Big Banks: Big Fines: Business As Usual

Last week, the Department of Justice announced that five major global banks had agreed to cop parent-level guilty pleas that rendered them all official corporate felons. The banks will pay more than $2.5 billion of criminal fines on top of a slew of past fines, plus regulatory and other fines of $3.1 billion, on top of a slew of past fines. It doesn't take a genius to see the pattern. Crime. Wrist-slap. Rinse. Repeat.

Here’s the thing. These kinds of penalties cause no financial damage; the profit was booked and releveraged long ago. The costs of the fines were set-aside in tax-deductible reserves awaiting this moment. Pleading guilty to one-count of felony level price rigging yet being allowed to maintain their status also alters nothing. These foreign currency exchange (FX) market manipulators – or “The Cartel” as they call themselves - Citicorp, JPMorgan Chase,  Barclays, The Royal Bank of Scotland, and UBS AG (who also received a $203 million fine for breaching its prior LIBOR manipulation settlement) will feel this punishment like an elephant feels a gnat, maybe even less.

As is customary after these sorts of fines are announced, the Department of Justice, aided in its investigations by a host of international regulatory and judicial bodies that are financed with taxpayer dollars and missed what was going on for years, waxed triumphant.

“Today’s historic resolutions,” remarked newly appointed Attorney General, Loretta Lynch, “serve as a stark reminder that this Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers.”

She claimed that the penalties levied against these banks were commensurate with the “long-running and egregious nature of their anticompetitive conduct.” She further added that they “should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare.”

But they won’t deter anything. Of that particular pack and this particular time, UBS was the only firm that agreed to pay extra for repeat crimes, but the rest of the crew are all repeat offenders in their own right who have had no restrictions placed on their might or market share as a result.

On the urban streets, recidivists get thrown behind bars. In the hallowed corridors of banking, financial goliaths only have to say they’re sorry, pay a fine, and promise not to do it again. In the real world, being tarred a felon makes it harder to get a job, a mortgage, and a personal loan. In the financial realm, it means business as usual following mildly unpleasant press releases and tiny fines from proud arbiters of justice and vigilance.

Since the 2008 financial crisis, some $140 billion worth of settlements against major banks have been announced by the Department of Justice, international regulators and class action legal teams. A normal person could be forgiven for losing focus of the details. It gets fuzzy after mortgage fraud and money laundering. By the time we reach manipulating LIBOR (London-Interbank-Offering-Rate) or rigging FX rates, it can seem mind numbing. Consider this, anything that costs you money has been influenced or manipulated by the big banks. Why? Because of their size and ability to use it against, or on the gray line of the law, to their advantage.

For not one, but for more than five years, from December 2007 and January 2013, euro-dollar traders at Citicorp, JPMorgan, Barclays and RBS – “The Cartel” – used an exclusive electronic chat room to coordinate their trading of U.S. dollars and euros so as to manipulate the benchmark rates set at the 1:15 PM European Central Bank and 4:00 PM World Markets/Reuters fixing times in order to maximize their profits. 

They would withhold buying or selling euros or dollars if doing so would hurt open positions held by their co-conspirators. In the global game of profit extraction, these sometimes-competitors protected each other in a manner similar to two mafia families locking arms (or firing shots)  to keep a third away from encroaching on their territory.

Each bank will pay a fine “proportional to its involvement in the conspiracy.” Citicorp, who spent the longest time rigging the FX markets, from as early as December 2007 until at least January 2013, will pay a $925 million fine. Barclays will pay a $650 million fine and a $60 million criminal penalty for violating its 2012 non-prosecution agreement regarding LIBOR rigging. The firms will fire 8 people, though not the CEO.

JPMorgan Chase, involved from at least as early as July 2010 until January 2013, agreed to pay a $550 million fine; and RBS, involved from at least as early as December 2007 until at least April 2010, agreed to pay a $395 million fine. 

