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Ian Fraser: HSBC’s $1.9 Billion Settlement Sets (Another) Dangerous Precedent

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Yves here. One of the things that has too often gone missing in the many discussions of why massive scale money launderer HSBC was not prosecuted is the basis of the “doing that would be destabilizing” excuse. When a company is indicted (mind you, indicted, not convicted), pretty much all Federal and many (most?) state agencies are required to stop doing business with it, immediately. The effect of the loss of so much business, particularly for a large financial firm, is seen as a death knell.

Of course, that’s the point. The threat of indictment of the company provides tremendous leverage to go after individuals. The Wall Street Journal’s editorial page went on a rampage against Eliot Spitzer when he used that cudgel to force the resignation of CEO Hank Greenberg. Now of course there is a different way to use this power. A prosecutor could just as well inform a board that it is ready to indict the company unless it secures the full cooperation of executives in order to secure prosecutions of all individuals involved in a meaningful fashion, top to bottom. That includes waving the company’s attorney-client privilege on this matter. Sending executives to prison has far more deterrent value that bringing a company down, since many will argue that employees who had nothing to do with the criminal activity would also be harmed.

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser.

The ‘settlements’ that London-headquartered banks HSBC and Standard Chartered have reached with the US authorities over serious criminal offences — including sanctions-busting and aiding and abetting terrorism and the global drug trade — are a travesty of justice. Even The Economist, a publication of which I am not usually fan, had a go at the ‘settlements’ saying:

The agreements put an end to uncertainty over the banks’ ability to operate within America, a key link in their global networks; their share prices both rose on the day the fines were announced. And the penalties are, in effect, levied on shareholders; not one corporate employee faces charges (although HSBC, at least, has clawed back payments to those responsible). Indeed, at a news conference this week Lanny Breuer, head of the Justice Department’s criminal division, suggested that an outright prosecution of HSBC was considered and rejected because of how damaging the impact could be on the bank’s viability, and thus on jobs and the American economy. Has a handful of banks become not too big to fail, but too big to jail?

Andrew Bailey, chief executive-designate of the Prudential Regulatory Authority, seems to believe they have. Bailey told the Telegraph’s Harry Wilson that some banks had grown too large to prosecute.

It would be a very destabilising issue. It’s another version of too important to fail. Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment.

So let’s get this straight. In Bailey’s universe protecting a bit of money is more important than the rule of law? Large banks and their senior executives must have an immunity from criminal prosecution — i.e. carte blanche to do whatever they want, including plundering the real economies, forming price-fixing cartels, rigging rates and markets, ransacking communities and funding terrorism, irrespective of the harm caused to others — for fear of upsetting financial stability? I am afraid this won’t wash.

If Bailey really believes it, he is unfit for regulatory office and should be forced out of his job. Writing on AlterNet Lynn Stuart Parramore said:

Senator Carl Levin, chairman of the U.S. Senate Permanent Subcommittee on Investigations, a congressional watchdog panel, observed that “the culture at HSBC was pervasively polluted for a long time.” Now we can be certain it will remain so. Criminal activity has been legitimized. In the world of banking, crime pays, big-time.

Anyone with half a brain must realise that such a stance is unsustainable in the long term. If it were allowed to persist, there’s zero chance of trust being rebuilt in the financial system. Without wishing to sound alarmist it could lead to anarchy and even civil war. After all, why should anyone else bother to obey the law if banks don’t have to? What is the point of having laws? What is the point of having regulators? The state would lose all legitimacy.
Here is what the Rolling Stone journalist Matt Taibbi said about the deals UK banks Standard Chartered and HSBC have pulled off with the US Department of Justice (introducing the clip):

Had pleasure of appearing on Eliot Spitzer’s Viewpoint last night to talk about the hideous Eric Holder/Lanny Breuer HSBC settlement, in which the government elected not to push criminal prosecutions against bank officers who admitted to laundering billions of dollars in drug money. Spitzer was the first guy I thought of when I saw the softball settlement, so it was cool to hear the prosecutorial take on the deal. When I came home after the show, my wife laughed. “It’s like you guys were fighting over who was more pissed off,” she said.

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36 comments

  1. Middle Seaman

    Even you believe the unchecked belief that the collapse of a large bank will bring down other major financial institution, the only small fine approach is way too favorable. DOJ could’ve caused the top management of HSBC to resign, pay back bonuses and be fined. Then it could have demanded much more money from HSBC itself. It could also put HSBC on probation.

    DOJ/Holder treated HSBC as family.

