In what the New York Times declared as a “dark day for the rule of law” on December 11, 2012, HSBC, the world’s second largest bank, failed to be indicted for extensive criminal activities in laundering money to and from regimes under sanctions, Mexican drug cartels, and terrorist organizations (including al-Qaeda). While admitting culpability, and with guilt assured, state and federal authorities in the United States decided not to indict the bank “over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.” Instead, HSBC agreed to pay a $1.92 billion settlement.
The fear was that an indictment would be a “death sentence” for HSBC. The U.S. Justice Department, which was prosecuting the case, was told by the U.S. Treasury Department and the Federal Reserve that taking such an “aggressive stance” against HSBC could have negative effects upon the economy. Instead, the bank was to forfeit $1.2 billion and pay $700 million in fines on top of that for violating the Bank Secrecy Act and the Trading with the Enemy Act. In a statement, HSBC’s CEO stated, “We accept responsibility for our past mistakes… We are committed to protecting the integrity of the global financial system. To this end, we will continue to work closely with governments and regulators around the world.” With more than $7 billion in Mexican drug cartel money laundered through HSBC alone, the fine amounts to a slap on the wrist, no more than a cost-benefit analysis of doing business: if the ‘cost’ of laundering billions in drug money is less than the ‘benefit,’ the policy will continue.
As part of the settlement, not one banker at HSBC was to be charged in the case. The New York Times acknowledged that, “the government has bought into the notion that too big to fail is too big to jail.” HSBC joins a list of some of the world’s other largest banks in paying fines for criminal activities, including Credit Suisse, Lloyds, ABN Amro and ING, among others. The U.S. Assistant Attorney General Lanny A. Breuer referred to the settlement as an example of HSBC “being held accountable for stunning failures of oversight.” Lanny Breuer, who heads the Justice Department’s criminal division, which was responsible for prosecuting the case against HSBC, was previously a partner at a law firm (along with the U.S. Attorney General Eric Holder) where they represented a number of major banks and other conglomerates in cases dealing with foreclosure fraud. While Breuer and Holder were partners at Covington & Burling, the firm represented notable clients such as Bank of America, Citigroup, JP Morgan Chase and Wells Fargo, among others. It seems that at the Justice Department, they continue to have the same job: protecting the major banks from being persecuted for criminal behaviour.
With a great deal of focus on the $1.9 billion in fines being paid out by HSBC, little mention was made of the fact that HSBC had roughly $2.5 trillion in assets, and earned $22 billion in profits in 2011. But not to worry, HSBC’s executive said that they “accept responsibility for our past mistakes,” and added: “We have said we are profoundly sorry for them, and we do so again.” So not only did the executives of the world’s second largest bank apologize for laundering billions in drug money (along with other crimes), but they apologized… again. Thus, they pay a comparably small fine and face no criminal charges. I wonder if a crack dealer from a ghetto in the United States could avoid criminal prosecution if he were to apologize not once, but twice. Actually, we don’t have to wonder. In May of 2012, as HSBC executives were testifying before the U.S. Senate in Washington D.C., admitting their role in drug money laundering, a poor black man was convicted of peddling 5.5 grams of crack cocaine just across the river from the U.S. Capitol building, and he was given 10 years in prison.
Back in August the bank stated that they had put aside $700 million to pay fines for illegal activities, which conveniently was the exact amount they were fined by the U.S. Justice Department (not including the forfeiture of profits). Lanny Breuer declared the settlement to be “a very just, very real and very powerful result.” Indeed, one could agree that the results are “powerful” and “very real,” in that they provide a legal state-sanctioned decision that big banks will not be prosecuted for their vast criminal activities, precisely because they are big banks. The “very real” result of this is that we can guarantee that such criminal behaviour will continue, since the banks will continue to be protected by the state. With news of the settlement, HSBC’s market share price rose by 2.8%, a clear sign that “financial markets” also reward criminal behaviour and the “pervasively polluted” culture at HSBC (in the words of the U.S. Senate report).
Jack Blum, a Washington attorney and former special counsel for the Senate Foreign Relations Committee who specializes in money laundering and financial crimes stated that, “If these people aren’t prosecuted, who will be?” He further asked: “What do you have to do to be prosecuted? They have crossed every bright line in bank compliance. When is there an offense that’s bad enough for a big bank to be prosecuted?” But the Justice Department’s Lanny Breuer explained that his department had to consider “the collateral consequences” of prosecutions: “If you prosecute one of the largest banks in the world, do you risk that people will lose their jobs, other financial institutions and other parties will leave the bank, and there will be some kind of event in the world economy?”
