Tag Archives: Eric Holder

Too Big to Jail?

It has been a while since I wrote a new post regarding fines and lawsuits brought up on banks in my Revenge on the Street segment. Feel free to  It seemed as if the US Department of Justice had taken a break in its mission to bring justice upon those whose crimes and wrongdoings led to the financial collapse of 2008 and other ensuing scandals such as JP Morgan’s entanglement in Bernie Madoff’s ponzi scheme and the LIBOR rigging affair.

Progressives and liberals claim that the US Department of Justice have actually been letting banks who’ve broken the law get away with their crimes by paying a fine which is usually a meager amount when compared to the profits banks make and the bonuses top bankers earn. They demand that banks and bankers who committed crimes should go to jail like the rest of us would if we stole a car or assaulted a police officer. The reason that banks are not prosecuted and are backed by the government is because of a concept called ‘too big to fail’, or in legal cases ‘too big to jail’. The idea behind this term is that international banks have become so large and so integrated into our economic systems that the government will bail it out if it goes bankrupt (fail) and will prevent any prosecutions that would shut it down or severely effect its structure (jail.)

However, just last week, US Attorney General Eric Holder released a video stating that “there is no such thing as too big to jail” and that “no individual or company, no matter how large or how profitable, is above the law”. Check out the rest of Eric Holder’s statement in the following clip.

Great news right! With the full support of the US Attorney General, justice will finally be served and banks will be appropriately punished for the crimes they committed. In fact it is believed that Holder made this statement in reference to BNP Paribas and Credit Suisse, which should expect legal cases brought upon them soon. BNP Paribas is alleged to have done business with blacklisted countries such as Iran whereas Credit Suisse is believed to have provided illegal tax shelters. and Citigroup is suspected to have provided.

I’d hate to be a pessimist but its wise to not put too much trust in Eric Holder’s words. I’m a man of reason. I base my judgement on facts and historical trends and in this case, history shows that we’re bound to see the same weak treatment of criminal actions as before. A prosecution will be started and will end in a settlement worth a few billion dollars which may sound like a lot until you take a look at the profits these banks make. If you don’t believe me, take a look at this table on the Economist’s website of recent settlements.

settlements

In none of these cases did a single banker go to jail. That why I think this meme sums up the situation displayed in the table pretty accurately.

too big to jail

Just to be clear, I’m not a progressive or a socialist. I don’t like to attach myself to any form of ideology and I have nothing against the banking sector. In fact, I work in the finance sector. But I do have a problem with the double standard applied when it comes to justice in this world. No one can deny that those who are wealthy and in positions of power get more lenient repercussions for their crimes than regular citizens. Whereas politicians and bankers get away for their multi-million crimes by paying bail or through community service (take a look at Silvio Berlusconi’s punishment for tax evasion), regular folks like you and me would get many years in prison for much smaller misdemeanors. From the table above, I think HSBC’s settlement best explains the injustice that I’m attempting to point out. In December of 2012, HSBC was discovered to have provided money laundering services to various Mexican drug cartels and had also facilitated transactions with rogue nations such as Iran, Libya, Sudan and Myanmar, which is in violation of the sanctions placed by the US Treasury. These may have just been financial transactions, but in effect, HSBC indirectly aided the massacre in Darfur by the Sudanian government and the deaths caused by drug cartels in Mexico. To put some numbers to those cases, roughly 120,000 people have died due to gang related violence across Mexico and somewhere between 170,000 to 450,000 have lost their lives during the conflict in Darfur. Thus, HSBC aided people who have blood on their hands. Usually, the mainstream media does a poor job of covering these issues. However, here is a great ABC News video regarding HSBC’s money laundering scandal.

The Department of Justice did not pursue criminal charges and settled for a $1.9 payment from HSBC. Like I stated before, that might sound like a hefty amount, but in 2012 HSBC generated a profit of $13.5 billion. In my opinion, that makes the $1.9 billion fine sound like a gentle slap on the wrist. News articles state that the money laundering occurred due to cost cutting in the bank’s compliance department. This makes it sound as if no one at the bank had any idea that these transactions were going on. Someone somewhere had to have known and that person should be in jail right now. When asked in a judiciary committee in 2013 by US Senator Chuck Grassley on why the Department of Justice did not indict HSBC, it was Attorney General Eric Holder himself who said the following words:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them. When we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy”

From the mouth of the hero himself, there is the unfortunate nail on the coffin. No matter how tough Attorney General Eric Holder may talk, past cases prove that at the end of the day, the wealth that banks posses and the influence they have over our politicians will lead to injustice. To be fair, I have read news articles stating that the Department of Justice may start banning banks charged with future criminal actions from using US dollars in transactions. This could deal a serious blow to banks that are charged with criminal cases in the future. However, if you consider the fact that I could go to jail for shoplifting or that a junkie on the street can be sentenced to prison for many years for selling drugs to homeless people, we can definitely say that banks will still get away with it.

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So how can we solve the problem of too big to fail/jail? Its a daunting task that is often debated by economists and politicians around the world. I think this post has served its purpose of being a good introduction to this topic and I don’t want to keep rambling on. So I’ll leave that discussion to a future post.

“Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators.”
David Bagley, HSBC’s Head of Compliance

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Revenge on the Street

Lately, I had been having writers block and had not been able to write a new article. But after a new interesting breaking story, a catchy title, and some inspirational electronic music, lets get rolling.

Speaking of rolling, heads are rolling on Wall Street these days; mainly, JP Morgan’s head. What is JP Morgan? Well its only the eight largest bank in the world and the largest bank in the United States based on assets. Originally, on August 13, it was announced that JP Morgan was being investigated  by the United States Department of Justice for its sale of mortgage backed securities in the period leading up to the 2008 financial crisis. The Department of Justice claimed that prior to the crisis, JP Morgan had misrepresented the quality of mortgages it was packaging into assets and selling to investors. More specifically, it is claimed that JP Morgan had misrepresented subprime and risky mortgages to investors as safe and sound assets. However, as we all painfully discovered in 2008, many mortgages across the United States were lent out to irresponsible and unworthy borrowers. When they defaulted on their mortgages, the mortgage backed securities collapsed and the price of houses plummeted. By the way, before we move on, if any of that jargon regarding the financial crisis was confusing to you, check out this EXCELLENT graphic explanation of the crisis.

After weeks of negotiations between JP Morgan CEO Jamie Dimon and Attorney General Eric Holder, Dimon finally settled to pay $13 billion of fines to the Department of Justice regarding the investigation. Even though many people assume that Dimon agreed to settle because he wanted to avoid future legal costs in the case of a potential civil suit, I like to believe that Eric Holder put on a Batman costume, and gave Dimon a beatdown in a poorly lit room. Rumor has it that Dimon was heard yelling the following words:

“If you’re a financial institution threatened with criminal prosecution, you have no ability to negotiate…you cannot win..you have a gun to your head”, said Warren Buffet, a couple a days ago. So maybe my theory on how the negotiation went down might not be so far-fetched.

So where will the $13 billion go? $9 billion of it will go to the government to help repay the taxpayers for the $188 billion bailout of Fannie Mae and Freddie Mac, two large semi-private mortgage issuers. They too had bought mortgage backed securities from banks like JP Morgan prior to 2008, and once homeowners defaulted on their mortgages, they too went under. The other $4 billion will go directly to help struggling homeowners pay their outstanding mortgages.

This will surely eat a large chunk out of JP Morgan’s profits for the next quarter. $13 billion is no small amount. According to a study by Bloomberg, JP Morgan’s $13 billion fine is bigger than Southwest Airlines’ market value, Google’s revenue for the third quarter, and JP Morgan’s Consumer Banking revenue for the third quarter.

size of fine

Is JP Morgan hurt? Definitely. Is JP Morgan done for? Definitely not. It still is and will remain to be, a very profitable bank. In 2012, JP Morgan recorded profits totaling to a whopping $32 billion. That’s profits, not revenue! It is true that compared to other recent legal fines that financial institutions have faced, this one is much larger.

fines

But as the Joker said in the Dark Knight: “Its not about the money. Its about sending a message.”

(Am I on fire with the Dark Knight references or what.)

What makes this case so significant is what it symbolizes, and that is the revenge of Main Street. By that, I mean that since the crash of 2008, not many banks or financial institutions had been prosecuted regarding the shady financial voodoo that went down prior to the economic collapse. Many people who had been severely effected by the crisis are still furious to this day that the banks are not being punished for their wrongdoings. And who can blame them? Because of the games played by bankers, lives across the globe were changed for the worse.

However, just like many things in life, there is no black and white. There are no perfect good guys or pure bad guys. Everything is somewhere in the middle. To understand what I mean, we have to turn around and look at the government. Firstly, it is crucial to note that the sales of mortgage backed securities at JP Morgan were occurring mainly in 2 subsidiaries, Washington Mutual, which was a bank that was known for issuing mortgages, and Bear Sterns, an investment bank. Prior to the financial crisis, these entities were independent companies. However, they both went bankrupt after the housing bubble collapsed. After their bankruptcy, the government persuaded JP Morgan to buy these institutions and save them from insolvency. So one could very easily make the argument that the US government is now trying to punish JP Morgan for owning the very entities that it made it purchase 5 years ago in order to save the United States from utter financial meltdown.

Secondly, why is it that the US government waited 5 years to prosecute JP Morgan? Why not act shortly after the crime was committed? The Department of Justice will claim that it takes a very long period of time to truly crack financial cases. Years of transactions must be analyzed, accounts dating back many years must be studied, and a definitive crime must be found. However, the more likely reason is that the government didn’t want to drive troubled banks off the cliff in 2008 by bringing down legal cases on them. Thus, they decided to look away from their wrongdoings for many years and only started to take them seriously once the economy picked up. Again, the government’s actions fall into a certain gray area. They ignored a crime for several years only to pick it up again. Doesn’t look like an example of pure good will does it?

Many parts of this settlement deal have not yet been finalized. We should receive more information regarding the deals in the following weeks. Until then, enjoy the song that Jamie Dimon has been listening to the most these past several weeks.

This country is a lot better off because Jamie Dimon has been running JP Morgan
-Warren Buffett