  2. jake chase

    Attempting to leverage the threat of company indictments on boards of directors assumes a fact not in evidence, that directors are independent of top management. In reality, directors are celebrity stooges hired by top management and dependent for their cushy livings on continued service as directors on multiple boards. These directors are the real pardoned turkeys of our corporatist system. They snooze through a half dozen monthly power lunches at which CEOs bloke smoke, and they rubber stamp board minutes prepared by company lawyers. The fees and cheap stock they collect in exchange for this service is substantial in the aggregate. Were the directors of any bank even to suggest cooperation with the prosecution of executive miscreants, not one of them would ever get another director gig as long as he or she lived. Perhaps that is why no prosecutor ever tried it. And don’t forget that every prosecutor is generally a director or law firm partner in waiting. There isn’t enough money in public service to make any of these prosecutors more than a loudmouth placeholder.

    When one knows enough about how things actually work the idea of reform is simply preposterous. Perhaps after the next crash, or the depression, or a hyperinflation, or the next world war…..

    1. Nathanael

      Or if a group gets mad and starts an assassination/execution campaign against the criminal CEO/director class.

      I don’t expect it and I wouldn’t do it, but thinking about the French Revolution…. it’s perfectly possible it might happen.

      Of course, if the government was backing the criminal CEOs, this would very quickly turn into a guerrilla war. Well, it’s one scenario to watch out for.

      Now, if we had a government which was interested in fixing anything, it would immediately propagate rules prohibiting company boards from nominating directors, soliciting proxies, or otherwise attempting to affect the outcome of corporate elections using money held in trust for stockholders. A flat prohibition on dilution of stock without stockholder approval would also be necessary. But this isn’t happening because the CEOs own the government.

  3. Jackson Nickels

    TOO BIG TO FAIL AND TOO RICH TO JAIL.

    Brought to you by Government Inc., “protecting thieves from justice for 50 years”

    1. from Mexico

      I think that the handwriting has been on the wall for some time, that US law enforcement is completely owned by the transnational corporations, which are allowed to operate with impunity.

      This became clarion in the wake of the BP blowout in the Gulf. Fish and Wildlife all but gave carte Blanche to deepwater drillers in the Gulf of Mexico. Here’s how a New York Times reporter put it:

      The federal agency charged with protecting endangered species like the brown pelican and the Kemp’s ridley sea turtle signed off on the Minerals Management Service’s conclusion that deepwater drilling for oil in the Gulf of Mexico posed no significant risk to wildlife, despite evidence that a spill of even moderate size could be disastrous, according to federal documents.
      http://www.nytimes.com/2010/07/06/us/06wildlife.html?_r=2&scp=1&sq=2007%20september%20fish%20and%20wildlife&st=cse

      All the law enforcement bureaucrats still need something to do, however, in order to justify their massive and ever-expanding bureaucracies. So the weight of the jack boot of the state falls increasingly upon the neck of the average guy or gal on the street. This chart, which shows the number of Americans incarcerated from 1920 to 2006, showcases the sordid tale:

      http://www.dailypaul.com/86866/what-happened-in-1980

      It’s almost enough to make one want to be a libertarian or an anarchist.

      1. Massinissa

        An Anarchist, sure. But Libertarians are just bastardized anarchists. Anarchists want to free people from state AND corporate power (With the exception of Anarcho-Capitalists, but thats another conversation). Without the state, who in gods name will protect the people from the predations of corporate power? The people have no such ability.

        If the government wont prosecute corporate power… I hardly feel that getting rid of the government entirely, or otherwise making it more vestigial than it is already, would be any kind of panacea to the root problem: that corporate power is unchecked and unbalanced.

        By the way, the Koch brothers consider themselves Libertarians. That should in itself be a very very telling sign that Libertarianism is not a viable solution to these problems.

        1. from Mexico

          So what are the options?

          1) No government:

          The indivdual faces off against the Koch brothers

          2) Bad government:

          The individual faces off against the Koch brothers and the government

          3) Good government:

          The individual and the government face off against the Koch brothers

          I agree that the only fighting chance the individual has to not be annihilated is option #3. But it seems like the Koch brothers have convinced a heck of a lot of people there is an option #4:

          4) Good government:

          The individual and the Koch brothers face off against the government.

          How could this be? I don’t think a lot of people realize the role the Koch brothers have played in creating the American police state, and that when they opt for #4 they’re really opting for #2.

