Banking

Bankers Gone Wild (Again)

get_out_of_jail_free There seems to be no end to the chutzpah of the big banks. They brazenly break the law and then pay growing but still quite affordable penalties to get out of their legal jeopardy.

The latest examples have just been reported by the New York Times. The front page of the newspaper has a blood-boiling story on how the likes of JPMorgan Chase, Bank of America and Citigroup intimidate people who have gone through personal bankruptcy into paying back debts that have been discharged in court. Although the debts are not legally collectable, the banks keep the obligations alive on credit reports, meaning that borrowers are faced with a choice between paying and having their credit rating ruined. Such a tactic makes loan sharks look good by comparison.

According to the Times, the practice is being investigated by the Justice Department. Before long we will read of a settlement, and the banks will move on to a new way of cheating their customers.

JPMorgan and Citi are also involved in a settlement just announced by U.S. and European regulators involving another sleazy banking practice: the manipulation of foreign currency markets. The U.S. Commodity Futures Trading Commission ordered five banks to pay more than $1.4 billion in penalties, including $310 million each from JPMorgan and Citi. Britain’s Financial Conduct Authority fined the five banks (which also include HSBC, Royal Bank of Scotland and UBS) another $1.7 billion, including around $350 million each for JPMorgan and Citi. Swiss regulators hit UBS with an additional $138 million penalty.

In foreign exchange markets, the daily setting of rates is known as the fix. Evidence released by regulators made it abundantly clear that traders at the five banks saw to it that the fix was fixed (i.e. manipulated) by colluding rather than competing.

These settlements involved civil charges. The Justice Department is reportedly investigating criminal misconduct by the banks. That’s good news, but there is a strong possibility that these probes will result in something disappointing.

The Justice Department has a long track record of allowing large corporations to evade serious criminal charges by offering miscreants the option to enter into deferred prosecution or non-prosecution agreements that amount to get-out-of-jail-free cards. And even when token criminal charges are enforced, as happened in the Credit Suisse tax case last May and the UBS interest-rate-manipulation case before that, the consequences are hardly devastating.

This failure of corporate prosecution is the subject of a new book called Too Big to Jail by Brandon Garrett, a professor of the University of Virginia School of Law. In an interview with the Corporate Crime Reporter, Garrett says: “There are a number of ways to punish a company. The concern is that none of those ways are being taken seriously enough.” Garrett proposes a system in which corporations plead guilty and are put on probation – hopefully a more rigorous form than the probation BP was on (because of its 2007 case involving an explosion at its Texas City refinery) at the time of the Deepwater Horizon disaster.

Garrett’s notion that having a judge (rather than just a monitor) involved in these cases is laudable, but it is not clear that would be enough to rein in corporate lawlessness.

Note: Garrett has posted a handy list of more than 300 deferred and non-prosecution agreements on his website.

Slapping Corporate Wrists a Little Harder

Governments will go to ridiculous lengths to punish criminals. States that cling to the death penalty now resort to back-alley methods for obtaining the drugs used in lethal injections, leading to grotesque results such as the recent botched execution of Clayton Lockett in Oklahoma.

When it comes to corporate crime, a very different standard is applied. Prosecutors go out of their way to soften the impact on offenders. Criminal charges are often not filed, and when they are companies are offered deferred prosecution agreements that allow them to pay fines and make promises not to sin again.

Federal prosecutors are now feeling pressure to take a harder line, especially with global banks that may have flouted U.S. laws relating to tax evasion and international sanctions. The New York Times reports that the Justice Department is pushing to get guilty pleas from Credit Suisse, which has faced charges of helping wealthy Americans dodge taxes through secret bank accounts, and BNP Paribas, which is being investigated for violating U.S. economic sanctions against countries such as Sudan and Iran.

Getting a guilty plea from a major bank (rather than from one of its obscure subsidiaries, as happened in the LIBOR-manipulation case involving UBS) would be an important step in affirming that these institutions are not above the law. The problem is that the Justice Department does not seem to want to impose the kind of penalties that normally go along with a criminal conviction.

According to the Times, prosecutors are meeting with banking regulators “about how to criminally punish banks without putting them out of business and damaging the economy.”

We would never hear such a statement made about, say, an illegal gambling ring. There is no concern that going after such an operation would eliminate jobs and harm the economy.

As for banks, even when they are found to have engaged in egregious behavior, they are treated as legitimate institutions that must be preserved. It is true that not every employee may have been involved in criminal misconduct, but that is no reason why the continued survival of the bank in its existing form has to be regarded as an essential component of any resolution of criminal charges.