Citicorp, Barclays, JPMorgan Chase, RBS and UBS have each agreed to a three-year period of corporate probation and to cease all criminal activity. (I’ll take the under on  when the next set of criminal activity related settlements hits them. )

Adding in the $4.3 billion from their November, 2014 related settlements with US and European regulatory agencies, last week’s FX “resolutions” bring the total fines and penalties paid by these five banks –  just for their FX conduct – to about $10 billion. 

Citicorp settled for the largest criminal fine of $925 million, on top of a $342 million Fed penalty. The other banks were fined relative to the fractional portion of the crime time frame.  No jail sentences were imposed – not even a day of house arrest or ankle monitors.

Size does matter. Sort of. According to the agreements,  “the statutory maximum penalty which may be imposed upon conviction for a violation of Section One of the Sherman Antitrust Act is a fine in an amount equal to the greatest of: $100 million, twice the gross pecuniary gain the conspirators derived from the crime or twice the gross pecuniary loss caused to the victims of the crime by the conspirators.”

But since there’s no way the DOJ totaled all the fractional losses non-Cartel members felt over the five years (which would likely include your by the way), it means that they believe the five banks at most collectively made $5 billion over five years, or $1 billion each (give or take) or $200 million (give or take) each from FX manipulation per year. I’m calling hogwash on that; $200 million per year rigging FX rates would have been such a pocket change game that the Cartel would have lost interest in it quickly.

JPM Chase’s press release didn’t mention the word ‘felony’ instead opting for the more demure term ‘violation.’ In keeping with his normal reaction to the financial crimes of his company, JPM Chase Chairman and CEO Jamie Dimon used the “bad-apple defense.” Calling this latest revelation of felonious activity a “disappointment,” he stated, “The lesson here is that the conduct of a small group of employees, or of even a single employee, can reflect badly on all of us, and have significant ramifications for the entire firm. That’s why we’ve redoubled our efforts to fortify our controls and enhance our historically strong culture.”

That’s not quite true. Not only was the supervisor of Foreign Exchange at JPMorgan not fired, but as Wall Street on Parade reported last week, that “individual, Troy Rohrbaugh, who has been head of Foreign Exchange at JPMorgan since 2005, is now serving in the dual role as Chair of the Foreign Exchange Committee at the New York Fed, helping his regulator establish best practices in foreign exchange trading.”

Stock values of the Cartel-Five banks only mildly underperformed the overall market on the day of the announcement, since their chieftains made it clear that money had already been set in reserve for these fines. They rebounded the next day.  In other news, last Tuesday, Jamie Dimon’s annual pay package of $20 million passed a shareholder vote.  

As for Citicorp, the firm’s settlement with the Federal Reserve included the entry of a cease and desist order (for criminal activity) and a civil penalty of $342 million. Citi also reached a separate settlement  in a related private class action suit for $394 million.

Michael Corbat, CEO of Citigroup, said, “The behavior that resulted in the settlements .. is an embarrassment to our firm, and stands in stark contrast to Citi’s values.” He added, “We will learn from this experience and continue building upon the changes that we have already made to our systems, controls, and monitoring processes.”

Investigations of other crimes continue. The EU, for instance, is re-evaluating its [4-year on hold] antitrust probe into whether 13 of the world’s largest banks conspired to shut exchanges out of the credit-default swaps (CDS) market in the years surrounding the financial crisis. Goldman Sachs. Bank of America, Deutsche Bank AG, JPMorgan Chase, Citigroup and HSBC Holdings are among the multiple-offender banks accused of colluding in this game from 2006 to 2009.

The upshot is this. These fines don’t matter. Felony pleas are a nice touch, but none of these punishments impose solid structural change, nor is any being suggested. Putting the fines in perspective, Citicorp's criminal fine of $925 million is equal to 1/20th of 1 percent of its assets. For JPM Chase, the fine of $550 million is equivalent to about 1/50th of 1 percent of its assets.  Why would that deter anything?

