Prosecutors Reopening Cases Against Bank Recidivists; Change or “Change You Can Believe in”?

The New York Times yesterday published a new story by Ben Protess and Jessica Silver-Greenberg on how Federal prosecutors are investigating reopening cases against big banks and hitting them with additional charges. Reader Richard D, who was curious about the story, wrote, “It is hard for me to know whether this is a momentous event, or a nothingburger.”

It’s actually somewhere in the middle. While it represents prosecutors starting to use muscles that had atrophied, at least as far as financial firms are concerned, as readers will no doubt suspect, the shift falls well short of the levels of official zeal needed.

But there’s actually an important shift discussed at some length in the article that may have bigger ramifications: that powerful bank consultants and lawyers are no longer being taken at their word.

Here’s the guts of the story:

The reopening of these cases represents a shift for the government, the first acknowledgment that prosecutors are coming to terms with the limitations of how they punish bank misdeeds. Typically, when banks have repeatedly run afoul of the law, they have returned to business as usual with little or no additional penalty — a stark contrast to how prosecutors mete out justice for the average criminal.

When punishing banks, prosecutors have favored so-called deferred-prosecution agreements, which suspend charges in exchange for the bank’s paying a fine and promising to behave. Several giant banks have reached multiple deferred or nonprosecution agreements in a short span, fueling concerns that the deals amount to little more than a slap on the wrist and enable a pattern of Wall Street recidivism.

Even now that prosecutors are examining repeat offenses on Wall Street, they are likely to seek punishments more symbolic than sweeping. Top executives are not expected to land in prison, nor are any problem banks in jeopardy of shutting down.

The reason for initially seeing this story as yet another overhyping of legal actions against banks is that the targets are all foreign banks and hence safe politically. The cases being re-investigated fall into two categories: money laundering and abuses related to Libor fixing settlements.

New York superintendent of financial services Benjamin Lawsky is the driving force behind the money laundering cases. He is identified as the party pushing for the tougher money-laundering settlements, based on evidence that Standard Chartered lied, as in hid evidence about the extent of its misconduct when its settlement was being negotiated. The fact the it was PriceWaterhouseCoopers that provided an unduly rosy report led Lawsky’s office to look into a second settlement, one with Mitsubishi-IBJ, where the bank also used PriceWaterhouseCoopers, and the consultant’s role again looks sus.

Lawsky, as he did during his first high profile action, threatened Standard Chartered with pulling its US banking license, and in the settlement with BNP Paribas, suspended their access to dollar clearing, which is a serious blow to many of their businesses. So Lawsky ability to do real damage to banks has no doubt played a role in securing the cooperation of Federal prosecutors. They do not want Lawsky to pull out his big guns out of frustration about not getting their cooperation. As an aside, Standard Chartered has behaved so badly and has been at points openly defiant that it deserves to be raked over the coals.

The second groups of cases, in which foreign banks are most prominent, is foreign exchange manipulation, which would violate previous settlement related to Libor manipulation. The miscreants flagged in the current New York Times account are Barclays and UBS; the other players under investigation are Deutsche, JP Morgan, and Citigroup. This is a straight-up Department of Justice deal, an apparent last-ditch effort to help burnish Holder’s legacy.

If the New York Times comment section is any guide, there was nary a good word to be said about this new prosecutorial push. Readers want to see executives punished and view mere fines as wrist-slaps at best. And this cynicism is warranted save for the way critical power brokers that have enabled bank misconduct are losing their privileged standing. Here is the germane part of the story:

When Mr. Lawsky made his initial $250 million settlement with the bank last year, the punishment was based partly on an outside consultant’s estimate of the illegal dealings. But the New York State regulator has since uncovered emails indicating that the consultant, PricewaterhouseCoopers, watered down the report under pressure from the bank, according to regulatory records.

In August, Mr. Lawsky imposed a $25 million penalty on PricewaterhouseCoopers, which said at the time that the report was “detailed” and “disclosed the relevant facts.”

