The Banking Dirty Dozen: A Cheat Sheet

JPM-banksterWith 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.


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)

A Tale of Two States and Subsidy Transparency

florida sunshineFlorida and Mississippi may come close to sharing a border, but they are worlds apart in their current approach to the disclosure of economic development subsidies.

Florida has just launched an Economic Development Incentives Portal that makes it easy to discover which companies have benefited from programs such as the Quick Action Closing Fund, the Qualified Target Industry Tax Refund and the High Impact Performance Incentive.

Online subsidy disclosure is not completely new to Florida. An agency called the Governor’s Office of Tourism, Trade and Economic Development used to post a PDF list of recipients for various programs. After Rick Scott took office as governor in 2011, that agency was put under the auspices of the new Department of Economic Opportunity, and the old disclosure site disappeared. DEO promised to restore transparency and has now made good on that promise.

The new portal, produced by DEO in partnership with Enterprise Florida, covers a dozen programs with a total of about 1,250 entries, including “every non-confidential incentive project with an executed contract since 1996 that received or is on schedule to receive payments from the state of Florida.” DEO promises to add listings for confidential projects as their exemptions from disclosure requirements expire.

Searches can be targeted according to business name, county or date range. The results show company name, industry, subsidy value, county, approval date and project status. They also include both committed and actual numbers for jobs and investment, though in many cases the performance figures are listed as not available. The portal also includes projects that are inactive or have been terminated.

Florida’s portal is an important advance for subsidy transparency. The site would be even more useful if it included street addresses for the subsidized facilities (to facilitate mapping) and allowed downloading of search results in spreadsheet form.  At my request, DEO sent such a spreadsheet for the entire database, which I used both to prepare this piece and to upload the information to Subsidy Tracker.

Mississippi, on the other hand, is resisting online disclosure. The state legislature recently killed a bill that would have required the Mississippi Development Authority to publish an annual report on the tax credits, loans and grants it provides to companies in the name of economic development.

It turns out that the agency produced such a report for internal purposes but did not make it public. A group called the Bigger Pie Forum learned about the document—the 2012 Mississippi Incentives Report—and filed a successful freedom of information act request. Bigger Pie was only able to get a hard copy, but it scanned the report and has posted it online here. The info in that report has also been added to Subsidy Tracker.

Despite the reluctance of state legislators, online subsidy disclosure has come to Mississippi. Perhaps the Magnolia State will realize the futility of resisting official transparency and join the Sunshine State, among about 45 others, in making subsidy information directly available to the public via the web.

Note: The latest addition to CORPORATE RAP SHEETS is a dossier on the Royal Bank of Scotland, including its nine-figure settlements of charges relating to violations of U.S. economic sanctions and manipulation of the LIBOR interest rate index.  Speaking of subsidies, the rap sheet mentions that a U.S. subsidiary of RBS extracted a $100 million subsidy from the state of Connecticut to move its offices from New York to Stamford. Read the rap sheet here.

Ending the Corporate Crime Wave

Stop Corporate CrimeThe top executives of giant corporations may still effectively be immune from criminal prosecution for their misdeeds, but the financial penalties imposed on their companies by regulators are beginning to be felt in the bottom line. The question is whether plunging profits are enough to get corporate malefactors to clean up their act.

In February, the Swiss bank UBS posted a quarterly loss of $2.1 billion (and an annual loss of more than $2.7 billion), largely reflecting the $1.5 billion it paid to resolve charges brought by U.S., Swiss and British prosecutors in connection with the bank’s role in manipulating the LIBOR interest rate index.

Recently, the British bank HSBC reported a 17 percent decline in profits brought about to a great extent by the $1.9 billion in penalties it had to pay to resolve allegations by U.S. regulators that its lax internal controls against money laundering aided customers with links to drug trafficking and terrorism.

Oil giant BP noted that its 2012 results were affected by a “net adverse impact” of more than $5 billion relating to the Gulf of Mexico oil spill, for which the company had to pay $4 billion to resolve charges brought by U.S. prosecutors.

GlaxoSmithKline’s announcement of 2012 results noted that its net cash flow was depressed by the cost of legal settlements, including the $3 billion it had to pay the federal government to resolve allegations of illegal marketing of prescription drugs, withholding of crucial safety data and other abuses.  GSK went so far as to include a figure for cash flow “before legal settlements” similar to the way companies like to show results before interest, taxes and depreciation to make their performance look better.

It will be interesting to see how institutional investors regard these material financial impacts. Corporations have been breaking the law for a long time, and the penalties they incur have come to be seen as a routine cost of doing business. Many corporate critics thus tend to downplay their significance and instead press for more criminal prosecutions. That chorus has just intensified with a statement by U.S. Attorney General Eric Holder that some banks have grown so large that it is difficult to prosecute them.

It is worth noting, however, that all of the cases cited above contained criminal elements. A Japanese subsidiary of UBS pleaded guilty to a felony wire fraud charge. HSBC, the Justice Department said, “accepted responsibility for its criminal conduct and that of its employees” and was offered a deferred prosecution agreement. A BP unit pleaded guilty to felony manslaughter, environmental crimes and obstruction of Congress. GSK pleaded guilty to a three-count criminal information and consented to enter into a corporate integrity agreement with the federal government.

What was missing, of course, were criminal prosecutions of high-level executives in the firms, who presumably had ultimate responsibility for the misdeeds.

I agree that chief executives should be made to pay a stiff personal price for the anti-social practices of their organizations, but I’m not entirely convinced that putting some of them behind bars would be a foolproof deterrent against corporate misconduct. After all, plenty of businesspeople have gone to prison for insider trading, yet the practice never seems to end.

Financial sanctions may be more effective if the trend toward larger penalties is escalated even further. The wave of billion-dollar settlements may be causing some pain, but the companies—especially huge and highly profitable ones like BP—will easily recover. Penalties for serious offenses need to be raised to the point that they force the company to take drastic action, such as selling off major assets. Or the government could directly seize those assets, as some were urging in the wake of the BP disaster in the gulf.

There would undoubtedly be a major backlash from business interests to a policy of imposing penalties that threaten the survival of companies. Yet the alternative is to go on living amid a perpetual corporate crime wave.

Note:  My latest Corporate Rap Sheet is on HSBC, covering both the big penalty cited above and the other scandals surrounding the bank. It can be found here.