Words of contrition from bank CEOs have repeatedly followed the unearthing of fresh crimes or settlements for correlated criminal or quasi-criminal behavior. Words of triumph from justice officials or regulators have proceeded more manipulations and discoveries. Aside from our tacit support for these banks by keeping our money with them or using them for more humble services, we citizens pay for the people-hours of public officials in a myriad of ways including funding the bodies that are supposed to keep us financially safe from bank shenanigans.

How many more crimes do these banks get to commit before these judicial and regulatory bodies, and the rest of Washington wakes up and breaks them up? Bigger banks, bigger crimes. Smaller banks, smaller crimes. At least, a size reduction would be a step in the right direction.


Four Factors Behind Rising Volatility And How To Deal With Them

No one could have predicted the sheer scope of global monetary policy bolstering the private banking and trading system. Yet, here we were - ensconced in the seventh year of capital markets being buoyed by coordinated government and central bank strategies. It’s Keynesianism for Wall Street. The unprecedented nature of this international effort has provided an illusion of stability, albeit reliant on artificial stimulus to the private sector in the form of cheap money, tempered currency rates (except the dollar - so far) and multi-trillion dollar bond buying programs. It is the most expensive, blatant aid for major financial players ever conceived and executed. But the facade is fading. Even those sustaining this madness, like the IMF, are issuing warnings about increasing volatility.

We are repeatedly told these tactics benefit broader populations and economies. Yet by design, they encourage hoarding, or more crafty speculative behavior, on the part of big financial firms (in the guise of obeying slightly adjusted capital rules) and their corporate clients (that largely use cheap funds to buy their own stock.) While politicians, central banks and multinational government-funded entities opine on “remaining” structural weaknesses of certain individual countries, they congratulate themselves on having staved off more acute crises.  All without exhibiting the slightest bit of irony. 

When cheap funds stop flowing, and “hot” money shifts its attentions, as it invariably and inevitably does, volatility escalates as it is doing now. This usually signals a downturn, but not before nail-biting ups and downs in the process.

These four risk factors individually, or collectively, drive rapid price fluctuations. Individually, they fuel market volatility. Concurrently, they can wreak far greater havoc:

  1. Central Bank Policies
  2. Credit Default Risk
  3. Geo-Political Maneuvering
  4. Financial Industry Manipulation And Crime

Events that in isolation don’t impact markets severely can coalesce with more negative results. This is important to understand when prioritizing personal investment decisions. In this two-part report, I will outline driving forces behind today’s volatility and provide suggestions as to what you can do to protect yourself, and even thrive, going forward.

Take Central Banks First

Two weeks ago, stock and bond markets dipped when Federal Reserve Chair Janet Yellen announced, “equity market valuations at this point generally are quite high."  She admitted,  “There are potential dangers." She saw no bubble. The Fed continues to claim its policies have fostered sustainable - if slow – growth for the mainstream economy.

This wasn’t the first time Yellen has said as much. It won’t be the last. In November 2013, she saw no equity or real estate bubble, either. In July 2014, at an IMF lecture, she said the Fed wouldn’t raise rates just to burst bubbles, rather when the US has a healthy job market with stable prices.  She has assumed Ben Bernanke’s mantras in this regard.

Each time she speaks, the media enters interpretation overdrive and markets react similarly. They drop initially, then rebound to slightly lower levels than before. The pattern is becoming increasingly pronounced, though, as is the associated volatility.

Recent volatility spikes underscore the fragility of markets inhaling cheap money due to the global central bank policies that began with the US Federal Reserve, and spread to the European Central Bank, the Bank of Japan and the People’s Bank of China.  The IMF has recently stated that, despite rising volatility, a dose of “QE-Plus” may be needed.

Since the beginning of 2015, the stock market has fluctuated between new highs and turning negative for the year. Movements are mostly linked to the rate hike timing guessing game, amidst a roster of other commonly circulated “threats” from Grexit to erratic oil price behavior. Associated speculation is marked by lengthy media debates about what the word ‘patience’ means regarding Fed talk on rate hikes and smatterings of the realization that artificially stimulated markets don’t promote real long-term growth.

