Quelle Surprise! The Geithner Doctrine Not Only Puts Banks Above the Law, It Also Serves to Excuse Their Bad Behavior

Our Treasury Secretary, also known as the Bailouter in Chief and “Foamy,” has a default explanation for why ordinary citizens must bend over every time banking interests are threatened. The more formal statement of this policy is the Geithner Doctrine, which is “nothing must be done that will destablize the banking system.” However, Geithner also subscribes to the Humpty Dumpty School of Language, in which words mean what he chooses them to mean, nothing more or less. So “destabilize” means “hurts the profits or reputation of” and “banking system” means “any bank that is pretty big and/or well connected”.

The most clear-cut example of the Geithner Doctrine in action was when New York State Banking and Financial Services Superintendent Benjamin Lawsky filed an order against Standard Chartered for violations under New York law for money laundering with Iranian banks, among other things. Astonishingly, Federal regulators went on the warpath against Lawsky. As we wrote in August:

But the Treasury and Fed are also in an uproar, although they have no one to blame but themselves for their discomfort. The Treasury (supposedly the lead actor in investigating “terrorist financing” and violations of economic sanctions; the Office of Foreign Assets Control is a Treasury operation), Fed, DoJ, District Attorney of New York and the DFS were all investigating Iran transfers at various banks, including SCB, since 2010. The others has settled; SCB was still under investigation and seemed to believe it would get a clean bill of health.

It got even better. Standard Chartered, using an analysis cooked up by Promontory Capital, claimed a miniscule $14 million in transactions were out of compliance; Lawsky found a full $250 billion. The Federal regulatory were apparently to accept the Standard Chartered/Promontory argument and Lawsky derailed that.

My impression is that the outrage didn’t result simply from a supposedly secondary regulator operating independently and aggressively; it was also due to the fact that Lawsky threatened to pull the bank’s New York branch license and end its access to dollar clearing services. From a later August post:

I have to confess I’m really enjoying the dust up between the New York Superintendent of Financial Services, Benjamin Lawsky, and his opponents, namely, his target, Standard Chartered, and the flummoxed Federal regulators that he is showing up as so deeply captured that they genuinely can’t tell regulatory theater from the real thing.

The amount of consternation directed at Lawsky is telling. It’s as if he brought a heavily tattooed and body pierced trannie to a country club. He’s flouted the rules in a way that offends his detractors deeply, and yet he also can’t be brought to heel.

And have no doubt that Geithner was likely the moving force in the Lawsky drama. He’s evidently playing a similar role in the HSBC money-laundering case, in which the facts were so bad that the normally lapdog Department of Justice was contemplating prosecuting the bank. Bill Black flagged a key section of a New York Times account:

Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.

Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter….

A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.

Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.

“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”

Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place.”

Black’s recap:

To sum it up: the regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes. They warned that such a guilty plea could cause a systemic crisis because HSBC was an SDI. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged Holder to meet personally with Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, Breuer emphasized that DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.

Note the disingenuous statement made by the Treasury to the press. Yes, DOJ makes the “decision” whether to prosecute, but if DOJ were to prosecute in a case where Treasury had warned that the sky would fall if there were a prosecution – and the sky did fall – then the DOJ’s leaders would be the idiots who ignored Treasury and blew up the world’s economy.

And Black flagged the lengths Treasury will go to in order to shift responsibility for Geithner’s actions to others. It was Lanny Breuer of the Department of Justice (admittedly, a charter member of the “Be Nice to Banks Club”) who was the official spokesperson for the decision not to prosecute HSBC. That bit is understandable, but serves to hide Treasury’s role. And get a load of this, again from Black:

The Treasury statement completes setting the stage for the tale I promised to complete about Geithner’s sensitivity to his role in blocking prosecutions becoming better known. Breuer and I were interviewed by NPR about the HSBC settlement. …

When the NPR story ran originally it contained a quotation from me noting Geithner’s long-standing opposition to prosecuting SDIs and the government’s incentive to reduce greatly the penalties on HSBC because it was an SDI. My quotation mentioning Geithner was removed from the NPR story at the request of Treasury and replaced with this “Clarification.”

Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department that made the decision to defer prosecution of HSBC.

I was not “speculating” that “Geithner did not want to put HSBC out of business.” My statement was not only factual; it wasn’t controversial given the many insider exposes that have confirmed Geithner’s position on SDIs. (A position now parroted by Breuer.) The statement that Treasury got placed in the “clarification” is the same carefully crafted disingenuous statement that Treasury is using to obscure the continuing success of Geithner’s efforts to prevent prosecutions of the SDIs. What we now know definitively is how hyper-sensitive Geithner is to anything that brings to greater public attention his pusillanimous role in ensuring that fraudulent SDIs and the banksters that control them can commit their crimes with impunity from the criminal laws.

If you’ve been paying close attention to Our Fearless Treasury Secretary, Geithner’s conduct is true to established form. But we learned of a new wrinkle tonight. The Financial Times has a update on the Libor scandal, but its headline, “Geithner was told of Libor fears in 2008,” might lead readers to skip the piece. It making it sound as if the issue was that Geithner knew about the mismarking earlier than he’d previously indicated. But recall how the plot went, at least for Barclays, the bank most in the spotlight on Libor: from 2005 to 2007, it was gaming Libor to increase profits, which could result in Libor being higher or lower than what a true market rate would have been, and during the crisis, Barclays and pretty much every other bank were putting up artificially low Libor postings to make them look healthier than they were.