In other words, the U.S. Justice Department decided that big banks are above the law, because if they weren’t, there would be severe consequences for the financial system. And this is not just good news for HSBC, the “favourite” bank of Mexican drug cartels (according to Bloomberg), but it’s good news for all banks. After all, HSBC is not the only bank engaged in laundering drug money and other illegal activities. Back in 2010, Wachovia (now part of Wells Fargo) paid roughly $160 million in fines for laundering some $378.4 billion in drug money. Drug money has also been found to be laundered through other major financial institutions, including Bank of America, Banco Santander, Citigroup, and the banking branch of American Express. Nearly all of the world’s largest banks have been or are currently being investigated for other crimes, including rigging interest rates (in what’s known as the Libor scandal), and other forms of fraud. Among the banks being investigated for criminal activity by U.S. prosecutors are Barclays, Deutsche Bank, Citigroup, JP Morgan Chase, Royal Bank of Scotland, UBS, Bank of America, Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, Rabobank, Royal Bank of Canada, and Société Générale, among others. Regulators and investigators of the Libor scandal – “the biggest financial scandal ever” – report that the world’s largest banks engage in “organized fraud” and function like a “cartel” or “mafia.”
The pervasive criminality of this “international cartel” is so consistent that one commentator with the Guardian has referred to global banks as “the financial services wing of the drug cartels.” But indeed, where could be a better place for drug cartels to deposit their profits than with a financial cartel? And why would banks give up their pivotal role in the global drug trade? While the pharmaceutical drug industry records annual revenues in the hundreds of billions of dollars (which is nothing to ignore), the global trade in illicit drugs, according to the United Nations Office on Drugs and Crime, amounted to roughly 2.3-5.5% of global GDP, around $2.1 trillion (U.S.) in 2009. That same year, the same United Nations office reported that billions of dollars in drug money saved the major global banks during the financial crisis, as “the only liquid investment capital” pouring into banks. Roughly $325 billion in drug money was absorbed by the financial system in 2009. It is in the interest of banks to continue profiting off of the global drug trade, and now they have been given a full green light by the Obama administration to continue.
Welcome to the world of financial criminality, the “international cartel” of drug money banks and their political protectors. These banks not only launder billions in drug money, finance terrorists and commit massive fraud, but they create massive financial and economic crises, and then our governments give them trillions of dollars in bailouts, again rewarding them for creating crises and committing criminal acts. On top of that, we, the people, are handed the bill for the bailouts and have to pay for them through reduced standards of living by being punished into poverty through ‘austerity measures’ and have our labour, resources, and societies exploited through ‘structural reform’ policies. These criminal banks dominate the global economy, and dictate policies to national political oligarchies. Their greed, power, and parasitic nature knows no bounds.
The fact that the Justice Department refused to prosecute HSBC because of the effects it could have on the financial system should be a clear sign that the financial system does not function for the benefit of people and society as a whole, and thus, that it needs to be dramatically changed, cartels need to be destroyed, banks broken up, criminal behaviour punished (not rewarded), and that people should dictate the policies of society, not a small network of international criminal cartel banks.
But then, that would be rational, so naturally it’s not even up for discussion.
Why is HSBC still in operation? On the same day (December 10, 2012) that the Obama administration leaked the story of the HSBC settlement a story ran in the New York Times that was full of self-praise by the Obama and Cameron (U.K.) governments for their “cooperative approach” to cracking down on systemically dangerous institutions (SDIs). SDIs are treated as “too big to fail” because they pose a global systemic risk when they fail. The HSBC settlement puts the lie to the Obama/Cameron crack-down on the SDIs for it revealed a disgrace – Obama and Cameron treat the SDIs as too big to prosecute. Indeed, HSBC demonstrates that the SDIs’ senior officers are treated by Obama and Cameron as too elite to prosecute. The propaganda meme of the NYT story – that the SDIs would never again be given special favors due to reforms being adopted by Obama and Cameron – lasted four hours before it was destroyed by the disgraceful reality of the Obama and Cameron governments’ refusal to prosecute HSBC and its officers for their tens of thousands of felonies.
The NYT article begins by accepting the Obama/Cameron framing of the SDI issue, without any critical analysis. “It is one of the thorniest problems hanging over the financial system: how should authorities deal with the collapse of a sprawling global bank to protect the financial system at large?” The reporter’s implicit assumption is that we must have banks that are systemically dangerous when they fail.
This example exemplifies why implicit assumptions are so dangerous. They exclude far better alternatives or terrible risks from even being considered – and they do so unknowingly. If the reporter had made the assumption explicitly he would have been forced to defend it with analytics. The article acknowledges that SDIs drove the financial crisis that caused the Great Recession. In the U.S. alone this caused over a $15 trillion loss in wealth and led to the loss, or prevented the creation, of over 10 million jobs. According to the Bush and Obama administrations we were lucky in preventing the crisis from growing vastly larger. SDIs are economic weapons of mass destruction – but they cause their primary destruction inside the nation in which they reside.