Corporate crime will not disappear until prosecutors are willing to consider truly punitive penalties for companies that engage in serious misbehavior. By this I mean consequences that go well beyond fines that a company can easily afford (and can often deduct from its taxes).

It’s often said that bringing criminal charges against corporations is pointless, since a company cannot be put in prison. Leaving aside the question of the feasibility of putting corporate executives behind bars, this view fails to acknowledge the other ways in which a firm’s liberty can be restricted.

We see such an example in the current scandal involving Los Angeles Clippers owner Donald Sterling, who is being fined $2.5 million and banned for life by the National Basketball Association for making racist statements but who also may be forced to sell the team. Why is the Justice Department not talking about forcing banks such as Credit Suisse and BNP Paribas to divest themselves of the operations in which the prohibited practices took place? I would prefer to see such criminal enterprises confiscated outright, but that may be too much to hope for.

Prosecutors have to weigh the economic impact of cases that might, for instance, lead to the revocation of a bank’s license to operate, which is considered the corporate equivalent of the death penalty. This is apparently behind the caution being exhibited in the Credit Suisse and BNP Paribas negotiations.

The lesson that prosecutors seem to have taken from the 2002 conviction of Arthur Andersen, the accounting firm that abetted Enron’s frauds, is that putting a company out of business is a big mistake. I don’t understand why.

The demise of Andersen and Enron and Drexel Lambert did not bring about economic calamity. In fact, the economy was probably better off without these corrupt institutions. We might also be better off if today’s miscreants met a similar fate, or at least had to undergo radical restructuring. And that would send a clear message to other corporations that they have to clean up their act.

Note: For an analysis of an industry that has a lot to clean up, including widespread wage theft, see the report just issued by the Restaurant Opportunities Center United and other groups on the National Restaurant Association and its members. I contributed the Rogues Gallery section.

J. Ponzi Morgan

morgan_madoff It’s bad enough that for years JPMorgan Chase failed to alert federal authorities about the suspicious transactions being conducted by its customer Madoff Securities in what would later be revealed as a massive Ponzi scheme.

What’s equally damning in the criminal case the bank just resolved with federal prosecutors is that at times JPM seemed to want to get in on Madoff’s action.

The Statement of Facts to which JPM stipulated tells an interesting story about how, beginning in 2006, the bank began investing substantial sums (initially $343 million) of its own money in Madoff feeder funds in addition to issuing derivates tied to those funds and selling them to investors. In 2007 this business seemed so appealing that JPM’s London branch sought to write more than $1 billion in Madoff-linked derivatives.

This move had to be approved by the bank’s chief risk officer, who in 2007 nixed the plan after being told by a colleague that there is a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” While he was unwilling to risk $1.3 billion under such circumstances, the officer did allow the Madoff exposure to remain up to $250 million.

The JPM London trading desk subsequently became more uneasy about Madoff Securities. It pulled out of the Madoff feeder funds, and in 2008 it filed a report with UK regulators expressing concerns that Madoff’s returns were probably “too good to be true.” JPM failed to do the same in the United States, and that turned out to be an expensive oversight.

JPM’s messy history with Madoff illustrates an interesting point about the relationship between individual white-collar crime and collective corporate crime. There’s long been a tendency to see corruption for self-enrichment (such as embezzlement) as being separate from misconduct by groups of people to enrich corporations (for example, price-fixing conspiracies).

In the case of Madoff and JPM, the two were closely connected. Madoff, who was working through his firm but was essentially running a one-man Ponzi operation, created conditions that were exploited (up to a point) by JPM to enhance the profits of the bank’s derivatives business. Even when that opportunity was deemed too risky by JPM, the bank failed to warn U.S. regulators and went on doing profitable banking business with Madoff.

In other words, the individual fraud being committed by Madoff was a source of profit for JPM, which in a sense became his co-conspirator.

The distinction between individual crime and corporate misbehavior is also a matter of perennial debate when it comes to punishment. Business apologists like to claim that corporations cannot really commit crimes and that only individuals should be prosecuted, knowing full well that such cases are much harder to prove.

What’s needed is a more aggressive approach toward the prosecution of both corporations and the higher-level executives responsible for their misconduct.