The key bit here, which the article assumes readers know, is that Geithner’s position has been that he told UK officials about Libor manipulation not long after he learned about it, and that it was due to managing appearances during market upheavals. And according to the Geithner Doctrine that would warrant doing nothing about it, since anything banks do to preserve stability is ever and always correct.

But the FT account makes clear that Geither had been told that the banks were manipulating the market to make money, not out of safety concerns:

The Federal Reserve Bank of New York was warned as early as mid-2008 that banks may have been misreporting their Libor borrowing rate to aid their own trading positions, much earlier than previously known.
Tim Geithner, then president of the New York Fed and now US Treasury secretary, was told by a senior colleague in a May 2008 email of her concerns about banks’ deliberate misreporting.

The email was part of an internal push among some at the New York Fed to press the Bank of England and the British Bankers’ Association to reform the benchmark lending gauge, known as the London Interbank Offered Rate.

It is the first indication that officials at the New York Fed had grown suspicious that banks may have been misreporting Libor to improve their trading results…

The email from Hayley Boesky to Mr Geithner – with three senior colleagues, Meg McConnell, Matthew Raskin and William Dudley, copied in – are among unreported emails seen by the FT that show New York Fed officials linking the incentive for banks to misreport borrowing rates to the bank’s derivatives positions.

The plea by Ms Boesky, sent a few days before Mr Geithner made Libor reform recommendations to Sir Mervyn King, governor of the BoE, is perhaps the first indication that senior US officials suspected traders may have been influencing banks’ Libor submissions.

“These individuals report to the head of [the] money markets desk, who often reports to the same person who oversees the derivatives book. They verify the posting with the boss to make sure it suits their derivatives position,” Ms Boesky wrote on May 23 2008.

The US Congress has launched an inquiry into Libor. In July, the New York Fed made public selected documents related to alleged Libor-rigging by Barclays, which had just reached a $450m settlement with US and UK authorities. Barclays admitted to taking requests from its own derivatives traders and those at other banks into account when making submissions to Libor and Euribor, the euro equivalent, from 2005 to 2007.

The New York Fed documents played down the possibility of a link between alleged rate manipulation to traders’ derivatives positions. Rather, in those documents New York Fed officials linked Libor misreporting to banks’ fears of appearing financially weak.

So get this: Fed staffers tried to make sure that Geithner understood profit gaming was a real issue, which suggests they knew or suspected he didn’t know about that aspect of bank behavior, or worse, was ignoring it. More details of the internal discussions:

Other emails seen by the FT at the New York Fed raised concerns about the possible influence of derivatives traders.

On May 1 2008, Deborah Leonard, a senior New York Fed official, speculated in an email to colleagues about what she referred to as the “lying premium” theory about Libor submissions. She said there could be an “incentive to lie” by banks if a large number of derivatives used a particular Libor rate as a reference.

In a June 3 2008 email, Matthew Raskin of the New York Fed noted to colleagues that a pending BBA proposal on Libor best practice stated that rates should be “submitted by members . . . with responsibility for management of a bank’s cash, rather than a bank’s derivatives book”, and that “rates must . . . not [be] set in reference to information given by brokers”.

Mr Raskin wrote in his email: “While these statements are meant to describe the current state of Libor, they are not consistent with practices described by panel members we’ve spoken with, nor with market perceptions of the process.”
Other authorities seem to have shared these concerns. In a July 14 2008 email, one Fed official noted that the “principal concern” at the International Monetary Fund “centred on who at the banks provided the Libor quotes – ie making sure the rates come from funding desks as opposed to derivatives traders”.

It’s important to recognize the timeframe. After the Bear Stearns rescue, the officialdom went into “Mission Accomplished” mode. The stock and bond markets rallied and business reporting was generally chipper. Even though Fannie and Freddie were a lingering worry (and the Lehman melodrama kept rattling on), Hank Paulson made his famous bazooka quote in July as he set forth the Administration plan to stabilize the mortgage giants. Even though this period now looks like a brief hiatus, the consensus was that the market upheavals were pretty much over and only some cleanup remained. So the warnings about market manipulation would have been seen as more serious given the then-current prevailing belief that the worst of the crisis was past than they appear given what followed.

The New York Fed contends it did address these issues, even thought its Congressional testimony indicated otherwise:

A New York Fed spokeswoman said it had determined by “early 2008” that Libor was unreliable, and briefed officials in the US and UK in an effort to address the flawed rate-setting process in London and possible “conflicts of interest” at the banks.

“The New York Fed developed tough reform proposals including plans for independent audit of Libor submissions to prevent Libor misreporting, whatever the reason, and pressed the UK authorities to adopt them.”

But let’s consider the related issue. Geithner’s focus in his previous remarks on Libor manipulation focused on bank trying to pretend they were healthier than they were. Geithner’s failure to acknowledge publicly that the banks were also gaming Libor for fun and profit, whether or not he discussed this with the Bank of England, is yet another cover-up for them.

