Bank Fraud Will Continue Without Effective Punishment

As long as the behavior that led to the 2008 financial crisis goes unpunished, our country's economy will always be at risk.
Jamie Dimon, JP Morgan & Chase Co. Chairman and CEO Monday, June 23, 2014, at JPMorgan Chase Headquarters in New York. (Photo by Diane Bondareff/Invision for JPMorgan Chase/AP Images)

Jamie Dimon, JP Morgan & Chase Co. Chairman and CEO Monday, June 23, 2014, at JPMorgan Chase Headquarters in New York. (Photo by Diane Bondareff/Invision for JPMorgan Chase/AP Images)

This is part two in a two-part series on bank culture that encourages fraud. You can read part one here.

As Democratic presidential candidates declare themselves, it’s a perfect time to see if they are aware of the extent of the continuous criminal activity of the banks, the sociopathic banking culture that emboldens it – and if they have any realistic policies for ending it.

We are unlikely to have enough personal experience to evaluate whether the total lack of any moral compass described by Michael Lewis at Solomon Partners in his Liars Poker, or by Janet Tavakoli with her experience at several banks in The New Robber Barons, which are reviewed in the first part of this series, is typical of all investment bankers. We are also unlikely to have other former bankers, like Lewis – with his superb non-technical writing skill – and Tavakoli – with her unparalleled understanding of derivatives – tell us the inside story of the value culture of other investment banks. However, we can, as we were enjoined a couple thousand years ago, judge a tree by its fruit.


In 2104, Mark Carney, the usually quiet spoken Governor of the Bank of England (and boy from Fort Smith who made good), shocked the banking world with as critical a comment as was ever heard in that reserved community of mild spoken gentle people:

“The succession of scandals means it is simply untenable now to argue that the problem is one of a few bad apples. The issue is with the barrels in which they are stored.”

Carney was referring to the succession of: blatant money laundering for Mexican drug lords and Al Qaeda; assisting sanction evaders; the passing off of subprime mortgage loans as if they were AAA safe – all in the same period leading up to 2008; and then after they promised to clean up their act and be good boys (they were mostly male) from then on – they were found to have manipulated the foreign exchange rate for their personal benefit. And before that scandal had settled, bankers were caught manipulating the London Interbank Overnight Lending Rate (LIBOR)

A Geek Interlude: Because of government regulations on how much capital (capital is assets minus liabilities) must be retained and requirements for liquidity (meaning when a customer goes to a bank teller and asks for $100, the teller must be able to immediately reach into a drawer and give the customer $100), banks often lend their surplus to each other so they are not in violation of the regulations. They charged interest on the loans. They reported this interest to their own private organization. The London bank rate was then used to set the interest rates on any number of kinds of loans made not only in the UK but many other countries including the US. The reporting was on an honor system. Yes, a little hard to believe but our government regulators and the politicians trusted the banks to be honest and supervise their own system. So you know what happened.

And there was more. Individual traders – at commercial banks please note – were using bank money (our deposit money) to speculate in the highest risk derivative market for their personal bonuses way beyond what was authorized. Not just one trader at one bank, but to use Carney’s appropriate adjective, a succession of these incidents. The banks successfully convinced the media at the time that these were “rogue traders” acting on their own without the knowledge of their immediate superiors. However, each of the traders claimed that their superiors knew and benefited in bonuses from their dealings until they failed – and then, suddenly these same superiors knew nothing about how these huge bonuses had been earned. Here’s a short list of the most prominent ones:

1995 Nick Leeson, Barings Bank – $1 billion

2008 Jerome Kerviel, Societe Generale – $7.2 billion

2011 Kweku Adoboli, UBS – $12 billion

2012 Bruno Iskil (the London Whale) JP Morgan $6.2 billion

Crime Without Punishment

Financial journalist Bethany McLean follows the continuing saga of banker bad behavior and the ineffectiveness of fining banks as a punishment. In one week in 2013 (yes, just one week) she noted these headlines:

“Ex Goldman Trader Found Guilty for Misleading Investors.” “Bond Deal Draws Fine for UBS.” “JPMorgan Settles Electricity Manipulation Case for $410 million.” “Deutsche Bank Net Profit Halves on Charge For Potential Legal Costs.” “US Sues Bank of America Over Mortgage Securities.” “Senate Opens Probe of Banks’ Commodities Businesses.” “US Regulators Find Evidence of Banks Fixing Derivatives Rates.” “Goldman Sachs Sued for Allegedly Inflating Aluminum Prices.”

Maclean’s list came a year after the “too big to fail doctrine had been used to give banks that had been found money laundering for drug lords and Al Qaeda the non-prosecutorial agreements by which they paid fines but were not charged criminally.

And the list of serious scandalous behavior continues unabated. A few examples of recent shocking criminal facilitation: In December 2018, Morgan Stanley agreed to pay a US $10 million fine to settle a US regulator’s allegations that for more than five years it looked the other way as clients laundered money through it brokerage accounts.

In January 2018, Deutsche Bank, (one of the banks caught money laundering in 2008 and given a sweetheart non-prosecution agreement with a small, to a bank, fine) was fined for doing it again for Russia – as a result of a whistleblower.

And later, in November of last year, Deutsche bank’s offices were raided as a result of disclosures in the Panama Papers for yet another alleged money laundering scheme.

And why not. The bankers have kept 100% of their bonuses made by being the oil on the wheels of organized crime and fraud on investors for decades.