The JPM-Madoff case shows the limitations of the current system. No individuals were charged, and the bank was able to take advantage of the kind of deferred prosecution agreement that the Justice Department uses in almost every corporate case. Neither JPM nor the stock market seems to be fazed by the $2.6 billion payout. In fact, this is just the latest in a series of large settlements that JPM has made with prosecutors. Just two months ago, it agreed to pay $13 billion to resolve a variety of federal and state charges relating to the sale of toxic mortgage-backed securities.

Madoff himself was not able to buy his way out of a criminal conviction and prison time (150 years of it). There was a broad consensus that he deserved every penalty that could be imposed, to ensure that he could never defraud again.

We’re still waiting for a system of punishment that provides that kind of definitive treatment for rogue corporations such as J. Ponzi Morgan.

The Rising Cost of Bad Business

A New York City Police office stands at Eleven billion dollars. That’s the latest figure being leaked about the amount JPMorgan Chase could end up paying to resolve federal charges concerning the sale of toxic mortgage-backed securities in the run-up to the financial crisis. The word is that Attorney General Eric Holder personally rejected a $3 billion offer from the bank.

This is turning out to be an expensive period for JPMorgan. Earlier this month, it and Assurant Inc. had to pay $300 million to settle accusations that they forced homeowners into purchasing overpriced property insurance. A week later, the Consumer Financial Protection Board announced that the company would pay $80 million in fines and refund an estimated $309 million to more than 2 million customers for illegal credit card fees.

That same day, U.S. and UK financial regulators announced that JPMorgan would pay a total of $920 million to settle charges relating to the London Whale trading fiasco, with the bank admitting that it had violated securities laws.

What should we make of these settlements, particularly the eleven-figure one being hammered out with the Justice Department? To begin with, this is more evidence that corporations can no longer get away with paying trivial amounts to resolve criminal and civil charges and must part with amounts that have a noticeable financial impact.

JPMorgan is not alone in this category. Billion-dollar settlements have become almost commonplace in the various cases that have been brought against major banks in connection with toxic securities as well as foreclosure abuses, money laundering and manipulation of the LIBOR interest rate index.

Banks are not the only corporations paying out large settlement sums. Large pharmaceutical producers such as GlaxoSmithKline and Pfizer have also parted with ten-figure sums to resolve allegations relating to illegal marketing, withholding of safety data and defrauding federal healthcare programs. BP paid $4 billion to resolve criminal and civil charges relating to the Deepwater Horizon disaster.

There is a tendency among corporate critics to downplay these settlements because the cases were brought against the companies rather than their top executives. It is indeed frustrating to see CEOs that authorized reckless behavior get off scot free.

Yet the more fundamental question is whether individual prosecutions would be effective in deterring corporate misconduct. The assumption is that seeing some chief executives put on trial would strike fear in C-suites everywhere and cause firms to clean up their act. Some of this would occur, but I am not convinced it would be enough to stop corporate criminality. After all, high-profile cases against individuals have not put an end to insider trading.

Punishment of corporate executives needs to be accompanied by more aggressive actions against the companies they work for. One thing is clear: the new wave of billion-dollar settlements and penalties may be having a more noticeable financial impact, but they are still a manageable cost of doing business for the companies involved, especially in light of the fact that the payments are often, at least in part, tax deductible.

Take the case of JPMorgan Chase. An $11 billion settlement would not go entirely to the Treasury. Reports of the negotiations suggest that $4 billion of the total would take the form of relief to consumers, which means that the payout could be stretched over a long period of time. We’ve already seen considerable foot-dragging by the large banks (including JPMorgan) that agreed last year to a $25 billion plan to address foreclosure abuses.

Even if JPMorgan had to shell out the remaining $7 billion in a single year, it would be only one-third of the more than $21 billion in profits it generated last year. That would hurt but would be far from fatal.

Rather than disparagement of rising monetary settlements, I’d like to see more analysis of how high the penalties would have to go in order to make a real difference in corporate behavior. It is also worth exploring whether the property seizures used by federal prosecutors against individual felons could be applied more aggressively against corporations. The discussion of JPMorgan’s settlement would be a lot more interesting if the company was facing a penalty such as forfeiture of one of its main business units.

Eric Holder & Company deserve some credit for raising the cost of doing bad business, but the price is still far too low.

Note: To see my newly updated Corporate Rap Sheet on JPMorgan Chase, click here.

Fannie and Freddie Pay a Price for the Meltdown While the Banks Skate

predatory-lending-3 Five years ago at this time, the federal government seized control of Fannie Mae and Freddie Mac as the financial meltdown began to unfold. The two mortgage giants have remained in conservatorship ever since and are now the subject of a policy debate over whether they should be radically transformed or obliterated entirely.