And it’s an even more pernicious manifestation of the Geithner Doctrine. Not only does it entail refusing to mete out fitting punishment to banks and their executives, it also apparently entails hiding their misdeeds to avoid the annoying game of having to discipline them. After all, if you’re not going to do anything about bad behavior, why do you need to acknowledge that it exists? It’s so much more convenient to maintain the fiction that banks can be relied upon to do the right thing because they’d never want to suffer the reputational damage of being caught out. But with enablers like him, bank criminality would never come to light, by design, ending the fear of reputational harm.

I had assumed the insufferable arrogance of top bankers, which was a pronounced shift from their fearful state in late 2008 and early 2009, was the result of the Administration’s body language that it was fully committed to throwing its weight behind boosting their profit and their asset prices. But it may have had at least as much to do with their recognition that Geithner would make sure that none of their bad deeds would be punished.

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  1. Bhikshuni

    ” Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.”

    ” What we now know definitively is how hyper-sensitive Geithner is to anything that brings to greater public attention his pusillanimous role in ensuring that fraudulent SDIs and the banksters that control them can commit their crimes with impunity from the criminal laws. ”

    So perhaps these are the possible only leverage mechanisms left?

    Thanks for your steadfast work, Yves (& Bill Black!) May you live long wit vigorous health of body and mind !

    1. TitusPullo

      Yves wrote: The most clear-cut example of the Geithner Doctrine in action was when New York State Banking and Financial Services Superintendent Benjamin Lawsky filed an order against Standard Chartered for violations under New York law for money laundering with Iranian banks, among other things. Astonishingly, Federal regulators went on the warpath against Lawsky.

      I don’t think the ‘Geithner Doctrine’ belong to Geithner at all……

      In June 2010 (prior to Lawsky’s August 2010 cease and desist order) William Ihlenfeld – the U.S. Attorney in Wheeling, West Virginia- had been told to stand down in by the Department of Justice; just as they were preparing to indict HSBC for as many as 175 counts of money laundering .

      Prior to both stand down orders, UK investigation began in early 2010 (and concluded in 2012) when a whistle-blower gave UK Revenue and Customs, Britain’s tax authority, information of more than 8,000 accounts held at HSBC’s subsidiary in Jersey (the largest island in the English Channel – and Tax Haven); the accounts contained about GBP £669 million (USD $1.2billion) And, while a majority of the accounts were held by British citizens, nearly 4,000 belong to citizens of other countries – with more than 100 Americans held accounts with suspected links to CIA front companies.

      The US Senate Permanent Subcommittee on Investigations released a report saying HSBC allowed clients to move funds from countries that includes, Mexico, Iran, the, Cayman Islands, Saudi Arabia and Syria ($7 billion of dollars from Mexican drug cartels and 25,000 Iranian transactions totaling over $19 billion, in just one week). Saudi Arabia (nation to all 9/11 Al Qaeda terrorists), Iran (declared a nation of state sponsored terrorism by the US) and Syria – suspected of having ties to Hezbollah and Hamas – Islamist groups that the U.S. considers to be terrorist organizations.
      This alert initiated US agencies in the investigations, which, besides the DoJ, included the US Attorney’s office, the Office of the Comptroller of the Currency, and the Federal Reserve Bank of Chicago.

      However, HSBC only received requests for information from the DoJ and the Attorney’s Office, which focused on the bank’s global banknotes business and its “foreign correspondent” unit, which both move money around the world. The bank’s global banknotes business moved money around the world on behalf of its clients, often from central bank to major domestic banks (now shut down). The foreign correspondent unit is (still) involved in transmitting company funds to countries where they did not have bank accounts.

      HSBC “failed” to monitor $60 trillion in wire transfer and account activity from 2006 – 2009. Ignoring, for the moment, 2002-2005; how does any bank perform any transaction with any of these states from within the borders of the USA and UK without the CIA/NSA and MI6/DI, respectively, being made aware of it?

      1. Susan the other

        I know. Timmy, Eric and Barry are all goats in the Land of the Free and Home of the Pusillanimous. The global banking crisis is what we get when we create a system within a system within a system and then come to rely on it beyond its purpose (funding a cold war against “communism” for 50 years). So here we are struggling to make things work in a totally moribund world. This is why I doubt the efforts of anyone, no matter how forthright, to set a new agenda. When Barofsky urged Occupy et al to do so in order to redesign the SEC, I almost laughed. I honestly think it is impossible to do anything but start over. Let’s leave this sinking ship and board a new modern one.

        1. Bhikshuni

          Well, if Yves and Aurora, Bill Black, et al, started a member-owned co-op bank or insurance company, I don’t think there would be a shortage of applicants!

          With the 2-tiered justice and economic systems we need respective appropriate services.

          It is time to offer the public alternatives to the moral-political-corruption status quo!

  2. psychohistorian

    Nice posting Yves!! You continue to publish some awesome journalism that continues to put the captured MSM to shame.

    The Geithner Doctrine and lying premiums hidden by dear Foamy are not surprising to me. He is just currently a part of the global cover up of our incredible financial mess.

    Who is going to be his replacement next year? I expect it will be someone who will pretend and extend the Geithner Doctrine as needed to keep the control of the global inherited rich intact…..and despicable Foamy will ride off into a rich sunset.

    Anybody in jail yet? I mean for other than smoking weed.

