We’re 53 months removed from the Lehman Brothers meltdown. The U.S. bailouts have essentially been wound down at a profit. The Dow Jones Industrial Average is hovering near 14,000, and global bond markets are as calm as the Sargasso Sea. At the World Economic Forum last month, bankers like Jamie Dimon of JPMorgan Chase and Brian Moynihan of Bank of America, strode around proudly, their places and share prices largely restored. To a large degree, we have moved on.
But as William Faulkner wrote: “The past is never dead. It’s not even past.”
He could have been writing about the banks. Day after day, our largest financial institutions continue to be revealed as unreformed, largely unrepentant bad actors. Regulators, prosecutors, and plaintiffs in lawsuits continue to unearth scandalous behavior from before, during, and after the credit boom. Bankers conspired with their colleagues, with their counterparts at other banks, and at ratings agencies to milk money through plainly illicit and unkosher means. When caught, frequently indicted by their own emails and instant messages, the banks agree to pay big fines, utter pro forma apologies, and move on. A few people may lose their jobs, and a lot of people may lose their bonuses. But nobody goes to jail.
Why? Prosecutors fear that indicting a highly leveraged, highly indebted institution would trigger a cascade of unwanted outcomes—capital flight, bank runs, disruptions in vital markets. “The greatest triumph of the banking industry wasn’t ATMs or even depositing a check via the camera of your mobile phone,” notes Barry Ritholtz, a money manager and author of Bailout Nation. “It was convincing Treasury and Justice Department officials that prosecuting bankers for their crimes would destabilize the global economy.”
The crime without punishment is as predictable as it is infuriating.
The news this week has been concentrated in two big areas: last decade’s U.S. mortgage mania and the London-centered conspiracies among banks to fix benchmark interest rates.
First, mortgages. On Tuesday, the U.S. Department of Justice, joined by several state attorneys general, sued ratings agency Standard & Poor’s, charging that it put its highest stamp of approval—AAA—on packages of mortgage-backed securities that it knew were junky for the sake of collecting fees. Some have suggested that is payback for S&P having downgraded America’s credit rating in 2011. But come on. Several years ago, a congressional probe unearthed a classic instant message exchange between S&P employees. “We rate every deal,” an analyst said. “It could be structured by cows and we would rate it.” The possible damages: $5 billion.
On Wednesday Jessica Silver-Greenberg of The New York Times dug up some documents filed in a lawsuit in which a bank alleges that JPMorgan Chase turned a blind eye toward problems in the mortgages that it bundled into securities and sold to customers. (Last November JPMorgan Chase agreed to settle SEC charges that Bear, Stearns, which it acquired in 2008, hid information on loans when bundling mortgage securities. The cost: about $297 million.)
Last month in separate actions several banks, including JP Morgan Chase, agreed to an $8.5 billion settlement with federal authorities over the improper handling of foreclosures. Oh, and Bank of America agreed to pay $11.6 billion to mortgage giant Fannie Mae to settle claims over loans that it (and Countrywide Financial, which Bank of America owns) had sold to the government-backed mortgage giant.
The second flurry of news pertains to the long-running LIBOR scandal. Essentially, executives and traders at the world’s elite banks, over a period of years, blatantly, willfully, and persistently agreed to fix benchmark interbank lending rates. These are the obscure but vital rates that determine what hundreds of millions of consumers and companies around the world pay for mortgages, car loans, and corporate loans. And it turns out the rates were a sham. Last June Barclays agreed to pay a $453 million fine to settle charges over its involvement in the LIBOR scandal. In December UBS agreed to pay $1.5 billion in fines for its rule. As Assistant Attorney General Lanny Breuer described UBS’s efforts: “the scheme alleged is epic in scale.”
On Wednesday came word that RBS would pay more than $600 million to settle charges stemming from its role in the price-fixing scandal. RBS, formerly known as the Royal Bank of Scotland, was quite possibly the worst managed bank in the world in the precrisis years. After its collapse British taxpayers injected nearly $70 billion into the company and wound up owning 82 percent of RBS’s shares. In the settlement, RBS essentially admitted that the LIBOR-rigging scheme, which involved 21 employees, continued through 2010—well after the collapse and government takeover.
There are certain to be more LIBOR-related settlements to come.
If you work at a well-known, large, systematically important financial institution, you may lose your bonus—but not your freedom.
Of course, the regulatory authorities hit the banks where it is supposed to hurt: in their wallets. And bank leadership is trying to send a message to its employees—RBS and UBS have said that the funds for the settlement will come in part from cash that had been set aside for banker bonuses. Occasionally people lose their jobs. But the reaction is wholly unsatisfying. Banks issue ritualistic pro forma apologies that subtly manage to blame others. “LIBOR manipulation is an extreme example of a selfish and self-serving culture that took hold in parts of the banking industry during the financial boom,” RBS CEO Stephen Hester said on Wednesday. (Note: the manipulation at RBS carried on through 2010, well after the boom ended.)
Worst of all, there’s no apparent crime to go along with all this punishment. In all of these instances, rules, regulations, norms, and laws were clearly violated. The transgressions rose to such a level that nine- and 10-figure fines were levied. But it remains a source of anger that nobody will go to jail.
From the beginning of the financial scandal, there has been a noticeable lack of criminal prosecution at the largest institutions. Yes, the Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York have cracked down on insider trading, and have sent scores of people to jail for illicit schemes that may have netted tens or a few hundred million dollars. On Tuesday U.S. prosecutors busted up a ring of credit card fraudsters, whose takings amounted to $200 million.
But that’s small change compared with the damage inflicted in the mortgage and LIBOR scandals. A pretty clear rule of thumb has emerged: if you work at a well-known, large, systematically important financial institution, you may lose your bonus—but not your freedom. Simply put, authorities in the U.K., Switzerland, and the U.S. are not eager or willing to pursue banks to the fullest extent of the law. The trauma of the Lehman Brothers collapse has caused prosecutors around the world to treat banks with kid gloves. And that may be the greatest scandal stemming from the fall of 2008.