals go, that’s about as corrosive as it gets.”
Second, there’s an article on Wells Fargo paying $175 million to settle charges that it discriminated against black and Hispanic mortgage borrowers. More than 30,000 minority borrowers were charged higher fees and rates than similar white borrowers and more than 4,000 minorities were put into higher cost sub-prime mortgages than similar whites.
Finally, HSBC, the largest European financial institution, apologoized for allowing money laundering in the US from 2004 – 2010 that was linked to terrorism and drug dealing. It could end up paying fines of up to $1 billion.
I agree that the penalty needs to be much stronger (i.e. incarceration!) in order to really be a deterrent to future fraud. I’m upset that there are two systems of justice at work in our country – white collar, and everybody else. Most criminals don’t get a free second, third, fourth chance to steal!
We do need prosecutions of bankers and to see some of them go to jail. The penalties – fines and bans from certain lines of business – need to be meaningful so the banks and their executives and stockholders have strong incentives to stop these fraudulent and illegal activities.