  3. Expat

    For those of us who have worked in trading for investment banks, we know how it works. The management covers their asses by forcing traders to take compliance training and by paying off politicians (direct payments and campaign support). Meanwhile traders are instructed and allowed to do whatever it takes to make money. Some banks draw the line at murder, but it really depends on the size of the deal, not the bank.

    Of course, this blog is concerned with finance and banking so we are not discussing other industries. Energy, food, construction, and mining businesses are just as bad, if not worse.

    The surprising thing here is not that Geithner and the Treasury are protecting TBTF banks at all costs, but that they are being so stupidly open about it.

    If Geithner would simply invoke one of the Patriot Acts or request a Presidential finding stating that the preservation and protection of these institutions are necessary for the security of the United States, he could do whatever he wanted, squash stories, hand over free cash, rape choir boys, shoot up elementary schools, murder journalists, and take bribes all legally and without anyone knowing.

    basically Geithner is an idiot. But we knew that already.



      Your considerable experience supports all that you commented here, but let me add to your credibility, as if anything more were necessary.

      Of course Geithner would cover up LIBOR gaming for Profit, it fits well within his definition of his role and criteria of success. Of course he hides the Banks misdeeds. That, he considers his job.

      The only satisfaction that I receive from these commentaries is peripheral, however. In this case I do get a chuckle everytime Bill Black refers to SDIs.

      In my mind, I hear STDs.

      Another Wall Street problem.

    2. DP

      “Of course, this blog is concerned with finance and banking so we are not discussing other industries. Energy, food, construction, and mining businesses are just as bad, if not worse.”

      You left out big pharma, which is as dirty as it gets.

      1. Expat

        Ah, yes, Big Pharma. Those wonderful people who bring us human testing of our future drugs when those tests are illegal in the US and Europe. How, you ask? Simple. They use poor Africans and Asians. And they get paid to do it. Of course, it all in the name of saving lives…until the occasional drug is approved, then tough luck Africans…you have to pay for it now! Can’t afford it? Oh, well, it’s not our job to save lives.

  4. Clive

    Another one of those “yes, yes, we know already; it’s all true but what, exactly, are we all going to *do* about it ?” subjects.

    Apart from NC’s continued throwing things like this into the spotlight, I’ve got a bit of an out-on-a-limb theory which I’d be grateful for feedback on.

    What I’m beginning to think will ultimately resolve this gutter banking is… wait for it… the United States Department of Defense and possibly the FBI too. This theory is based on my reading of, say, things like the auto bailouts being sponsored (from behind the scenes) by the DoD simply because their demise would have rendered the US being incapable of manufacturing military vehicles. Not because a Chevy has anything directly in common with a Humvee but because component suppliers, metallurgy, engineering know-how etc. etc. would be impacted without a consumer vehicle domestic manufacturing capacity. A supply chain is only as strong as its weakest link, so with no US auto manufacturing, you’d have had a limited local supply of components — and it is these components which are also needed for military transport. Effectively, consumer autos subsidize and enable military machinery. Therefore, the DoD needed the survival of GM, Chrysler and Ford. That’s why they were bailed out.

    If my argument has any validity, then this offers some hope for rescuing the financial system. Even though the DoD, the FBI and others of their ilk have a long, long history of being evil, ultimately they too are threatened by an out of control, predatory and above the law financial services industry. The top brass within those agencies must be increasingly aware that at the moment it’s the political class which is hostage to the TBTFs. Doesn’t take too much of a stretch of the imagination to suggest that one day, a General or Admiral gets the nod from a TBTF who’s interests are threatened and thinks that a little gunboat diplomacy might be the answer. I’m the world’s least fan of the US armed forces but one thing I suspect is that they don’t like being pushed around by civilians, especially civilians on the make for their own ends.

    So, I’m expecting pushback from the US armed forces and secret service agencies. Covertly initially, then more openly as time goes by.

    When I have a theory that I don’t see anywhere else, I tend to think it’s just me being off the wall. Hence my question: is any of this based in reality ? am interested in what others think.

    1. Dan Kervick

      Maybe that would help. But could it be be that one reason these firms are receiving so much protection is that they are already doing certain kinds of off-the-books work for the US national security state?

      1. Aquifer

        Dan – quite a lucid explanation for all this was put forth in a comment to Stoller’s article on Leahy here @ NC the other day – “TitusPullo says: December 17, 2012 at 10:42 pm”

        I thought, quite frankly, using Occam’s razor, that made the most sense of all. I leave it to TP to reproduce it here if (s)he so chooses …

        1. JennyJ

          I trust TitusPullo doesn’t object to pasting:

          “TitusPullo says: December 17, 2012 at 10:42 pm” ‘ Leahy’s lack of interest and the DOJ’s lack of prosecution for HSBC criminality is likely due to the fact that HSBC has been working with and on behalf of US agencies (CIA, et al), explicitly – all part of a “just do what needs to be done” mentality that prevailed post-9/11.

          Ten years after 9/11, this administration looking to line itself up for easy financial services, pre-election prosecution (to counter the ‘soft on Banksters’ criticism) has Holder and the DOJ diligently investigate HSBC for three years. As such, the DOJ does what the DOJ does best for any incumbent President – it hands the administration an election year ‘October surprise’: an open-and-shut case to prosecute one of the biggest banks of them all, and a win in the election.