Growing Credit Risk

Yellen also mentioned "compression of spreads on high-yield debt, which certainly looks like a reach for yield type of behavior.” Obviously.  When high-grade debt interest rates are low, the only place to grab yield is in riskier securities. A credit bubble develops. This awareness has not been met with deterrent policy though, leaving the propensity of compressed spreads (and credit default spreads) to blow out (widen) from these levels.

The Fed’s goalposts on rate hikes keep changing. Globalization of low to negative interest rates and dampening of currency exchange rates relative to the dollar has helped keep US rate policy where it is, though the Fed doesn’t say this. The Fed’s zero-interest-rate and QE policy has propped markets, encouraged corporate share buybacks, caused yield seekers to buy riskier securities, and provided banks incentives to leverage it all.

Yellen isn’t wrong in her diagnosis; she’s just ignoring the Fed’s role in it. So is every other central bank and multinational entity. They offer liquidity crack and then wonder why junkies multiply. The Fed missed the last bubble and is missing this one. Meanwhile, the rate-hike guessing game increases market volatility.

From Geo-Politics to Manipulation

Excessive speculation also provokes volatility, especially as enacted by the major market players that control the narrative and the trading volume. This occurs with stocks, bonds, and commodities.  Often such moves rely on geo-political tensions as a cover.

When the US and its Euro-friends slapped economic sanctions on Russia over its actions in the Ukraine, the fallout was used to explain weaker market days.  Oil price drops were partially attributed to Middle East tensions, ostensibly because OPEC didn't agree to withhold production. They were also used to explain Russian economic weakness, allowing the Obama administration to gloat about the success of its sanctions.

Energy volatility, widely reported as oil price movements, can impair household budgets and the overall economy. When oil prices are elevated, associated household costs rise. When they drop, media stories about resultant layoffs can dampen markets and household investments in them. To the extent that prices are manipulated in either direction by financial players and not end-producers or users, they cause excessive volatility.

Big banks don’t care about any of this. They have the capital and global agility to leverage whatever situation arises. If Russia is weak, head to Latin America. If US hedge funds force Argentina into technical default, press Obama to lift sanctions and head to Cuba. It’s a merry-go-round of institutional speculation followed by volatility and decline.

Financial firms, including banks, hedge funds and less regulated players, exert tremendous power through leveraging capital, trading positions and public predictions. They can hype up prices to attract money into their market of choice and quickly reverse course, aided by a media eager to follow the story-du-jour for page-views or ratings.

The power of the large trading players to move prices remains vast. The Big Six US banks control 97% of all trading assets in the US banking system and 95% of all derivatives. Thirty Globally Systemically Important Banks (GSIB’s) control 40% of lending and 52% of assets worldwide. As volatility rises, ongoing concentration in these still-too-big-to-fail entities that can manipulate financial markets, produces triple digit stock market swings that capture headlines and stoke people’s fears.

Subsidization for the elite banking class can’t last forever. But it has already overstayed its welcome many times over, so predicting a specific end date is not easy (though I’m going with mid-2016, when the ECB will be done with this round of bond-buying.) In the interim, rising volatility signals an unraveling of current polices that can’t be ignored.

The uncertainty surrounding the inevitability, if not the exact timing, of multiple and possibly overlapping volatility drivers is itself a source of volatility. For the average person, these signs can be scary. Taking steps to avoid the circus as much as possible, such as extracting money from the markets, securing personal assets, and waiting out the swings, can be a source of emotional comfort and future financial stability.

(This Piece was Part 1 of a two-part piece marking the inauguration of my partnerhsip on such topics with Peak ProsperityPart 2: Navigating Safely In The Coming Era Of Volatility, which details the specific factors mostly likely to trigger market gyrations, as well as steps investors should be considering to safeguard capital in a coming age that promises turbulence and unpredictability is available under enrollment at Peak Prosperity.)