Why allow a weapon of mass destruction that primarily destroys your own nation? That is an act of insanity. The City of London cannot credibly threaten the United States by creating SDIs and threatening to destroy the UK’s economy. The proponents of SDIs bear an enormous burden of persuasion to prove why we shouldn’t end the catastrophic danger they pose by shrinking them to the point where they are no longer potential weapons of mass economic destruction. Their burden is even greater when one considers the dominant view of economists that the smaller banks would be more efficient than the SDIs, which are massively too large to manage. The NYT reporter does not even attempt to meet that burden. The reporter also presents no indication that the U.S. and U.K. regulators even considered ending our exposure to these weapons of mass economic destruction.
The article acknowledges that trying to prevent an SDI from causing a systemic, global financial crisis once it fails is likely to fail. First, the regulators are not at all sure that they can prevent a systemic crisis with their “cooperative” proposals. Second, few regulators would risk a global systemic crisis when the alternative of bailing out the failing SDI inherently exists. Regulators have seen the disastrous results of failing to bail out Lehman.
The obvious alternative (to everyone except the reporter, the U.S. and U.K. regulators, and the Obama and Cameron governments who have implicitly assumed it out of existence) is to shrink the SDIs to the point that they no longer pose a systemic risk and to conduct the shrinkage now before they fail. That alternative would vastly reduce the economic WMD and make the banks more efficient – a win-win solution.
The further good news is that those two “wins” are not the limits of the advantages of shrinking the SDIs before they fail. The NYT article, implicitly, assumes the Obama/Cameron framing of another issue critical to determining the SDI policies we should adopt. “‘Too big to fail’ is the label for the problem that confronts governments when a large bank is on its last legs.” The implicit assumption is that SDIs pose a “problem” only when they are on their “last legs.” Had the reporter made this assumption explicitly he would have recognized it is unsupportable. Beyond their inefficiency, SDIs pose grave risks to a nation when they are profitable and growing. SDIs make “free markets”, integrity, and justice impossible to maintain, they create the perverse political power that produces crony capitalism, and they drive the “competition to laxity” that drives regulatory failure. I have explained most of these points in prior writings, so I will summarize.
SDIs’ uninsured, general creditors get bailed out even though the contractual deal they agree to would normally cause them to suffer severe losses. The result is that they can borrow significantly more cheaply from general creditors than can their smaller rivals. SDIs that are insured banks receive an explicit governmental subsidy (deposit insurance), but the implicit federal subsidy to general creditors is far larger and is unique to SDIs. The very conservative economists who authored the book Guaranteed to Fail (2011) describe the implicit subsidy as being so large that it is the metaphorical equivalent of “bringing a gun to a knife fight.” They conclude that the subsidies are so large that they inherently create “a highly distorted market.” Indeed, they argue that the SDIs that created the mortgage crisis so distorted the market that there was “nothing free” about the mortgage markets. The authors also explain the SDIs’ immense political power and their ability to corrupt regulators and regulation.
The HSBC case illustrates why SDIs destroy integrity and justice. Public reports of the results of the government investigations of HSBC describe a bank that has been a criminal enterprise for at least 15 years. The current settlement addresses only three of the many scandals HSBC has committed over that time period. HSBC is a recidivist of epic proportions, but the Obama and Cameron governments have failed to prosecute HSBC or any of its officers. When powerful corporations and their controlling officers grow wealthy through massive frauds and do so with impunity from criminal sanction integrity and justice are eaten away. Effective financial regulation, supervision, and prosecutions are essential to “free” financial markets. When cheaters prosper honest firms are driven from the markets, a point that the Nobel Laureate George Akerlof explained in his famous 1970 article on markets for “lemons.” He described a “Gresham’s” dynamic in which bad ethics drove good ethics from the marketplace.
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
Fraud and the destruction of integrity among SDIs will tend to spread to their market rivals due to this Gresham’s dynamic. The result is another form of systemic risk.
The Justice Department, HSBC’s regulators, and the Obama and Cameron governments had the perfect opportunity to break this Gresham’s dynamic and restore justice and integrity by prosecuting and taking vigorous regulatory steps that forced HSBC to shrink over the next five years to the point that it was no longer an SDI. They could have done so at a time when HSBC was reporting very high profits rather than during a crisis. It was their paramount role and duty as prosecutors and regulators to break the Gresham’s dynamic by restoring the rule of law. Doing so would have been good for the markets, for increased competition, for bank efficiency, for the independence of the regulators and prosecutors, for safety and soundness, and for our democracy. Instead, they made the Gresham’s dynamic far worse, shamed their institutions and professions, and betrayed their duty to the nation and citizenry.
But things are likely far worse than this description suggests, for the pathetic truth is that there is no indication that the regulators, prosecutors, or government leaders considered doing the right thing at HSBC. That is how destructive making implicit assumptions and adopting the pro-crony framing of issues is in the real world. I hope I am wrong and that an insider will resign in disgust and disclose how she fought to shrink HSBC but was overruled by her superiors.