          So, imagine the ‘November Surprise’ when, on the eve of Holder handing out indictments, HSBC tells the DOJ that, actually, all of this nasty banking business had been for, and on behalf of Uncle Sam’s Praetorian Guard (and it has the ‘indemnity’ paperwork to prove it); HSBC had simply administrated the financial transactions of the CIA, its friends and its clients (allies and enemies alike). Sure, there were ‘transaction’ fees, overheads, maybe some excessive FX fees, but all-in-all it had been sanctioned and approved by the consigliere of the previous administration and this one – just ask Leon Panetta and that new guy, General ‘horndog’ Petreaus.

          The DOJ had stumbled upon its own decade long Al Qaeda-Los Zetas-CIA-Iran-Contra-type funding fuckfest. The October Surprise had to transition itself through a ‘November Nonevent’ into a ‘December Dud’. Because, the political jeopardy for this administration (or a prosecuted HSBC) announcing that the Pantheon of Wall Street is indeed a bastion of corruption, but it is this (and previous) administration’s sanctioned corruption, was likely to be less damaging than announcing: yes, banks and the bankers are bad, we tried our best, they are still too big to fail or jail, it’s their fault, let’s discuss how bad this TBTF/J problem is and let’s not look at the underlying basis of HSBC’s actions beyond their marginal profit motive. ‘

          I agree with TitusPullo. What motive and confidence underpins HSBC’s management that the risk of Trading with the Enemy, Drug Money Laundering and countless other violations wouldn’t result in its demise?

          1. Yves Smith Post author

            The reason I have trouble with this theory is the US would not use a foreign firm to do its dirty work if it had other options. Citi is the most “global” bank, and JPM would have been a viable choice.

          2. darms

            The reason I have trouble with this theory is the US would not use a foreign firm to do its dirty work if it had other options.

            Remember the Bank of Credit and Commerce International (BCCI)? They did plenty of dirty work for the CIA…

          3. Susan Pizzo

            I’m thinking it needn’t be either/or – Libor wasn’t. The global economy is being run as a vast criminal enterprise. We have some 14 ‘intelligence’ services (well documented in the Washington Post’s ‘Top Secret America’), all running programs on a ‘need to know’ basis. No doubt diversification occurred – that way everybody’s got skin in the game. I appreciate Yves’s thorough update on the Libor/derivatives connection and wonder how long it will take before some grad student in need of a novel thesis project graphs the change in rates vs. client losses. Bonus points for impact on the Greek crisis…

          4. TitusPullo

            In 1991, The Bank of Credit and Commerce International (BCCI) imploded it involved bribery, corruption, money laundering, gun running, drug smuggling, and terrorism, and upwards of $5 billion (enormous amounts in the 80’s) in lost or stolen assets in more than 70 different countries. According to the then CIA Deputy Director Richard Kerr, the CIA’s Directorate of Operations, the CIA had its own people working inside the bank at the highest level, it kept funds at various BCCI branch offices, and used BCCI’s home office in Pakistan as a conduit for some of the $2 billion in secret U.S. aid to mujahedin rebels fighting Soviet forces in; covert funding, stolen by corrupt Pakistani officials, and US agency “officers” using BCCI accounts

            The then NY, Manhattan District Attorney Robert Morgenthau upstaged the U.S. Justice Department (i.e. didn’t receive a Benjamin Lawsky’s and William Ihlenfeld-type cease and desist order) by indicting BCCI and two of its top executives, founder Agha Hasan Abedi and CEO Swaleh Naqvi, on charges of fraud, larceny, bribery and money laundering.

            BCCI served as a “Federal Express service” for CIA weapons, drugs, gold and currency for smugglers all over the world, it helped to finance and ship Scud missiles from North Korea to Syria and Chinese Silkworm missiles to unidentified countries in the Middle East. The CIA used BCCI branches in Europe and a front company in Warsaw to trade in weapons. So much so, that the “CIA” had several checks drawn on a BCCI account from Manucher Ghorbanifar, an Iranian arms dealer who played middleman during the Reagan administration’s covert attempts to negotiate the release of U.S. hostages in Lebanon with the Iranian government (Iran-Contra).

            In Washington, Sen. John Kerry of Massachusetts held subcommittee hearings, and cited a 1986 CIA memo, five pages long and stamped SECRET (followed by a much more detailed 1989, ‘SECRET’ 30 page report) summarizing the agency’s knowledge of BCCI’s activities-including the clandestine acquisition of First American Bankshares of Washington, D.C. Both memos were prepared by the CIA’s Directorate of Operations (an indication that the agency was actively involved in BCCI) and sent to various government agencies including the Treasury Department, the Federal Reserve Board and the Justice Department. The CIA memos advised that BCCI was involved in money laundering, “narcotics-financing,” gunrunning and holding large sums of money for terrorist groups; that BCCI had established a so-called black operation and that a bank-within-a-bank consisted of “secret, managers’ accounts” used to enable favored clients to move money without attracting the attention of international banking authorities.

            But the bigger issue in Washington was whether Treasury, FRB or Justice Dept. had done all it could to alert the rest of the U.S. government to the bank’s violations of U.S. law. Treasury Department, FRB and the Justice Department all played hot potato with the question. The FRB, which approved the acquisition of First American in 1982 on the basis of what may have been misleading information about its Arab purchasers, says it never got the memo. The Justice Department, which prosecuted officials at a BCCI branch in Tampa, Fla., for money laundering in 1990, maintained that it was still following all available leads to BCCI’s behind-the-scenes ownership of First American. And Treasury officials said the department got a single memo only in 1986 (Whodanode?).

