For the banks, regulators will try to pull a happy ending out from through the court’s noose. Punishment should be biblical instead
Most ambitious financial regulators know there is one rule to establishing their names: reel in a really, really big fish on Wall Street, and make them pay, either through convictions, penalties, or sheer humiliation.
The Royal Bank of Scotland is not this fish. Not only is RBS almost entirely unknown to the American populace, but its alleged crime – fixing inter-bank interest rates years ago – has failed to garner any outrage or surprise from consumers, no matter how appalling the offense.
Yet RBS – and the London inter-bank lending rate (Libor) – is the hinge on which US regulators have recently staked their reputation and enormous governmental prosecutorial resources. The Wall Street Journal is reporting that regulators are pressuring RBS to accept criminal charges in its fixing of Libor, the same way UBS did.
As the Journal points out, it’s not clear why “pressure” is necessary; obviously, outside of Washington’s bizarro world, RBS does not need to give its permission to be prosecuted for wrongdoing by the US government.
But here’s the real problem: the outmoded, cozy system of prosecution, which have regulators still bound by old handshake agreements. Banks and prosecutors work closely to agree on a deal that is severe enough to make regulators look tough, but does not hurt the bank’s reputation to the point of real financial harm. The Journal has this eye-popping paragraph, for instance, about a deal with Swiss bank UBS:
“Justice Department officials were heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s guilty plea. Before the settlement deal, some officials had worried it could destabilize the bank.”
No wonder, then, that one idea under discussion by US regulators is to go after a completely inconsequential Asian subsidiary of RBS for allegedly rigging Libor.
Not to nitpick, but this is missing the point of prosecution entirely. It’s not just the friendliness of the arrangements, but the purpose. It doesn’t become the US government to approach wrongdoers hat in hand, whispering “Please, sir, may we prosecute you? If you don’t mind, of course … we hate to be a bother of any kind.”
This is obviously problematic. Part of the point of a prosecution is to inflict some damage to finances and reputation, to show the culprit the error of his ways and to provide an example to others. But banks know they will get away with whatever they do; it costs them a paltry penalty relative to the profit they or their employees made. In a worst case scenario, it could even lead to lawsuits that tie up the banks’ excellent and expensive lawyers for a while, but in which they will outspend, outthink, and eventually agree to settle for a small portion of the actual damages.
There are obvious barriers to prosecutions. It is, for instance, a lot of work. I don’t mean that flippantly. There are millions of documents involved in these cases, and smoking guns are few and far between. Proving something in a court of law is a high standard, and it’s often difficult to find enough key witnesses who can prove that what looks like fraud isn’t just stupidity (which is, sadly, legal).
Another barrier is the sheer number of people and institutions involved; mortgage fraud, for instance, took a cast of thousands, from the low to the high. Jails may not even have enough space for them all.
But in retrospect, no matter how good the reasons, they still sound like excuses – another reason that the rich don’t have to pay the same price as the middle-class and the poor.
This is what most Americans are sick of, perhaps even more than financial malfeasance itself – that the system is, by its nature, tilted to favor banks and wealthy traders and bankers, with their greater resources. It’s the unfairness of it. A trader who knowingly sells batches of bad mortgages will never pay the same penalties as a homeowner who defaults on his one mortgage loan.
“Buyer beware” has two different definitions for the financially well-connected and for consumers. The main difference is that the financial elite have enough resources to absorb the losses, while homeowners can be instantly ruined.
That is why the main public purpose of these prosecutions – the political theater part – is to make wrongdoers pay, and to establish regulators as the tough cop on the financial beat. Americans seem to believe in capitalism and class mobility, by and large, but what Occupy Wall Street indicated was that citizens were ready for ethical capitalism, not the slash-and-burn kind that so often wins.
No American taxpayer wants to subsidize a testosterone-addled wolfpack of traders, who only shrug after they screw up. What Americans seem to really want is some good old-fashioned Abrahamic wrath brought upon the traitors to capitalism among us. Regulators will never be regarded as truly competent until they provide at least one real prosecution for a crime that has actually hurt US consumers or our system of markets.
For instance, there is literally no one in the United States who has ever pounded a dinner table in outrage over government complacency, yelling, “But if we’re so tough on financial crime, why haven’t we thrown those obscure Asian bureaucrats of a foreign bank into the slammer for fixing a London-based interest rate?!”
No. What US consumers wanted was the prosecution of American banks, for American crimes. Insider trading. Mortgage fraud. Foreclosure abuses. Unjust, overdone compensation for executives and managers who failed to uphold ethical business standards. The American people would probably even take a good court case over mortgage-backed securities, though it has been at least a year since anyone got in a good lather about derivatives.
Libor doesn’t cut it. For one thing, it’s ancient history. For another, it lacks specifics: sometimes banks pushed the rate up, and sometimes down, so it’s exceptionally hard to determine who was hurt, how much, and when.
For another, it’s literally a foreign concept to most Americans. Libor is set in London, and most of the banks that have been publicly accused of rigging it are foreign. For regulators, this is too easy: it’s easy to beat up on foreign banks but much harder to focus your wrath at home, on the executives that are a familiar presence in Washington.
So Libor is a dud, as far as prosecutorial glory goes. The problem with those other good, juicy subjects for homegrown American prosecutions, however, is simply that those ships have sailed.
The statute of limitations for pursuing legal action, in many cases, has already run out. Perhaps prosecutors were worried about that all-important reputational damage to the US banks when they were weak; perhaps the work of combing through millions of financial documents proved too much. Whatever the reason, the fight is over. Regulators needed to look tough on mortgages, on derivatives, and on reckless practices and compensation. They can’t start getting tough on Libor now and expect to be thanked.
It’s understandable that the Justice Department wants to gain something back of the stature it has lost. Recently, the DOJ has been embarrassed mightily by an acidly damning PBS Frontline special that criticized it – among others – for not finding anyone worthy of prosecution in the morass of casual fraud and wrongdoing that was the credit crisis. It’s understandable. But RBS, no matter what were its wrongdoing with Libor, won’t get the DOJ where it wants to go. Only getting really tough can do that.