After that settlement, people briefed on the matter said, prosecutors at the Manhattan district attorney’s office opened an investigation into the work that PricewaterhouseCoopers did for the Japanese bank, a previously unreported development. Already, the prosecutors have requested the consulting firm’s records in the case.

The investigations, the people said, also unearthed emails showing that PricewaterhouseCoopers changed the report not only at the suggestion of the bank, but also at the behest of lawyers working on the bank’s behalf. Like many banks caught in the government’s cross hairs, the Bank of Tokyo-Mitsubishi turned to Sullivan & Cromwell, an elite law firm as woven into the fabric of Wall Street as the banks it represents. Sullivan & Cromwell also represented Standard Chartered in the bank’s 2012 settlement with the Justice Department in Washington and the district attorney’s office in Manhattan.

More recently, the government has grown skeptical of the argument that some banks are simply too big to charge, an argument that Sullivan & Cromwell often employs for its clients. That argument was tested in a recent case against BNP Paribas, the giant French bank accused of processing billions of dollars for Sudan and Iran.

At a meeting in Washington this year, a lawyer from Sullivan & Cromwell cautioned prosecutors about the potential fallout from BNP pleading guilty to a crime, according to people briefed on the meeting. To illustrate the concern, the lawyer presented prosecutors with a fake newspaper article reporting that a huge bank had pleaded guilty for the first time in decades. The hypothetical report detailed what regulatory problems could befall the bank if prosecutors did not lower their demands for a fine and take precautions when extracting a plea.

Why is this significant? Sullivan & Cromwell, and in particular bank uber lawyer Rodgin Cohen, is in a league by itself in terms of advising banks on regulatory behavior. Cohen has access and clout second to none. Notice that prosecutors chose to leak to the Times the role that Sullivan & Cromwell played not only in the cases now being reopened, but publicized its earlier, dubious arguments in the BNP Paribas case. The sources made clear that the firm’s “don’t touch that dial” scare talk regarding guilty pleas and other tough settlements was no longer working. And prosecutors are no doubt incensed at a law firm pushing a consultant to take the fall for giving misleading information.

This is important not simply regarding the standing of Sullivan & Cromwell, but the use of elite advisors as liability shields. The prosecutors are trying to send the message that if you as the bank client try that sort of thing, you’ll pay even more in the end. And it also means that prosecutors will be more skeptical of supposedly reputable professionals in bank employ and may start getting more independent analyses in high-profile cases.

At this stage, it is incremental change, but it shows a rift among elite regulators and high-powered insiders, that the officialdom is finally putting its foot down and saying certain types of conduct no longer wash. This may seem a modest place to draw the line, but it’s still a meaningful shift in attitudes. It says that within the club, certain types of corruption are no longer tolerated. That’s a long-overdue step in the right direction.

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  1. NotTimothyGeithner

    Short of soaring stock prices for manufacturers of orange jump suits and a clear denouncement from the White House of Obama’s chum Eric Holder, this is desperate kabuki from Democrats who finally bothered to ask voters why they are angry.

    1. Vatch

      The U.S. election occurs on Nov. 4, so the federal prosecutors can close the reopened cases on Nov. 5. Problem solved!

      1. NotTimothyGeithner

        At Hillary’s age, she can’t risk a challenge to her campaign. Her coronation failed in 2007/8, and her core voters are 8 years older. A 20 year old could care less about Hillary. I doubt 30 year olds care, and 40 year olds grew up in a much more gender equality world (at least in theory) than Hillary’s base. Those voters won’t care about breaking the glass ceiling when they want to hear about policy especially with a Senator like Warren or Gillenbrand out there.

        On a practical level, Bill won in 92 and 96 with under 50% of the vote. 41 wasn’t a world beater. Al Gore lost in 2000 to a coke addled moron (it was close enough to steal). In 94, the vaunted Clinton machine saw the most diverse Congress in history lose to basically whitest (and that’s saying something). Hillary had her own loss to a black guy in America.