            No senior US- BCCI bank employee was indicted. Chief among them being founder Agha Hasan Abedi (Pakistani officials “refused” to give him up for extradition), CEO Swaleh Naqvi and Clark Clifford, chairman of First American (ranking patriarch of the Democratic Party). Clifford and his law partner Robert Altman (also First American’s president), made millions advising BCCI on a variety of legal issues-but they maintain they were duped, like everyone else, about the true nature of BCCI’s activities.

            HSBC – today’s BCCI.

      2. Hypothetical_Taxpayer

        Does make you wonder how much “dirt” the banks have accumilated on the USG? Fear of bank “whistleblowing” to the press may explain a lot.

    2. Rob

      I would say,”that ship sailed long ago.”.so long ago,it has set up colonies.
      There is no military in this country.the generals,admiralal are all beholden to their superiors.the superiors all ready know that they work for the big financial and industrial interests.and the ones who don,t know that,aren’t allowed to think.They just take orders.
      It has always been this way.but in the last century or so, what you are describing is the”establishment” .An example of these links of power,is “the council on foreign relations”.Look at it’s membership rosters for the last ninety y.ears.Then read a good history book.A CERTAIN SIDE OF THE CLASS STRUGGLE IS REPRESENTED BY THE COUNCIL.they were created as a “circle of helpers””now who knows? a powerful network
      Then there is the more mundane of connections,military folk retire early.while in positions of decision making for the gov’t defense apparatus ,they get to be in charge of huge amounts of spending.while in service they have been brought up by those who went before them.those who came before,retire and often land lucrative private sector jobs,in industries that, appeal for public sector expenditures,like:auto,airways,security,weapons,steel,chemical,supplies,etc.And when the brass of today retire, they want those big cushy salaries too. And their underlings who follow in their footsteps ,may be amenable ,to continuing on the purchasing train.I haven’t seen a detailed list since one from the sixties.
      , but the list was long..
      Another example was USMC Gen. Smedley Butler’s book/story;”War is a racket”.1935.
      Before he went on to expose the plot by the houses of Morgan and DuPont to overthrow the US gov’t/franklin Roosevelt,in an attempted fascist coup in 1934.where in the bankers used the American legion and the liberty league for muscle.There were supposedly a million of these american strike breakers/brown shirts.that was the greatest generation too.But before that,he said of his years commanding the marines;
      Into,china,for standard oil
      Into Nicaragua ,for brown bros bank
      Into all sorts of places,the marines were there to be the muscle for the multinational corporation.He said Capone could have learned from them.
      And today,it is the same,just different faces.
      There is no separate military in this country.they are owned and directed by big business.they have already been co-opted.
      And what is worse, is the military train in crowd control tactics… Who do you think that, is meant to control….. All those pesky people who think this is THEIR country.
      Shirts for the banks ready to go in 1934.

  5. Bill

    Geithner can’t hold it ALL together . Hes just one man. When it blows , it will blow . No human will be able to stop it .

    Unbridled greed and corruption always comes to a bad end .

    It will again.

  6. hermanas

    Can’t recall this “Extra-legal Banks Own Congress” civics chapter.
    Thanks for the help, Yves. On all you do too.

  7. Potomacker

    I’m lost as to how prosecution of the actors within HSBC involved in criminal activities might lead to a “…death sentence for the bank.” Is this merely hyerbole akin to the smoking gun in the form of a mushroom cloud? And what is the measurable fallout to the banking system if HSBC is dissolved? Have any of us suffered for the loss of Barings?

      1. charles sereno

        @ Potomacker You’ve given me an entry to get my 2 cents worth in — (“death sentence for the bank” “mushroom cloud”). The first atomic bomb (Trinity) was exploded in 1945 at Alamogordo and it did produce a “mushroom cloud.” To my knowledge, no exploding bank has ever produced a “mushroom cloud” nor has any ship fallen over the edge of the ocean.
        Bernard Lawsky (erstwhile Lancelot) is awaiting license from Cuomo (erstwhile Arthur) to attend the Tournament. These guys are just more of the same.

    1. Hypothetical_Taxpayer

      A mushroom cloud is not the real problem.

      It’s Armageddon. That’s when Beelzebub, Lucifer and Cerberus break loose from Hell and terrorize the Earth.

      oh wait…

  8. Elise Mattu

    Well what in the world can be done about Geithner? You cannot even say that he serves at the pleasure of the Presdient, as Geithenr himself states that Obama works for him. He has said this at various official meetings that he attends with foreign officals. And Obama certainly dotes on the guy.

    One thing that could have been done is that back when he lied to Congress on several occasions circa 2008 , ’09, and perhaps even in ’10, he culd have been impeached. Lying to Congress is a felony, and if anyone in Congress had wanted his hed, they could have gone for it.

    1. LeeAnne

      that remark was meant to be snark, but come to think about it, there are serious correlations between venereal disease and Bankster crime headed by Geithner, initiated by his predecessor Hank Paulson supposedly representing and protecting the interests of ‘the people’ of the United States.