Meanwhile, the primary culprits for the housing bubble and collapse – the big Wall Street banks, that is – remain intact. They face some legal entanglements, but they will be able to buy their way out of those cases and continue with business as usual, which for them means profiting from reckless transactions and expecting that taxpayers will eventually pay to clean up the mess.

A major reason for the disparity between the fates of Fannie and Freddie and that of the banks was the success of the rightwing disinformation campaign blaming the financial crisis entirely on the mortgage agencies. According to this warped narrative, it was their role in promoting home ownership among lower-income Americans that brought the system down. In 2011 New York Times columnist David Brooks declared that “the Fannie Mae scandal is the most important political scandal since Watergate. It helped sink the American economy. It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.”

Fannie and Freddie certainly made their share of mistakes. Let’s recall, as conservatives typically fail to do, that while these agencies were created by Congress and ultimately had taxpayer backing, they had been functioning as for-profit entities. Their executives benefited handsomely from the housing bubble.

Yet much more damage was done by purely private-sector players such as Countrywide Financial, which steered low-income families into predatory sub-prime mortgages, as well as the big investment banks, which packaged those doomed mortgages into securities whose risks were not adequately disclosed to investors. In this they were aided by the unscrupulous credit-rating agencies.

Those risks were also not sufficiently disclosed to Fannie Mae and Freddie Mac, which purchased many of the toxic securities. A few years ago, the Federal Housing Finance Agency, which currently oversees Fannie and Freddie, began to bring legal actions against the banks.

In January 2011 Bank of America, which had purchased Countrywide, consented to pay $2.8 billion to settle one such suit brought by FHFA. The amount was considered a bargain for BofA, with one financial analyst calling it a “gift” from the government.

In July 2011 FHFA brought a similar action against a U.S. subsidiary of the Swiss bank UBS, which had been an aggressive marketer of mortgage-backed securities in the years following its acquisition of U.S. investment banks PaineWebber and Kidder Peabody. The case is pending.

And in September 2011 FHFA brought suits against 17 financial institutions, among them Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In the Citi complaint, for example, FHFA alleged that the bank “falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers’ to repay their mortgage loans.” Those cases are pending as well.

At the beginning of this year, Bank of America agreed to pay another $10.3 billion ($3.6 billion in cash and $6.75 billion in mortgage repurchases) to Fannie Mae to settle a new lawsuit concerning the bank’s sale of faulty mortgages to the agency. As part of the deal, BofA also agreed to sell off about 20 percent of its loan servicing business.

Those who depict Fannie and Freddie as the root of all housing evil should explain how it is that they ended up among the main victims of Wall Street’s huge mortgage-backed securities scam and are receiving billions to resolve their legal claims over the matter.

In August President Obama came out in favor of winding down Fannie and Freddie and sharply restricting the role of the federal government in mortgage markets. When will the Administration propose something similarly radical about the big banks?

When Will the Big Banks Be Reined In?

In case anyone had doubts about the venality of the big U.S. banks, some recent news reports provide indisputable proof.

First, David Kocieniewski of the New York Times wrote a mind-boggling front-page report on how Goldman Sachs has been using a metals storage company to move large quantities of aluminum from one warehouse to another in Detroit. The maneuver, which exploits esoteric rules of the London Metal Exchange, generates millions of dollars in profit for Goldman and pushes up the price of products such as soft drinks sold in aluminum cans.

The creation of paper profits from aluminum shuffling is just one of the various ways that banks manipulate commodity prices. Occasionally they are called to task for their actions. The Federal Energy Regulatory Commission just announced that JPMorgan Chase would pay $410 million in penalties and disgorgement to ratepayers to settle charges that it manipulated electricity markets in California and the Midwest several years ago. The announcement came shortly after the agency ordered the British bank Barclays and four of its traders to pay $453 million in civil penalties in connection with similar abuses in the western United States.

Apparently these banks decided that Enron’s energy market manipulation from a decade earlier was a game plan rather than a cautionary tale.

Another Times piece reports that major banks have in effect blacklisted more than a million low-income Americans because their names appear in databases of supposedly risky customers. The article highlights a Brooklyn woman who ended up on such a list after she overdrew her checking account by all of $40 in 2010 and subsequently was turned down by numerous banks when she tried to open an account. Many of the blacklisted people had to resort to exploitative check-cashing services and payday lenders to conduct their financial transactions. Among the subscribers to ChexSystems, the largest of the databases, were said to be Bank of America, Citibank, JPMorgan Chase and Wells Fargo.