    2. Wendy Alison Nora

      “Protecting thieves from justice for 50 years . . .”
      should read “Protecting thieves from justice since the beginning of recorded history.” Now all pretense has been discarded.
      There are some of us who hope that this outrageous exposure of the two-tiered legal system will give some credibility to foreclosure defense lawyers who have been trying to expose the criminality of foreclosing on real estate using forged documents. The direct approach: “Your honor, we are dealing with an entity which provides banking services to murderous drug chiefs in violation of anti-money-laundering laws. Does it surprise you that the it would claim to be the Trustee for investors in an unfunded trust and allow its servicer to come into court with forged mortgage documents to try to take this home on the basis of a loan which has already been paid for by the investors, credit default swaps, mortgage insurance and TARP funds?”

      Perhaps reverse psychology would work: “Your honor, you should let HSBC seize this home on the basis of the forged endorsement on the note and the forged assignment of mortgage. They need to have you launder this real estate title so that it can liquidate the home to pay their fine for money laundering.” Sounds reasonable.

  4. from Mexico

    You’d have to come to a place like Mexico to find a criminal justice system that rivals that of the US in its debauchery and corruption.

  5. Tom

    I now understand why executives get paid so much money for their work product.

    It’s a high risk job.

    I propose to apply risk based on dollar remuneration.

    Therefore, an executive job at a bank is hundreds of more times riskier than robbing a fully modern bank.

    It is now obvious that no one going forward should be stupid enough to rob a fully modern bank without first, consulting with the Board of Directors, top management and the owners.

  6. JEHR

    So how does corruption spread its rot from person to person, from institution to institution, and, perhaps, from country to country? Could globalization and really big institutions breed this festering sore that has become a cancerous excrescence that will eventually destroy its host which happens to be us?

    We have a front-row seat in witnessing the continuing corruption of the financial system and the government. Why is anyone bothering to write about re-structuring a system that is rotten to its very core?

  7. Fraud Guy- Also

    There seems to be a point missing in the logical train here. I am not aware that law enforcement authorities have stated that they DON’T intend to pursue criminal charges against individuals at HSBC or Standard Chartered. Have they, in fact, said this? Can somebody offer a citation.

    Look, I am the last person on earth to have confidence in the thirst for Justice on the part of the federal government. However, it may well be that something along the lines that Ian Fraser describes has actually come to pass–that the banks have agreed, in return for not being indicted corporately, to fully cooperate in the criminal investigation of those responsible.

    Just how do we establish that this is not the case?

    1. Yves Smith Post author

      Correct. They NEVER said that. The issue of prosecuting individuals has been conflated with prosecuting the institution. Huh?

      Look. at Barclays, the chairman of the board, CEO and president were forced to step down when they dared try to make the Bank of England look bad in Treasury Select committee hearings. If you can throw out the three top execs in a major TBTF bank and not have it fall over, it disproves the idea that any one, or even any group of executives in indispensable.

      1. lambert strether

        Which is not what you would expect in a system rules by law, but is what you would expect in a lawless system where theives take what they can.

        “Catch-22 says they have a right to do anything we can’t stop them from doing.”

    2. Chauncey Gardiner

      Re: … “Just how do we establish that this is not the case?”

      We need to see some individual perp walks, including criminal indictments of any C level execs who planned, organized, directed, sanctioned or enabled these criminal activities; failed to comply with related laws and regulations; overrode, circumvented, or ignored internal controls designed to prevent such criminal activity; or who had knowledge of the violations and intentionally mis-stated the bank’s published financial results.

      This, the Libor racketeering, and so much else that has occurred are egregious violations of law. Enough already!

  8. Mary

    A corollary

    Smaller fraud = prosecutable
    Huge fraud = Too big to fail (destabilizing)
    Small murders = prosecutable
    Mass murders/oppression = Too big to go after (destabilizing) (until convenient)

  9. lambert strether

    Fraser is right to frame HSBC as a legitimacy crisis.

    * * *

    I think the powers that be have already placed their bets on the compliance apparatus they put in place as a happy outcome of 9/11. And since they are experts at rigging the casino, it’s possible their bet may pay off (for them).

    Louis XVI probably thought just the same thing, however.

    1. DANNYBOY

      lambert,

      Correctly observed. My immediate response to Yves comment:

      “Without wishing to sound alarmist it could lead to anarchy and even civil war. After all, why should anyone else bother to obey the law if banks don’t have to? What is the point of having laws? What is the point of having regulators? The state would lose all legitimacy.”

      At this point the government no longer requires our agreement to their legitimacy. First they stopped representing the citizens, then they betrayed the citizens. Now they openly OPPOSE the citizens…because the power government projects is overwhelming.