      Being intimate with any one person in this bankster system; as in bankster counterparties, gets you infected. Trying to cure the disease by prosecuting and imprisoning them involves informing every person who ever had an intimate relationship with any other person in the chain. It could be done. Its done selectively in the illicit global drug industry. Small street dealers get busted, turning prisons into a growth industry, expanding the criminal justice system in general, while globally the big guys stay in business unless someone like Noriega steps out of line.

      Thinking about the problem of prosecuting criminals in the banking system in that way simplifies things.

      Its also, if I say so myself, a great idea for giving non-violent drug dealers a break to open up prison space for banksters.

      1. DANNYBOY

        Let’s make this simple:

        Bankers do deranged ‘banking’

        Bankers often do have STDs

        Bankers mostly use illegal drugs

        bankers are just not socially constrained.

        Got a diagnosis yet?

          1. DANNYBOY


            I worked among Them for 30 years. My report is that proximity makes you sick. They need to be isolated, much like any contagion.

            Ever wonder why they call it Financial Contagion?


    but Yves,

    Don’t you think Geithner is just plain more effective at maintaining the bank’s stability without the bonds of law, without the constraints of principles…without any humanity holding him back?

    I guess that he just took the course of ‘the ends justify the means’

    Seen many like that.

  10. Brooklin Bridge

    OT, As of yesterday, Obama explicitly put Social Security cuts on the table (via the stupid index). I realize we all knew he was probably going to do it, even though he implied or stated he wouldn’t during his campaign (what else is new) but now he has actually gone and done it. It’s a shameless attack on our elderly.

    This is also the time to raise a hue and cry on every possible blog site (yes the scum in the White House does read this stuff) just as was done when they floated the Medicare eligibility age hike balloon. So I’m just wondering why no post on the subject has yet appeared here on NC?

    1. LeeAnne

      So, while all eyes were on the Newtown massacre of innocents where Obama was crying, the media didn’t notice that the war on seniors was moving right along.

      1. Susan the other

        The “chained CPI” for decreasing the SS increases over time is like negative compound entitlement. After 10 years you have accumulated much less than you bargained for. And Congress is giddy about this because it will divert traffic from the cliff for now. The Chained effect argument blithely assumes prices will come down in balance with their .3% annual tweak. Everyone else thinks prices are goin’ up.


      if he’s Time’s Man of the Year, than he’s not mine.

      Time Magazine and I have somewhat different values

      and interests

      and ideas

      Different species, I guess..

    2. Brooklin Bridge

      Times magazine has been little more than a propaganda rag for people with Attention Deficit Disorder for a long long time.

  11. Norman

    The handwritting on the wall. The purge of the Generals & Admirals to warn off the others. Greed & corruption of the Government. The “O” just a tool of the leaders. The little black book, where one is, depends on when one will fall out of grace, if on front, likely to go to jail to keep the holder out, in the back, safe until the who system implodes. We are witnessing the last days before the idiots roar out of the asylum and all hell breaks loose. Happy holidays all.

  12. Brick

    My suspicions are that there is far more of story behind the scenes than we suspect and I am not sure we are asking the right questions.

    Manipulating libor for profit seems like a clear case for criminal prosecution. It also says something about regulation to me when the banks caught so far are a British bank and a Swiss Bank. In a nut shell I would say that UK and Swiss regulators are keen to clean house, if not to seriously slap wrists.

    Motivations about why HSBC did not face criminal charges and loose its US banking licence might not be quite as suggested. HSBC is possibly one of the few true global bank covering a broader range of countries than any other, but is busy largely withdrawing from the US after its problems with Household. Since HSBC forms a key part of global financial backbone who exactly looses and gains if HSBC was to loose its US banking licence? (probably HSBC, US Banks ?, US economy ?, UK Banks ?, HK economy ?).

    Another tricky point for me is how does a bank detect money laundering and terrorist financing. The simple answer is to have systems which monitor cross country transfers,and unusual activity on bank accounts. Now since JPM, BOA and others are reportedly being investigated as well (see link below), we should perhaps consider exactly how the monitoring systems may impact us. In the UK any unusual activity on your bank account will potentially automatically result in your bank account being frozen and potentially you become a terrorist suspect if you pay a large check into your account. It should be easy to detect large amounts of cash going into accounts, but you can be sure that banks will make a dogs dinner mess of it. There may even be banks who decide to close down their US operations to bypass the rules and get into the profit making money laundering. Inconsistent regulation strikes again with banks trying to arbitrage the inconsistencies down to the lowest point, only this time they bet on the wrong horse. Geithner has sympathy with the inconsistencies and lets things ride.


    1. charles sereno

      To be clear, the traders under prosecution are presently 33 and 41 years old. Lord knows how old they were when they purportedly committed their crimes. Rest assured, we’ve got ahold of the “masterminds.”

      1. charles sereno

        NC readers: Orange alert!!! USB tops Barclays with $1.5 billion settlement on Libor. I’m breathlessly awaiting commenters (much smarter than me) to weigh in on this.

  13. Wat Tyler

    Off topic but I would like to share a marvellous quote from the English writer GK Chesterton from circa 1924 that I just discovered :

    “The whole modern world has divided itself into Conservatives and Progressives. The business of Progressives is to go on making mistakes. The business of the Conservatives is to prevent the mistakes from being corrected.”