Allow that to sink it. Banks that have been involved in multi-billion-dollar scandals involving the deceptive sale of toxic securities, municipal bond bid rigging, foreclosure abuses and the like decide that it is too risky to take on a customer who once had a two-digit overdraft in her checking account.

For institutions such as these, the only proper response is to play as dirty as they do. A third NYT article reports that the city of Richmond, California is doing exactly that by employing its power of eminent domain to take over occupied homes that are under the threat of foreclosure and instead offer the owners new, more affordable mortgages that reflect the diminished value of the property. The banks, which have dragged their feet on foreclosure reforms, are indignant over the move and are, in the words of the Times, threatening to “bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity” to consider the tactic.

The need for bold tactics such as eminent domain has been brought about not only by the banks but also by the half-hearted efforts of the Obama Administration to deal with the foreclosure crisis. This is just one of the ways the administration has not held the financial industry fully responsible for the financial meltdown of 2008 and the repercussions that are still with us.

The President himself is spending his time these days lobbying Congress to support the selection of Larry Summers as the next chair of the Federal Reserve. This is the same Summers who, as Clinton’s Treasury Secretary, promoted the financial deregulation that helped usher in the bank recklessness that has done so much harm to the economy.

The Wall Street Journal recently revealed for the first time that Summers has been working as a consultant to Citigroup in addition to his previously reported roles advising a hedge fund, a venture capital firm and a money management company. Obama apparently thinks that someone with this kind of track record is well suited to oversee monetary policy as the head of an agency that is also one of the main banking regulators.

I’m more impressed with the public officials in Richmond, California.

JPMorgan Chase in the Sewer

dimon The business news has been full of speculation on whether JPMorgan Chase Jamie Dimon will go on serving as both CEO and chairman of the big bank, in light of a shareholder campaign to strip him of the latter post. The effort to bring Dimon down a notch—and to oust three members of the board—is hardly the work of a “lynch mob,” as Jeffrey Sonnenfeld of Yale suggested in a New York Times op-ed.

That’s not to say that a corporate lynching is not in order. JPMorgan’s behavior has been outrageous in many respects. The latest evidence has just come to light in a lawsuit filed by California Attorney General Kamala Harris, who accuses the bank of engaging in “fraudulent and unlawful debt-collection practices” against tens of thousands of residents of her state.

In charges reminiscent of the scandals involving improper foreclosures by the likes of JPMorgan, the complaint describes gross violations of proper legal procedures in the course of filing vast numbers of lawsuits against borrowers, including:

Robo-signing of court filings without proper review of relevant files and bank records;
Failing to properly serve notice on customers—a practice known as “sewer service”; and
Failing to redact personal information from court filings, potentially exposing customers to identity theft.

JPMorgan got so carried away with what the complaint calls its “debt collection mill,” that on a single day in 2010 it filed 469 lawsuits.

The accusations come amid reports of ongoing screw-ups in the process of providing compensation to victims of the foreclosure abuses. For JPMorgan, the California charges also bring to mind its own dismal record when it comes to respecting the rights of credit card customers.

In January 2001, just before it was taken over by what was then J.P. Morgan, Chase Manhattan had to pay at least $22 million to settle lawsuits asserting that its credit card customers were charged illegitimate late fees.

In July 2012 JPMorgan Chase agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers.

The credit card abuses are only part of a broad pattern of misconduct by JPMorgan. In the past year alone, its track record includes the following:

In October 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that its Bear Stearns unit had fraudulently misled investors in the sale of residential mortgage-backed securities. The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

In January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses. That same month, bank regulators ordered JPMorgan to take corrective action to address risk management shortcomings that caused massive trading losses in the London Whale scandal. It was also ordered to strengthen its efforts to prevent money laundering. In a move that was interpreted as a signal to regulators, JPMorgan’s board of directors cut the compensation of Dimon by 50 percent.

JPMorgan’s image was further tarnished by an internal probe of the big trading losses that found widespread failures in the bank’s risk management system. Investigations of the losses by the FBI and other federal agencies continue.

In February 2013 documents came to light indicating JPMorgan had altered the results of an outside analysis showing deficiencies in thousands of home mortgages that the bank had bundled into securities that turned out to be toxic.

In March 2013 the Senate Permanent Committee on Investigation released a 300-page report that charged the bank with ignoring internal controls and misleading regulators and shareholders about the scope of losses associated with the London Whale fiasco.

