August 29, 2010
I cannot tell the truth
What would George Washington make of Wall Street?
The Senate Committee room is buzzing with excitement. The committee chairman had been preparing for months for this special session. A few nips and tucks of cosmetic surgery, an expensive Caribbean tan, a new Saville Row suit from an investigative trip to London. He was determined to look his best for his state, his constituents and his mid-term election chances.
Smiling to the CNBC camera, the chairman tapped the gavel on the table and brought the room to a respectful hush.
'Welcome, esteemed senators, ladies and gentlemen, to the first sitting of the Special Investigative Committee into alleged manipulation of the national Cherry market.'
He continued, 'Committee staff have distributed background papers on these dreadful events and as a matter of urgency the committee will call the first witness - George Washington - a gentleman farmer from Virginia.'
After the young George was sworn in, the chairman opened. 'Mr. Washington, sir, as a major participant, can you please explain your understanding of the recent disgraceful events in the Cherry market?'
Clearing his throat, Washington read a prepared opening statement.
'Mr. Chairman, esteemed committee members, the American system has been founded on the principles of free trade and free markets. In all markets, there are, by the nature of American capitalism, some winners and some losers. In this case, some cherry trees survive, some die, it is not the role of government to pick winners, nor pick cherries (muffled laughter from the audience)'
Angered by the laughter, the chairman roared 'this is a serious matter, sir, did you or did you not chop down a cherry tree with a new axe, in the knowledge the action would adversely impact the free market for cherries?'
Before Washington could reply, he was tapped on the arm by his lawyer and, after some minutes of intense discussion, he rose to his feet.
'Senator, committee members, I am pleased to announce that we have come to a settlement with the SEC on this matter. I neither admit nor deny the charge but in settlement I agree to plant three new cherry trees and distribute cherry pies to the poor of Virginia'
The chairman was overjoyed by the outcome. 'Thank you Mr. Washington for acting so promptly and sensibly to resolve this serious matter in the American way - brush it under the carpet.'
He shook the young man's hand, 'By the way have you ever thought of politics as a career?'
In an apocryphal story, the young George Washington, when asked about the chopping down of his father's favorite cherry tree, is reported to have replied - 'I cannot tell a lie, I cut the tree'. Washington was a man of probity and eighteenth century sensibilities - his word was his bond.
But what would George Washington make of today's Wall Street, where truth is just another tradable commodity with a market price?
The latest, but by no means only, example is of Barclays bank which, on payment of almost $300 million has settled with the SEC in a case involving sanctions busting over many years with banned countries, including Cuba and Iran. Criminal charges will be dropped if Barclays can demonstrate that over two years it can comply with US laws. In other words, two years probation for 15 years wrongdoing*, and no managers or board members have been charged with criminal actions - nor have they taken personal responsibility!
Other examples abound, with Credit Suisse, UBS, Lloyds all paying multi-million dollar fines for sanctions busting over the past few years, with no managers or board members falling on their swords.
Nor is sanctions-busting the only crime involved?
In July, Goldman Sachs agreed to pay half a billion dollars to settle civil charges that it duped clients. Goldmans did have the grace to admit that it had made a 'mistake' but no heads rolled, in fact large bonuses continued to be paid.
In another example, Bank of America paid the SEC $150 million 'to end civil charges accusing the bank of misleading shareholders when it acquired Merrill Lynch.' Again, no one owned up!
The SEC appears to have become little more than a third-world traffic cop, happy to take an 'on the spot fine' to make a problem go away.
Nor is the USA alone. In late 2009, the four largest banks in Australia paid some A$1.7 billion to settle a dispute with the NZ Commissioner for Inland Revenue over certain structured finance transactions that the commissioner argued were 'tax avoidance arrangements entered into for a purpose of avoiding tax'. Surprise, surprise, no one admitted any fault nor resigned, nor were fired!
Who paid for these settlements? Not the perpetrators but the shareholders of the companies involved who were innocents as regards the criminal activities but had to suffer anyway!
Since when has the habit of paying huge fines to settle criminal cases, without admitting guilt become standard practice for Wall Street firms and international banks?
Partly, it can be traced back to the early 2000s, when the SEC, for a sum of almost $1 billion, settled with the ten largest Wall Street firms over 'research analysts conflicts of interest' i.e. recommending dodgy securities. In this mother of all settlements, no one admitted or denied wrongdoing!
No wonder this was seen by Wall Street as the green light that any type of underhand behavior is acceptable, leading inexorably to the sub-prime debacle!
Under Basel II Operational Risk capital rules, all of these settlements are operational risk events under the event type 'Clients, Products & Business Practices' and count as 'external events' that should be covered in every bank's capital calculation.
This creates the ludicrous situation that not only shareholders in the offending bank have take an undeserved hit but shareholders in all advanced banks have to set aside some capital to cover the misdeeds of others! That is really spreading the guilt around!
Are the regulators to blame?
Somewhat. In the case of the Bank Of America settlement, Judge J. Rakoff noted that 'While better than nothing, this [SEC deal] is half-baked justice at best.'
But the SEC is not completely to blame; their hands are tied by totally inadequate laws. It is almost impossible under current legislation to convict white-collar criminals and the easy way out is for a regulator to settle for a minor win. Unless legislators are prepared to take on the big banks and improve ethics throughout the financial markets, the current wild west situation will go on to the next crisis, and the one after.
Was George Washington being over confident, or naive, when he once wrote 'truth will ultimately prevail where there is pains taken to bring it to light'?
Do the SEC and other regulators have to become a real pain on behalf of shareholders and taxpayers, for truth to prevail?
Postscript
*Compare the Barclays wrist-slap for 15 years sanctions busting with the five-year jail sentences handed down by UK courts, in June 2009, to Moshen Nik for the attempted export of eight liquid oxygen canisters to Iran.
Posted by pjmcconnell at 01:50 AM
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