It’s a good thing Elizabeth Warren seems to regard contending with uncooperative, evasive and obviously misleading witnesses as a form of sport. I’d want to punch them.
Today Warren continued the line of questioning that she started in her first Senate Banking Committee hearing: what is it going to take to get someone in authority to come down hard on banks and bank executives? Given the time limits imposed on each Senator, she is forced to focus on relatively simple questions that will expose how regulators are craven and/or captured. This time, the point of departure was the settlement for HSBC’s money laundering, which was widely decried as inadequate.
As much as Warren came off well today, if you knew the history on this beat, the responses by the Treasury and Fed officials were dishonest and infuriating.
There is a big dead body in the room, namely, Standard Chartered’s settlement last year over Iran-related money laundering lasting over a decade. Warren keeps asking the officials what level of money laundering-related abuses would it take to get them to pull the license of a bank, or even hold hearings on revoking their license. We’ll discuss shortly how that issue was addressed. But the bottom line is the Treasury and Fed representatives made clear that this was something they would not entertain, and the Fed was remarkably direct in taking that position.
Last year, Standard Chartered was negotiating a settlement of money laundering charges. The New York state banking regulator, Benjamin Lawsky was initially working with Federal banking regulators, under the lead of the Treasury, since this was an OFAC (U.S. Office of Foreign Assets Control) matter. Lawsky thought there was more to this than the national regulators did. He asked the point person at the Fed whether he could take this further. The Fed official, apparently assuming a newbie state regulator wouldn’t do all that much, gave his assent.
Bad assumption. Lawsky did precisely the sort of thing Warren asked about: he ordered the bank appear at a hearing to explain why he should not revoke its New York banking license. And the order itself provided riveting detail about how the bank had persistently defied previous regulatory orders to stop its money laundering with Iran and other verboten nations. It even ignored the advice of outside counsel.
Lawsky’s action produced a vitriolic response not only from Standard Chartered but from the Federal regulators, who started a full bore press campaign against Lawsky. But the only audience that mattered to Lawsky was Governor Cuomo and the New York press, particularly in Albany, and both were on his side.
Lawsky had all the leverage he needed. Standard Chartered conducted its US banking operations through a New York branch. Loss of the license for that branch would end its access to dollar clearing services. That would cripple the bank; indeed, it would be hard to see how Standard Chartered could do an orderly wind-down of that operation. We predicted, correctly, that the hearing would not take place; Standard Chartered absolutely did not want that to happen since a hearing would mean the settlement negotiations had broken down.
The bank admitted to $250 billion of impermissible conduct, more than four orders of magnitude above the $14 million it had previously insisted was all it had done wrong, and agreed to pay $340 million in fines. The Feds, apparently unwilling to reopen certain aspects of their negotiations with Standard Chartered, later had the bank admit to a mere $133 million in bad conduct and pay $327 million in fines.
Now Warren and the men she is up against know full well that the regulators can bring banks to heel any time they want to. The treat of the loss of key licenses or access to Fedwire, the Federal Reserve’s dollar clearing services, would be a death knell to too big to fail banks. So would a criminal prosecution, since many types of customers are required to stop doing business immediately with a firm that has been indicted. That is why the toughest, most litigious CEO in recent history, Hank Greenberg of AIG, has to step down when Eliot Spitzer threatened to prosecute AIG.
So why do the officials refuse to entertain this conversation? Frankly, I don’t think it’s so terrible to admit they can’t prosecute big firms, because you don’t need to do that to change behavior. You need to start getting executives thrown out and individuals sued and prosecuted. And the threat of prosecution or the loss of a license is sufficient to force action. It wasn’t all that long ago that the authorities were willing to do that in the US. Salomon Brothers, the biggest bond deal in the world, had its CEO, vice chairman, general counsel, and a senior trader all depart in 1992 when it failed to tell the authorities that it had failed to rein in a trader who had been ordered to stop gaming Treasury bond auctions. And in the UK just last year, the Bank of England forced Barclays to get rid of its chairman, CEO, and president after they dared trying to discredit a Bank of England official during the Libor investigation.