In an article in late March, the New York Times reported that the bank was facing investigations by at least eight federal agencies. Last week, the newspaper revealed a new investigation of JPMorgan by the Federal Energy Regulatory Commission, which was said to have assembled evidence that the bank used “manipulative schemes” to transform money-losing power plants into “powerful profit centers.”

You know a bank is in big trouble when the coverage of its activities includes phrases like “lynch mob,” “sewer service” and “manipulative schemes.“

The Banking Dirty Dozen: A Cheat Sheet

JPM-bankster With the posting of a dossier on Barclays, the inventory of Corporate Rap Sheets on the banking industry now stands at twelve. Looked at together, the track records of these major financial institutions since the mid-2000s amounts to one of the most brazen corporate crime waves in the entire history of capitalism.

The dirty dozen includes six banks based in the United States (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo); three in the United Kingdom (Barclays, HSBC and the Royal Bank of Scotland); two in Switzerland (Credit Suisse and UBS); and one in Germany (Deutsche Bank).

Although the prosecution of their crimes has been far from adequate, quite a few cases have been brought by a variety of agencies and plaintiffs. The charges have also been wide-ranging: from investor deception and mortgage abuses to violation of economic sanctions and the facilitation of tax evasion and money laundering.

Even if we limit the universe to those cases in which there was a penalty or settlement worth $100 million or more, the list presented below comes to more than three dozen. The recoveries in these megacases add up to an astounding $82 billion (including mandated repurchases of securities and mortgage modifications). And this figure does not include many large cases that remain unresolved—not to mention the cases that have yet to be brought.

Beyond the numbers, it is difficult to say what all this amounts to. The penalties, while substantial in comparison to those imposed in the past, do not seem to be serving as much of a deterrent against the reckless and unscrupulous business practices that gave rise to the financial meltdown just a few years ago.

The answer may be that the penalties need to be much larger, so that they force crooked banks to taken more drastic actions such as selling off major assets. Or it may be that changes are necessary to those tax code provisions that allow banks (and other corporations) to deduct many of these penalties. Another possibility is that only more aggressive criminal prosecutions of both banks and their executives will get them to clean up their act. Other remedies such as charter revocations also need to be given new consideration.

One way or another, the banking crime wave needs to be brought to an end.

MEGACASES INVOLVING THE BANKING DIRTY DOZEN DISCUSSED IN THEIR CORPORATE RAP SHEETS

Deceiving investors

Bank of America (SEC cases re Merrill Lynch): $183 million (2009 and 2010)
Bank of America (class actions re Merrill Lynch): $2.7 billion (2011 and 2012)
Bank of America (re securities sold to Fannie Mae): $10.3 billion (2013)
Citigroup: $285 million (2011)
Citigroup: $590 million (2012)
Citigroup (class action): $730 million (2013)
Credit Suisse: $120 million (2012)
Goldman Sachs: $550 million (2010)
JPMorgan Chase: $153 million (2011)
Wells Fargo: $125 million (2011)

Disputes with purchasers of auction rate securities

Deutsche Bank: $1.3 billion (2009)
UBS: $18.2 billion (2008 and 2010)
Wells Fargo: $1.4 billion (2009)

Mortgage and foreclosure abuses

Bank of America (re Countrywide Financial): $463 million (2010 and 2011)
Bank of America, Citigroup, JPMorgan Chase, Wells Fargo (and Ally Financial): $25 billion (2012)
Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and six others): $8.5 billion (2013)
Goldman Sachs: $330 million (2013)
HSBC: $249 million (2013)
Morgan Stanley (re Saxon Mortgage Services): $227 million (2013)
Wells Fargo (racial discrimination): $175 million (2012)
Wells Fargo: $2 billion (2010)

Defrauding of federal government regarding mortgage insurance

Citigroup: $158 million (2012)
Deutsche Bank: $202 million (2012)

Municipal bond bid rigging and illegal payments

Bank of America: $137 million (2010)
JPMorgan Chase: $747 million (2009)
JPMorgan Chase: $228 million (2011)
UBS: $160 million (2011)
Wells Fargo: $148 million (2011)

Manipulation of the LIBOR interest rate index

Barclays: $450 million (2012)
Royal Bank of Scotland: $612 million (2013)
UBS: $1.5 billion (2012)

Facilitation of tax evasion and money laundering by customers

Deutsche Bank: $553 million (2010)
HSBC: $1.3 billion (2012)
UBS: $780 million (2009)