In an interview for Peak Prosperity, Tavakoli warned of the acceptance/tolerance of fraud in the banking community:

Where you have agroup of individuals who are well rewarded for this kind of behavior and yet there is no punishment for this kind of behavior. As long as we keep that in place, you will just see more of the same. The way the Fed and regulators have chosen to deal with it is to pretend it’s not happening and just continue to print money.

She concluded with the inevitable: “And, as I say, it acts as a neurotoxin in the financial system.”

The Real Power Over Bank Criminal Activity

All the politicians’ proclamations of outrage at Wall Street, no matter how well intended, are useless. In reality, politicians have no power over banker criminal activity. Sound extreme? Let’s look at a very good example.

Congress long ago made laws against fraud and failure to supervise. But even when banks were caught red-handed laundering billions upon billions for drug lords and Al Queda, and politicians on both sides expressed outrage, no banker personally suffered the least penalty. Because of the division of powers in government, the AG had the sole power to decide to prosecute or not, and can act independently of the wishes of Congress or the president.

In 2012, the Senate released a report about HSBC’s extensive criminal activity in facilitating transactions for drug lords and sanctioned evaders. The table of contents listing the number of violations/incidents goes on for two pages. There is enough detailed evidence of the numerous flagrant violations of the law that a first-year prosecutor could easily win the case. In three years (2006–2009) HSBC bank USA transferred $679.4 billion for Mexican drug cartels. Yet, there were no criminal charges laid against the guys at the bank who pretended not to notice nearly $700 billion in transactions.

For a summary of the Senate report see the section High End, Elite Financial Laundromats in one of my previous articles here.

The power to bring criminal charges or give sweetheart non-criminal prosecution agreement lay solely in the hands of the Department of Justice (DOJ). Later that same year (2012) in that HSBC facilitation of money laundering case, the DOJ opted not to proceed with criminal charges (and not to proceed against any bankers) but to proceed by civil action against the bank alone. The office justified it because of the size of the fine of a whopping $1.9 billion was a big deterrent. That would be a big deal to me, and perhaps to you, but it’s just a month’s profit to a bank. And worse, we ultimately bear the cost in increased user fees. No executive banker ever suffers a penalty for knowingly providing financial services to make it easier for wealthy criminals to carry out their crimes.

In 2013, when evidence belatedly surfaced of the massive banker fraud in knowingly passing off subprime mortgages as AAA safe, eighteen, all of them large international banks were again given non-prosecution agreement with another promise to be good in the future. The investigation of more banks continued resulting in billion dollar fines that appeared large to us, but were a tiny fraction of bank profits.

Ending Penalties that Do Not Punish

The concept of too-big-to-fail is certainly justifiable. If banks are charged criminally, they will lose their license to operate as a bank and thousands of innocent employees and shareholders will suffer.

However, fining the banks does not logically follow from the too-big-to-fail doctrine. Banks do not commit a crime. In fact, banks can do nothing. A bank is a concept, called a legal fiction. The executives in the bank do the crime and create a culture that emboldens crime. And no executive is too big to fail. And while it might be morally satisfying to see them put in jail knowing these guys in Guccis are eating bland cafeteria food three times a day and not having sex with a woman for months, there’s also no reason to give them a free toothbrush. What really hurts a sociopath is losing money.

Bill Black, the lead investigative counsel in the Savings and Loan debacle of the 1980s helped set an excellent precedent for small bankers. Over 1000 of those small-time state bankers went to jail in that crisis. The key is what happened later. Black did not join a Wall Street defense firm and start representing bankers when he left government. He joined a University faculty.

What happened to the too-big-to-fail proponents, Eric Holder, and Lanny Breuer, who justified giving the banks their sweetheart deals? They returned to the Wall Street and corporate defense firm, Covington and Burling. Within a month, they were defending the very banks that they had formerly regulated- but now against their successors in the DOJ.

BTW: Black breathed fire in the S&L inquiry. He so effectively exposed the connections between 5 politicians (including John Mc Cain) and the S&L industry, that S&L owner Charles Keating wrote in a memo: ‘get Black – kill him dead.’

And so it continues. Bank transgressions and fines are so commonplace, they are no longer newsworthy. If covered in the media somewhere on a back page, our eyes glance over the tiring, repetitious formula of a large bank name next to a fine.

Sociopaths do not feel gratitude at being given a light sentence/break. They view that as their entitlement. Only fear reforms a sociopath.

Black has the unrivaled solution: Fine every banker who does it down to their last cufflink.

So What?

Since politician declarations that they will finally reign in Wall Street are useless, the question to ask candidates for president is: Do they realize that they have no power to decide whether to prosecute banks or bankers and that critical power lies entirely with the Attorney General. Thus the important question is whether they will ensure the appointment of an Attorney General who will put their loyalty to their country above their loyalty to their paycheck. Will their appointee AG agree that after leaving office they will not go to a law firm or a lobbyist and represent bank and corporate interests, in any way, for five years.

Will they act like Black or like Breuer?

For more on the banking system follow Jan at and on Twitter @JanWeirLaw

This article was originally published on

Rantt Media’s comprehensive articles source reporting from top news organizations, but they’re also built on brilliant analysis from our team. We are independently-owned and strive for quality, not clicks. But the only way to truly have a media for the people is for media to be funded by the people. We take pride in being reader-funded so that we are beholden to you, not corporate interests. If you like the work we do, please consider supporting us by signing up for a $1 monthly subscription.

Opinion // Economy / Financial Crisis / Wall Street