Pigs get slaughtered?
It’s an old edict of trading that bears win, bulls win and pigs get slaughtered; but that hasn’t been the case in the past decade — when pigs arguably have been protected. Former Federal Deposit Insurance Corporation Chair Sheila Bair related an interesting anecdote from the penultimate Troubled Asset Relief Program (TARP) meeting during the 2008 credit crisis in a recent interview. All the pertinent regulators and bank executives were in attendance, and the first question asked during the bailout negotiations was from Merrill Lynch CEO John Thain. But it wasn’t about justice. It was about executive compensation.
They were discussing U.S. taxpayers bailing out the entire U.S. banking industry to the tune of hundreds of billions of dollars, and Thain wanted to make sure he still was getting his.
Bair referred to Thain derisively as one of the “masters of the universe” who Thomas Wolfe lampooned in his 1987 novel “Bonfire of the Vanities” — a book that ushered out the era of junk bonds and ushered in the current era, when fines levied against banks that get caught kicking around markets often pale in comparison to both the size of their systemic disruption and the money they siphon out. Barclays, for example, paid a grand total of $450 million to U.S. and U.K. regulators for fixing rates in the $10 trillion Libor market — and no one has faced criminal charges despite the fact that Section 2 of the U.K.’s Fraud Act 2006 says a banker or trader has committed fraud if he “(a) dishonestly makes a false representation, and (b)intends, by making the representation — (i)to make a gain for himself or another, or (ii)to cause loss to another or to expose another to a risk of loss.”
In July, New York Times reporter James Stewart identified a long litany of instances when UBS had negotiated immunity from prosecution for acts that would have landed lesser mortals in prison — including participation in the Libor scandal. In “For UBS, a record of averting prosecution,” he also makes a strong case for ignoring that immunity.
“A corporation, like a natural person, is expected to learn from its mistakes,” he writes, citing the Justice Department itself. “A history of similar misconduct may be probative of a corporate culture that encouraged, or at least condoned, such misdeeds, regardless of any compliance programs. Criminal prosecution of a corporation may be appropriate particularly where the corporation previously had been subject to noncriminal guidance, warnings or sanctions.”
Then there’s HSBC, which apologized for laundering money on behalf of “drug kingpins and rogue nations.” The list goes on and on.
In September, Martin Wheatley published the 92-page “Review of Libor: Final Report” that details sweeping reforms to Libor distilled from months of industry consultation. In the report, Wheatley, who will run the new Financial Conduct Authority (FCA) that takes over market-monitoring from the Financial Services Authority (FSA), says there may be a criminal case, but that the Fraud Act isn’t part of the FSA’s or FCA’s jurisdiction. The Serious Fraud Office says it’s looking into the matter, but also isn’t sure if it can prosecute.
And it’s that kind of legal slipperiness that has stymied regulators on both sides of the Atlantic for more than a decade. More than 20 banks participated in the Libor scandal, but Barclays is the only one to pay a penalty to date.