Violations of economic sanctions regarding countries such as Iran

Barclays: $298 million (2010)
Credit Suisse: $536 million (2009)
Royal Bank of Scotland (re ABN AMRO): $500 million (2010)

Improper increases in credit card minimum monthly payments

JPMorgan Chase: $100 million (2012)

Manipulation of electricity markets

Barclays: $470 million (2012)

Violating the Norm at Deutsche Bank

Layout 1 Corporate annual meetings and the publication of company annual reports usually come off like clockwork. Deutsche Bank, however, has found itself in the awkward position of having to call an extraordinary general meeting and delay the issuance of its annual financial documents until after that event.

These unusual measures are symptoms of the disarray of the giant German financial institution as it copes with a series of legal complications stemming from its own ethical shortcomings.

The special meeting was necessitated by a court ruling that invalidated votes that had been taken at last year’s scheduled shareholder gathering. That ruling came as the result of a legal challenge brought by the heirs of German media tycoon Leo Kirch, who blame the bank for forcing his company into bankruptcy.

There’s a silver lining in this for Deutsche Bank management, since the delay in the publication of the annual report (and the 20-F filing with the U.S. Securities and Exchange Commission) means that it will have more time before it needs to give more details about the various legal messes it is in.

It’s not easy keeping track of them all. Deutsche Bank’s reputation has been tarnished in a variety of ways. This is not to say that the bank’s image started off spotless. It did, after all, actively collaborate with the Nazi regime, helping appropriate the assets of financial institutions in conquered countries.

The sins were not all in the distant past. In 1999 Deutsche Bank acquired New York-based Bankers Trust, which was embroiled in a scandal over its diversion of unclaimed customer assets into its own accounts; it had to pay a $60 million fine and plead guilty to criminal charges.

Deutsche Bank itself was then the subject of wide-ranging investigations of its role in helping wealthy customers, especially those from the U.S., engage in tax evasion. The bank was featured in an investigative report on offshore tax abuses issued by a U.S. Senate committee and was eventually charged by federal prosecutors. In 2010 it had to pay $553 million and admit to criminal wrongdoing to resolve allegations that it participated in transactions that promoted fraudulent tax shelters and generated billions of dollars in U.S. tax losses.

That did not put an end to Deutsche Bank’s tax evasion woes. It is currently reported to be the subject of an investigation by German prosecutors of tax dodging through the use of carbon credits. In December, the bank’s German offices were raided by some 500 police officers seeking evidence for the probe.

Deutsche Bank is also widely reported to be under investigation for its role in the manipulation of the LIBOR interest rate index. There has been speculation that the bank’s co-chief executive, Anshu Jain, might lose his job over the issue. Lower-level employees of the bank have already been disciplined.

There’s more. Deutsche Bank is one of the firms that were sued by the U.S. Federal Housing Finance Agency for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac (the case is pending). Last year, the U.S. Attorney for the Southern District of New York announced that Deutsche Bank would pay $202 million to settle charges that its MortgageIT unit had repeatedly made false certifications to the U.S. Federal Housing Administration about the quality of mortgages to qualify them for FHA insurance coverage.

In January Deutsche Bank agreed to pay a $1.5 million fine to the U.S. Federal Energy Regulatory Commission to settle charges that it had manipulated energy markets in California in 2010.

Deutsche Bank’s misconduct goes beyond the realm of finance. The bank is being targeted by labor activists in Las Vegas, where it owns two casinos. Members of UNITE HERE have been picketing the bank’s Cosmopolitan casino over management’s insistence on weakening standard industry work rules during negotiations on the union’s first contract at the site. As part of its organizing drive, UNITE HERE created a website called Deutsche Bank Risk Alert to highlight the negative issues surrounding the casino’s parent. It has not lacked for content.

Note: This piece draws from my new Corporate Rap Sheet on Deutsche Bank, which can be found here.

Bluster Under Fire at JPMorgan Chase

Most chief executives use the World Economic Forum in Davos, Switzerland as an opportunity to solidify their relationships with other members of the global power elite. Jamie Dimon of JPMorgan Chase treats it as an occasion to strike back at critics. At the 2011 gathering he said he was sick of “this constant refrain—bankers, bankers, bankers.” This year he has been at it again, declaring that “we’re doing the right thing,” while regulators are “trying to do too much, too fast.”