My Review of Clinton Cash and Why it Matters

Bill and Hillary Clinton have formed political-financial alliances that few former presidents and first ladies have ever established, let alone, have couples seeking to become president and first gentleman. In Peter Schweizer’s latest smash expose, Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich, he follows the money between their public office and private citizen exploits, through the mega successful, Clinton Foundation. Since 2001, the Clinton Foundation has amassed a staggering $2 billion, mostly in chunks from globally powerful individuals, multinational companies and foreign countries.

Schweizer lays out compelling patterns in which the timing of policy decisions or international deals relative to donations, transcends coincidence - or at least, merits closer inspection. He narrates with crisp prose and illuminating detail. Though a few errors exist about certain speaking fees and event sequences, there’s no question that Bill Clinton’s speaking fees rose substantially after Hillary took the helm of State, as did Clinton Foundation donations from foreign countries and certain controversial operators.

The book runs 245 pages with an impressive 56 pages of endnotes. It might be tempting to dismiss Clinton Cash as a product of Schweizer’s own conservative leanings. Yet, his more recent works, Throw Them All Out and Extortion, have examined shenanigans on both sides of the aisle.

Plus, placing issues of possible impropriety or illegality in a partisan box, ignores the dangers of an oligarchical political system that hopelessly blurs public and private lines. The Clintons are champions of the ‘Clinton Blur’ as Schweizer dubs two of his chapters.

The Clintons are not alone in fusing the lines of public service and private positioning. As first lady, Eleanor Roosevelt ran many charitable initiatives. Yet, unlike Bill Clinton, who claims he needs high speaking fees to “pay our bills”, she donated her writing fees. President Harry Truman bestowed his humble post-presidential speaking fees to build the Truman Library. The Carters run the Carter Center dedicated to humanitarian causes. The George W. Bush Foundation raised more than $341 million from 2006 to 2011. Nearly half of the 2010-2011 funds came from 16 donors, which begs further investigation. Still, those figures pale in comparison to the Clinton Foundation money and power machine.

The Clintons, and various members of the press, have condemned Clinton Cash, both for what they deem to be unsubstantiated slams, and for being misleading and containing certain factual errors. For the most part, these beckon further debate and exploration, rather than being downright wrong.

For instance, in Chapter 3, Hillary’s Reset, Schweizer indicates Hillary was involved in approving the sale of a Canadian company, Uranium One, which held a large stake in US uranium output to the Russian State Atomic Nuclear Agency (Rosatom). A Time magazine article found nothing linking Hillary specifically (or solely) to the related conversations. Yet, large donations did came from Uranium One Chairman, Ian Telfer, concurrent with the deal, and while Hillary Clinton was Secretary of State.

Schweizer concedes in Chapter 5, The Clinton Blur (1) that, “The Clinton's ability to convene various public and private interests around a common cause or project does create leverage for getting things done in the global arena.” But, he goes on to say, “the blur also creates opportunity for moving a lot of money around with very little accountability.”

Certain longtime Clinton supporters are sketchy to criminal in behavior. One of them, Vinod Gupta, Indian entrepreneur and founder and chairman of InfoUSA, was a Clinton Foundation trustee. In 2010, he was charged with fraud by the Securities and Exchange Commission (SEC) for using $9.5 million in company funds to support his extravagant lifestyle. He settled with the SEC for $7.3 million. His shareholders filed a separate suit over “misuse of corporate funds” including a $3 million consulting fee to Bill Clinton and “using corporate assets to fly the Clintons around.” The company settled for $13 million.

Sant Singh Chatwal, another trustee, was convicted for illegal campaign financing and obstruction of justice. He got no jail-time. Clinton Foundation board member, Argentine mogul, Rolando Gonzalez Bunster, was named in a fraud case in the Dominican Republic.

One could argue that it’s not the Clintons fault that some of their star supporters have such legality issues, though the company they keep renders their dismissals of conflicts of interest claims, less palatable. Maybe they should hang with a better class of billionaires?