    Now if we can only understand why people seem to divide into this binary state (if ,in fact, they do).


  14. JohnB

    The debt ceiling i.e. the US Gov’t not paying their bills due is unconstitional. Here is why:

    US Constitution, 14th Ammendment Section 4
    “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

  15. kevinearick

    Are you out ahead of the HFTs on healthcare winners and losers? You know they are going to turn around and try to re-establish the hash table pointers. They always do and they always get slaughtered, like placing sandbags in front of a river, which is why Bernanke has to keep doubling down, expanding the output gap between reality and perception. HFTs are like millipedes compare to II. They have already lost; all they can do is liquidate with increasing efficiency, until they can’t.

    I know many are in a hurry, but this is already the fastest empire crash in History, by a considerable margin.

  16. Tom

    The DOJ should be concerned with the law – only – not the economy. It is utter trash that anyone can believe the demise of a bank (the orderly demise) will mean anything to the economy – we are more talking about the prosecution of people who aided and abetted the violation of the law within the bank and the de-concentration of the edifice. Are we that deluded by econo-speak to believe that certain people possess knowledge beyond a lay-mans comprehension? That their knowledge will save our economy – and, that knowledge is now magically possessed by those same people who trashed the economy in the first place?
    Their admissions to being guilty of theft, fraud, deception are legion – they yell at the top of their lungs saying; we know what we are doing and, we have seen the result in our believing them and, now know what they were doing. Now they pontificate about what future disasters will befall us if we ignore their predictions as solid truth.
    Now, the DOJ has shown it’s cowardice by standing down and, hiding away from finding the truth and from upholding our laws. The DOJ believes the idiots (TBTFs) who hold signs up proclaiming the end of times. Our elected officials would rather follow the demented gospel espoused from thieves, crooks, con-men, psychopaths, hucksters, snake-oil-sales-men and idiots without a touch of savant in-em – rather then follow the will-of-the-people.
    What idiots believe that cutting SS benefits will do anything other than cut demand for goods and services while at the same time cutting the general welfare of its people. It is sick economics espoused by, the above, gospel singers.
    How shortsighted to think the rule of law; a guided law that has developed through thousands of years and assembled under our constitution — shortsighted to believe that placing the interest of money above the law would somehow advance humanity. Placing the law under the gospel of economic idiots in the name of a free market – how has that worked out?
    I thought the DOJ was to pursue justice and then, we would all figure out how to pick-up the pieces and move forward after justice has been done. Now we have progress short-circuited by the fear of the future. Fear being espoused by the few who will benefit by having a population in continual fear.
    Is not fear the highest form of tyranny?
    Is this not the same thing we fell for when we thought the Iraq war was a good thing? The same thing when we thought torture was OK? preemptive war?
    Now we are supposed to believe that Justice is no longer dominate over fear but, is now to be subservient to it.
    Bravo cowards in congress and justice – you now serve under the tyranny of fear. This fear is being fanned by TBTF financial institutions in the service of avarice and greed in opposition to our founding principles and, to the detriment of the will and shared prosperity of our people. Congratulations cowards of the congress and justice – you have managed to dim the lights further upon hundreds of years of human progress. Your abdication of duties was made in fear and, thereby in cowardice.
    Be brave for once. You fuck-ups in TBTF institutions….give up your egos for you have nothing to hide from us (except your ill gotten gains) mommy found out you were stealing from the purse and the rest of us know what fragile ignorant cowards you are so, stop hiding it and fess up — we already know that you are not the titans you advertised yourselves as and, we know your to punk to come out of the closet. Admit it movers-and-shakers – you ain’t all that.

  17. Ep3

    Yves, aren’t we building monsters with this thinking? What I am thinking is, say a bank breaks a rule, plays with libor or whatever. So instead of getting in trouble, geithner gives them a free pass. So what would the bank do? I think they would push the limits even more. And timmy boy would give in. And on and on.
    So what happens when the guy after Timmy says ‘well lets put our foot down’? I think that would be like trying to stop a semi truck with your big toe. But say he starts investigating. I think two things happen. First, the banks try to blow up the economy to try to prove they are all powerful. But the smaller banks, the ones that actually do real lending to real businesses, they are gonna freak out and stop all lending, fearing they are gonna get busted because the Feds wont go after the big guys.
    Point is, this is just bad in so many ways.

  18. cousin ivan's principles

    What a perfect example of this pariah state’s kleptocratic degradation: to find some simulacrum of integrity in this country we have to look to the poor relations of arch-crook Ivan Boesky.

  19. dannyb2b

    The greatest power the commercial banks have is their ability to create money when they extend loans. In other words they set monetary policy by determining the amount of money in circulation and they also determine the structure of the economy. Take money creation powers away from banks and make the central bank conduct monetary policy directly with its constituent.


  20. Charles Corum

    Geithner was Paulson’s protegee at G.S. What do you expect? Obama must assume some of the heat. His transition team in 2008 included Paul Volker and Joseph Stiglitz. This scared the sh*t out of Wall St., which breathed a huge sigh of relief when he appointed Geithner and Bernanke.
    The Obama administration, with Holder at the DOJ, is almost as much owned by corporations and Wall St. as the GOP.

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