What makes Dimon’s bluster all the more ridiculous is that it comes only a short time after he and other top executives at JPMorgan were reprimanded by a report produced by their own colleagues at the bank. The internal investigation was prompted by the ongoing scandal surrounding more than $6 billion in losses the bank experienced as the result of aggressive trading by its unit in London led by an individual nicknamed the London Whale.

For a document of this kind, the report is pretty blunt. It notes that during a conference call with analysts at an early stage of the controversy Dimon had agreed with a characterization of the matter as a “tempest in a teapot.” It goes on to accuse the bank’s chief investment office (CIO) of poor judgment and execution while alleging that the trading program in question had “inconsistent priorities” and “poorly conceived” strategies. The bank did not, the report says, “ensure that the controls and oversight of CIO evolved commensurately with the increased complexity and risks” of its activity. Such failings were behind the recent decision by the JPMorgan board to cut Dimon’s compensation in half.

Actually, the internal report and the pay cut are not the worst of Dimon’s problems. A variety of federal agencies are doing their own investigations of the trading losses, and it is likely that the bank will face civil if not criminal charges.

All this does not come as a surprise. JPMorgan—which represents the consolidation of several of the most powerful New York and Chicago money center banks as well as the investment house founded by the legendary financier and robber baron J.P. Morgan—has a long history of aggressive business practices, including ones that cross the line into outright misconduct.

For example, the bank was charged with abetting the accounting fraud perpetrated by Enron, and in 2003 it had to pay $135 million to settle SEC charges. Two years later, the bank agreed to pay $2.2 billion to settle a suit brought by Enron shareholders. That same year, it agreed to pay $2 billion to settle a suit related to its role in underwriting bonds for a company, WorldCom, at the center of another accounting scandal.

In 2003, JPMorgan’s securities arm was part of a $1.4 billion settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities; its share was $80 million. In 2006 it agreed to pay $425 million to settle a lawsuit charging that its securities operation misled investors during the dot com boom of the 1990s.

During the financial meltdown in 2008, federal regulators got JPMorgan to take over two failing institutions—investment house Bear Stearns and mortgage lender Washington Mutual—that brought with them a variety of legal problems stemming from their reckless practices.

For example, in 2010 the Federal Deposit Insurance Corporation announced that Washington Mutual and JPMorgan had agreed to settle claims relating to the bank’s failure. The agency did not cite the size of the settlement, but it was later reported to be about $6 billion. The following year, WaMu agreed to pay $105 million to settle an investor lawsuit relating to its collapse. Three former WaMu executives later agreed to pay $64 million to settle with the FDIC, but most of the money was to be paid from insurance policies the bank had purchased for them.

In 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that Bear Stearns had fraudulently misled investors in the sale of residential mortgage-backed securities. The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

JP Morgan has also faced legal travails of its own making. In 2009 the SEC announced that J.P. Morgan Securities would pay a penalty of $25 million, make a payment of $75 million to Jefferson County, Alabama and forfeit more than $647 million in claimed termination fees to settle charges that the firm and two of its former managing directors engaged in an illegal payment scheme to win municipal bond business from the county.

In 2011 JPMorgan found itself at the center of a controversy over improper foreclosures and excessive interest rates in connection with home loan customers who were members of the military. The bank agreed to pay $56 million to settle charges of having violated the Servicemembers Civil Relief Act.

Also in 2011, the SEC announced that JPMorgan would pay $153.6 million to settle allegations that in 2007 it misled investors in a complex mortgage securities transaction. The following month, the SEC said that J.P. Morgan Securities would pay $51.2 million to settle charges of fraudulently rigging municipal bond reinvestment transactions in 31 states. The agreement was part of a $228 million settlement the firm reached with a group of federal regulators and state attorneys general.

Documents made public in a lawsuit against JPMorgan by a court-appointed trustee in the Bernard Madoff Ponzi scheme case suggested that senior executives of the bank had developed doubts about the legitimacy of Madoff’s investment activities but continued to do business with him. The lawsuit was later dismissed.

JPMorgan was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. In April 2012 the Commodity Futures Trading Commission imposed a penalty of $20 million on JPMorgan for failing to segregate customer accounts being handled on behalf of Lehman Brothers prior to that firm’s collapse.

In July 2012 JPMorgan agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers. And in January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses.

One journalist in Davos reported that Dimon was wearing FBI cufflinks. Given this track record, FBI handcuffs might be more appropriate attire.

Note: This piece draws on my new Corporate Rap Sheet on JPMorgan Chase, which can be found here.