By Schweizer’s tabulation, approximately 75% of the Clinton Foundation’s money has come from contributions of $1 million or more, with a fair share from foreign nationals. Some of that money buys respect in the Clinton circle, if not overt policy favoritism. Notable dictators from countries like Ethiopia and Rwanda were invited guests at Clinton Foundation events and praised for their leadership.

Some of that money secures profitable business deals. In 2009, Schweizer writes, Hillary Clinton “pushed Russian officials to sign a [$3.7 billion] airplane agreement with Boeing. Two months after Boeing won the contract, the company pledged $900,000 to the Clinton Foundation.” In Haiti, Schweizer depicts certain disaster-relief contracts as awarded along the lines of Clinton Foundation donors. These depictions have been criticized for accuracy, though still point toward partiality, if not direct money flow.

Beginning in 2009, Schweizer writes, “Swedish telecom giant Ericsson came under US pressure for selling telecom equipment to oppressive governments,” including to Sudan, Syria, and Iran and Belarus. Erickson decided to sponsor a speech for which Bill Clinton received a record $750,000 at a Telecom conference. A week later on November 19th, 2011, the State Department had removed telecoms from its sanctions list. The causality again isn’t distinctly proven. However the order of events is eye raising.

In Chapter 8, Warlord Economics, Schweizer writes that as a senator, Hillary “took the lead in rooting out Democratic Republic of Congo (DRC) corruption and violence.” But when she became Secretary of State, her stance had softened considerably. According to Schweizer, certain “changes in policies conformed with the interest of Clinton Foundation large donors.”

He notes that, “The cluster of donors and advisers to the Clintons who rely on warlords and corrupt dictators is not confined to the DRC, Ethiopia, or Sudan.” It includes a Clinton pal with ties to the corrupt regime in Nigeria where Bill Clinton gave two of his most lucrative talks ($700,000 each) after Hillary became Secretary of State.

Controversial billionaire businessman Gilbert Chagoury made a fortune aiding former Nigerian dictator, Sani Abacha in various oil and money funneling schemes. His name comes up frequently regarding bribery and other scandals, though he was never explicitly charged by the US Department of Justice.

In response to the book, Bill Clinton has insisted, “There is no doubt in my mind that we have never done anything knowingly inappropriate in terms of taking money to influence any kind of American government policy.” He added, “I asked Hillary about this, and she said, ‘No one has ever tried to influence me by helping you.’”  Hillary could still treat their friends and Clinton Foundation donors deferentially, though. The question is -  to what degree? Where does acceptance of help in one area imply wanting, or getting, something in return in another?

The Clinton Foundation has admitted disclosure errors regarding certain donations, and claims it will increase the frequency of its financial statements and limit large donations from foreign governments. These matters remain a red flag.

Corruption in politics is bi-partisan. The power of money is bi-partisan. Lines get crossed for alliance and sway reasons continuously. The Clintons want to portray themselves as having crossed no lines, despite the myriad of individuals, companies and countries that benefited from their relationship with them, and vice versa. Schweizer provides a damning portrait of elite and circumspect power and influence. He also acknowledges that, “Corruption of the kind” he describes in Clinton Cash “is very difficult to prove.”

Given that Hillary Clinton is running for President, the motives of these larger Clinton Foundation foreign donors and speaker fees to Bill Clinton while Hillary Clinton was Secretary of State, require greater inspection. As Schweizer stresses, “the pattern of behavior I have established is too blatant to ignore, and deserves legal scrutiny by those with investigation capabilities that go beyond journalism.”

At the end of Clinton Cash, Schweizer concludes that “money carries a serious weight, gather enough weight and you can intimidate most people into not questioning how you got it.” Whether the Clintons are corrupt, or successful opportunists requires a deeper federal investigation. Since new US Attorney General, Loretta Lynch first came to professional prominence as Bill Clinton’s appointee for US Attorney for the Eastern District of New York, the possibility of a Department of Justice (DOJ) probe is remote. That’s a story for another time.

This article first appeared in Forbes.