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.