        Hillary is connected to financial deregulation (wall street), foreign policy disasters, Wal-Mart, that C Street Cult, the DLC, and I imagine there are a host of sins. She can’t stand up to scrutiny if one wants to look at her record and associates without delving to dopey conspiracy theories. She is an awful human being. Samantha Powers was right about her assessment of Hillary.

        I expect we will hear mumbo jumbo about prosecution until Hillary is out or wins the nod, but Hillary can’t face scrutiny or she will have to hit the campaign stump hard. And let’s be honest, she will be 70. Reagan got away with a lot in 1980 because well. ..Carter. If Hillary is out, the novelty of being a serious female candidate won’t transfer. Democrats will face questions and scrutiny lost in the to do over Hillary’s coronation process. There won’t be any questions about living with the first gentleman and former President. Is Liz Warren married? Does she have kids? I don’t know. No one cares because she wasn’t a novelty or a first. What did she think about the end of Boardwalk Empire? I do care about that.

        The Democrats to maintain the status quo will need to have a distraction from Hillary while allowing Hillary’s token ism to dominate. The Dems can’t be a minority because the GOP base and bulk of the electeds will go after Team Blue to distract from their own theft. The Clinton years will seem like a fantasy if the GOP gets into power.

      2. trish

        This does seem all such a charade. I wonder how much all these Wall Street players have donated to Democrats/Republicans this year. Including those on banking…and how long before someone from our hard-hitting regulatory agencies or Justice revolve out into a lucrative job on Wall Street yet again.
        Seems likely the banks are all being reassured behind the scenes on this show. Getting a good chuckle even? I admit I laughed a bit when I saw the NYT headline…

        1. NotTimothyGeithner

          All things considered, not that much. Its not that our politicians are whores. The issue is how cheap they actually are.

  2. steelhead23

    Thanks Yves. Your review suggests that Mr. Lawsky is pushing the banks to obey the law – and by so doing is pushing DOJ to do its job. While I live on the left-coast, I am cheering Mr. Lawsky. Keep it up – and stay the heck away from hookers.

      1. Deloss

        Incidentally, the first time Mr. Lawsky appeared in action as a sort of reincarnation of Eliot Ness, Yves suggested that we write and thank him. I have just written him my third letter, and I hope to have reason to write to him many more times.

        Mr. Benjamin Lawsky, Superintendent
        New York State Department of Financial Services
        One State Street
        New York, NY 10004-1511

  3. Carla

    Thank you, Yves. Let’s hope you and I are not the only ones reading the Times readers’ comments on this.

  4. cnchal

    . . . the use of elite advisors as liability shields

    Using elite advisors as a shield, should be a liability. The higher the price of legal “protection”, the bigger the scam.

  5. Banger

    This is interesting in its particulars but I don’t see it as a big shift at least not yet because I believe we are seeing a series of internal power struggles within the ruling elites (now that they control everything) in which federal prosecutors and agencies are used as mercenaries or pawns in these struggles. Since I believe the power-relations within The Empire are rather fluid at this time we may see quite a bit of this sort of thing crop up here and there. Having said that, it is certainly possible that some segments of the oligarchy seek a more predictable and rule-based system and a little less banditry. But their reasoning will make little difference to us who aren’t part of the elites anytime soon. If the trend continues, however, there may be light of a kind at the end of this tunnel–but it won’t be a return to the old Republic but, rather, a more benign version of the emergent feudal system.

    1. Doug Terpstra

      This is just pre-(s)election posturing, foxes pledging to protect the poultry, Lucy setting up the ball for Charlie. It really is just that simple. It’s impossible to be too cynical about politics; it finally becomes laughable.

      I caught a snippet of Obama’s latest get-out-the-vote stump, with the usual trite laugh-lines, and for the first time actually felt a bit sorry for him. The question, “What does it profit a man to gain the whole world and lose his soul?” hit home. I have that same feeling of sadness when I see Bill or Hillary.

      1. pretzelattack

        gained bill clinton maybe 100 million. theologians dispute whether republicans have souls, so the cost to them may be zero. pure profit babee!