      Yves, you know I am a great fan, but please forget concepts of fairness, justice, rule of law, and the assignment of legitimacy.

      I wish it weren’t so, as you do, but that’s where we are.

    2. Ms G

      … Except bayonets and cannons were not quite as effective as drones and other “compliance tools” in our post-9/11 Domestic Security Apparatus.

      1. Nathanael

        The US domestic security apparatus is worth precisely jack shit if the government has lost legitimacy in the eyes of the majority.

        It’s going to take a while for people to realize that, though. People are going to have to learn lessons from the people of Iraq and Afghanistan, or perhaps the people of the former Soviet Union.

        I would rather we got a government which was interested in re-establishing its legitimacy. This seems to be happening at the state level in some states. (Look for the ones legalizing cannabis.)

        The federal apparatus, however, seems to be completely broken. I blame the malapportionment of the US Senate, the gerrymandering of the US House, and the Electoral College. Proportional representation and approval voting might give us half a chance at a peaceful outcome, but nobody’s even *talking* about it.

  10. Fíréan

    Why no constructive action? Only plenty of talk, reporting, commenting, and debating about all these matters of injustice, allowing the demise to continue unobstructed.
    With access to all the bright minds,legal and economic backgrounds, and connections in the media and other fields, why not produce a well worded formal petition ?

  11. DolleyMadison

    When I went to (multiple) authorities about the physical threats, blackmail and blatant fraud upon the court used to attempt to steal my home by HSBC’s attorney, I was told that I should be ashamed – that i was trying to “ruin a man for no reason.” And that “they are just doing their job. After all, you may not owe them but you owe SOMEONE.” (never missed a payment and HSBC never lent me money or purchased my note yet has been trying to FC on my home for more than a year. Despite being found to have committed fraud in order to appear to have standing in lower court, local courts, law enforcement and state regulators are allowing them to appeal.) This may seem like one persons petty problem, but they are currently perpetrating the same scheme on thousands of homeowners and, if successful, will liquidate billions of dollars in U.S. Real Estate. Thank you for staying on this…it helps me to feel less hopeless and that at least SOMEONE believes me that these creeps are criminals.

    1. Shawnna

      Thank YOU for not giving up and fighting what is obviously an uphill battle.

      Please know you are not alone – even when it feels like it!

  12. Jimmy

    We can’t second guess the reason why the government refuse to convict the employees responsible for this crime. This agreement saved the government fro
    Having to dig deep into HSBC. Why put them out of business when you keep them open allow them to screw up again in a year or two then go after them again and make 2 billion more. This is more money for the government. Closed them down you don’t get anymore money

    1. DolleyMadison

      So if terrorists kill Americans, and Drug Lords kill border patrol agents and tourists and further gang wars in our streets, and families like mine are made homeless, – it’s all good b/c it gives our facist government more money with which to further corruption? Oh now I see…if you can’t beat ‘em join ‘em.

    2. Ms G

      “Closed them down you don’t get anymore money.”

      “They” meaning not just DOJ’s periodic cash infusions, but also a likely very significant percentage of the culprit Banks’ gross income.”

      Not that I think criminal fraud constitutes 99.9% of Bank revenue or anything.

  13. Nathanael

    Yves, the state is already very close to having lost all legitimacy.

    The drug war has discredited the state for the non-white population and a fair amount of the white population. The copyright mafia has discredited the state among a huge cross-section of the rest of the population. The patent trolls have discredited it among the most vibrant of the bigs industrial businesses!

    To the extent to which the government is allowing banks to steal people’s homes, this is particularly dangerous because this is discrediting the state among the middle class, and because stealing people’s homes tends to make people *particularly* mad.

    Then there’s torture. Our government is breaking its own laws in order to torture people and kidnap them without charges. Sadly only a small number of people seem to care about this, but it’s just another piece of self-discrediting.

    Then we get to the political problems. Gerrymandering means it’s not worthwhile for a lot of people to vote. Even when we do vote, our elected officials frequently betray us (Andrew Cuomo, trying to frack us to hell, comes to mine). That’s not very legitimating.

    And then there’s Bush v. Gore, which was the first actual coup in the United States since 1876. That’s discredited the state pretty extensively.

    What’s interesting is the question of how long things can stagger on after the state has lost legitimacy. Based on history, I’d say a very long time — decades. It seems to be *healthier* if there’s revolution/reform/a New Deal sooner, however; otherwise people get *used* to disrespecting the state and it becomes very hard to ever establish “good government” again.

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