It thus appears that the regulators are afraid of or unwilling to flex their muscles. Can’t jeopardize our future revolving door payout, now can we? If that is indeed the real impediment, it only strengthens the case for cutting the banks down to size.
Now to the video. Watch how no one there is responsible for anything Warren is interested in discussing!
The first person to respond to Warren is Donald Cohen of Treasury who is Undersecretary for Terrorism and Financial Intelligence. You’ll see him take credit for the HSBC settlement (notice the “we”) but then backpedal massively when Warren suggest that Treasury would have anything to do with a decision to pull bank charters. Suddenly Treasury has no authority and must defer to bank regulators. Huh?
First, as Warren points out, Treasury is the lead on OFAC matters. Second, the Treasury Secretary the chairman of the Financial Stability Oversight Council, so he presumably takes the lead role (and if Geithner is any guide, has the real say) in determining what sort of actions might produce too much systemic risk. As Sheila Bair described at length in her book Bull by the Horns, Geithner neutered her efforts to force management and other changes on Citigroup. And nationalizing Citi was an active topic in the press through early 2009. Bair didn’t need to cudgel Citi with the crude instrument of a license revocation; with the bank in as bad shape as it was, it needed plenty of breaks from its regulators and there was every reason to expect full cooperation. Yet Geithner was firmly opposed to meting out any meaningful punishments and there’s no reason to think a Lew Treasury will be any different.
By contrast, if you read Andrew Ross Sorkin’s Too Big to Fail, you’ll see that Paulson got the regulator of the GSEs, then OFHEO, headed by Jim Lockhart, to go along with forcing them into conservatorship. And it was Paulson, not Lockhart, who gave Fannie and Freddie their marching orders. Freddie’s management seemed to accept the inevitable, but Fannie’s management was stunned and its counsel, uber bank lawyer Rodgin Cohen, was up in arms. Their reflex was to fight (their view was Fannie was sound enough to make it. but Paulson was of the view that the market would not differentiate between Freddie and Fannie, and if he put Freddie into conservatorship, Fannie had to go to). Paulson made it quite clear he was putting Fannie into conservatorship whether its management and board agreed or not, and they quickly came around to his point of view.
Fed governor Powell is utterly disingenuous. His answer is Catch 22. The Fed won’t revoke a bank’s license until it has been prosecuted, which it says is not its job. That’s awfully convenient, since an indicted (large) bank is a dead bank. Not controversial to think about pulling its charter then!
Well, what about criminal referrals? Somehow that phrase does not seem to be in Powell’s vocabulary. He virtually disavowed that the Fed has any regulatory authority (“we do monetary policy, that crime stuff is over there”). And he knows full well that once a bank is indicted, what happens to the license of that entity (if it is a major one) is an afterthought. So the Fed’s answer was baldfacedly clear: they never think it is appropriate for them to entertain the question of prosecuting a bank. The most they do is answer questions if the DoJ rouses itself. If you look at Warren carefully during this interaction, you can see her contain her incredulity and make her closing comeback.
The “oh, it’s the DoJ’s job” is particularly rich since we know that Federal prosecutors spend sleepless nights worrying about bank counterparties and employees, not abused homeowners or victims of drug kingpins. Recall this pious speech by Lanny Breuer:
In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.
Now where do you think Breuer got the idea that global markets might be affected? Oh sure, any big player under the hot lights will undoubtedly say that. But you can bet he got confirmation from Federal banking regulators. Do you think for a nanosecond if someone at the DoJ actually were to have gotten serious about going after HSBC, or even just some of its executives, that the Geithner Treasury and the Bernanke Fed would have sat pat? You can bet, as they did so visibly and aggressively with Lawsky, they would have pressured him to back down.
Warren deserves kudos for making the best of a very constrained medium to put pressure on public officials. But she can’t do a Ferdinand Pecora in seven minute interludes spread out over time. It’s good to see her give voice to pent up public frustration. But the jury is still out as to whether she can use her bully pulpit to get badly needed, long overdue reforms.