  6. Xelcho

    This is interesting. Being a bit too cynical I also believe that this is way to convenient to be true grit. I am sure that Prof Bill Black will weigh in on this with additional information that will clear up the cloud of potential legitimacy of the stenographer’s claims. Let’s give him a couple of days to pull it together. :)

  7. Peter Pan

    I’m skeptical. I suspect that after the next banking crisis the regulators, prosecutors and legislators will all be giving blowjobs to bank CEO’s and their lawyers. Hell, they’ll probably even give them a crack at the anal orifice.

    1. steelhead23

      Peter Pan simply won’t grow up. While I enjoy sexual metaphors as much as the next guy, I kinda think its bad form to use such language on a gentle-lady’s blog. There are plenty of ways to show derision at the fecklessness of our financial regulators without recourse to crude imagery. Of course, if Yves starts using such language – all bets are off.

  8. Chauncey Gardiner

    Until proven otherwise I am going to take the position that this is the beginning of the real deal. Holder is departing, the incumbent is soon to be Lame Duck, and NY State regulators and federal prosecutors are showing interest in successfully prosecuting those who gained control of key institutions and have engaged in criminal behavior. Such action would do more to restore public trust and confidence in the system and any other single act I can think of.

    Based upon what has occurred, objections of highly compensated consultants and attorneys to criminal prosecutions can and should be ignored, as should defendants’ pecuniary contributions to political parties and campaigns. This has become a very deep social and divisive political issue of which the American people are keenly aware. That is increasingly being recognized by those in positions of influence. That this article and others have recently been published in the national newspaper of record is evidence of this.

    1. Vatch

      Chauncey, I sincerely hope that you are correct. However, Obama still needs to protect his future retirement income which could be based on outrageously high speaking fees, and whoever replaces Holder will also want to protect his position in the revolving door. So I doubt they will want to upset the financial oligarchs. As Fresno Dan said in the Links section today: “Lucy….football…..Charlie Brown”.

    2. NotTimothyGeithner

      No. These people have demonstrated time and time again they are miserable wretches totally devoted to thieves in ties.

      The only thing they understand is pressure. DADT wasn’t repealed because it was low hanging fruit. It was repealed because a Federal Judge (and possibly a group at the ArmyTimes) ruled it unconstitutional for the district that encompasses the Washington/Norfolk area and the military world wide after Obama’s gang argued repeatedly it would lead to widespread unrest in the ranks. The Army Times produced a poll of soldiers saying they would love to know who was gay so they could find out who was a hate filled prick. The Judge ruled almost immediately. Obama and the Dems were getting trashed.

      It took less than 3 days to get DADT repealed, not because Obama was given the benefit of the doubt.

      Biden “revealed” Obama’s true feelings on gay marriage after Obama and OFA refused to help North Carolina liberals/Democrats fight one of those preposterous and hateful ammendments.

      New people to the scene can be given the benefit of the doubt, but its still the same crooks. Results or a purge must come first.

      1. Chauncey Gardiner

        Re: “New people to the scene can be given the benefit of the doubt, but its still the same crooks. Results or a purge must come first.”

        Point well taken and duly noted.

  9. Faye Carr

    Being rather simple minded, is there some larger reason – besides the obvious, not OUR guys- why foreign institutions are targeted?

  10. pgrommit

    As long as the average Joe/Jane don’t get more riled up over the bankster pillaging, nothing of substance will happen. And as long as the parent firms of EVERY major media outlet have 1 or more directors from Wall Street on their boards, any “news” on this front will be appropriately filtered. Most voters don’t even know who Bill Black is. What he does isn’t “God’s work”.

  11. Trader Joe

    Seems to tie in nicely with Friday’s Bloomberg interview with Lacker about getting plans in place for bank deconsolidation and wind-downs.

    Also allows Barry a couple of years to slam the banks for lying to him, and his incompetent (or complicit) AG, that prosecuting the banks would lead to systemic failure…even Barry seems to have figured out that was BS

    Convenient that that POS Holder exits Stage Left just before the potential smackdown.

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