As leading experts suggest the pandemic nature of ‘shenanigans’ at our biggest banks calls for criminal charges against top executives, reforming the system becomes an important question in the US presidential election.
The esteemed song ‘America the Beautiful’ was taken from a poem by Katharine Lee Bates. Among the abandoned original lines: ‘America! America! God shed His grace on thee. Til selfish gain no longer stain, the banner of the free!’ Those lost words owed to the Panic of 1893, when many in a suffering middle class lost savings and couldn’t meet mortgage obligations amid shaky railroad financing and bank failures. Perhaps now is the time for those lines to be reconsidered. Given what experts are telling us, the runner-up question to the presidential election is if government will voice a new tune toward the finance sector and other purveyors of influence.
Charles Intriago is a former federal prosecutor, money laundering expert and founder of the Miami-based Association of Certified Financial Crime Specialists. He’s extremely intrigued by Coquina Investments’ successful lawsuit against TD Bank. ‘Coquina wasn’t a bank customer,’ says Intriago, ‘yet for the first time, a jury held a bank liable for aiding and abetting fraud committed by one of its customers.’ The federal trial jury ruled the bank must pay $67 million in damages, including $35 million in punitive damages. Scott Rothstein, disbarred lawyer and the former chief executive officer of the now-defunct Rothstein Rosenfeldt Adler law firm, utilized his $1.2 billion ponzi scheme to defraud Coquina, and TD Bank was found to have created the appearance of legitimacy and of making false statements to investors. TD Bank is appealing the decision.
Earlier, TD Bank settled with another Rothstein victim, the Razorback Group, for $170 million. Now, says Intriago, the gate has opened to subsequent lawsuits that build upon Coquina’s foundation. ‘This includes a ruling for one plaintiff, Emess Capital, that it can use the Coquina case to proceed with a RICO [Racketeering Influenced and Corrupt Organizations Act] civil lawsuit. RICO provides treble damages and attorneys’ fees. ‘With other potential lawsuits, this could rise to hundreds of millions of dollars in exposure,’ says Intriago. But he regards the greater fright to banks to be the liability precedent Coquina set.
Another case of keen interest to Intriago is United States of America v. Carollo, Goldberg and Grimm. The defendants worked for GE Capital, and were convicted in May of colluding to rig bids for interest paid to municipalities that park money raised by bonds for projects such as roads, schools, and hospitals until it’s fully spent. Other gold-plated firms are also alleged to be involved in schemes of fake competition. The defendants have asked the trial judge to throw out the verdict.
Municipalities seek to earn interest on their funds until the money is fully spent. The bidding process is supposed to get the most competitive rate. This is a market involving trillions of dollars, and when the bidding is rigged to keep the interest rates lower than an honest bid would reap, basis points add up. This has gone on at least for over a decade - windfalls to crooked bidders and real losses to states, counties, cities and town, many already scraping by. The perpetrators in such schemes often succeed because they are cloaked in complexity. In the bid-rigging universe, grease from illegal campaign contributions is not unknown.
As this is written, US v Ghavami goes to trial in federal court, a prosecution of former employees of UBS AG for bid-rigging on municipal investment contracts. Prosecutors aim to prove ‘knowing and active participation’ not only of UBS, but of GE, Bank of America Corp. and JPMorgan Chase & Co in the alleged fraud. Together with Wells Fargo & Co, these firms or related units have already paid over $700 million to settle government claims.
‘Having followed the way banks operate over years,’ says Intriago, ‘this is looking like a pandemic. When bid-rigging is added to all the shenanigans we’ve seen, such as Libor, HSBC, Peregrine Financial, TD Bank, and it’s about time some bankers go to jail, and not just lower level officers. We’ve lost sight that banks operate on a public charter the citizens gave them. That licence was based in trust, it’s not supposed to be a licence to steal. It should be yanked if bankers commit egregious crimes driven by contempt of law and by greed. Regulators have a whole array of weapons Congress gave them, they need to wake up and send some people to jail. Many are complicit in the worst crisis since the Depression, and they need to be held accountable. That’s what cells are for, open them up and put in some manicured nails and silk socks. Don’t just go after the Bernie Madoffs and Allen Stanfords who rip off the usually better heeled, go after those who’ve ripped off the Joe Schmoe taxpayer.’
But reality intrudes, as Intriago points to the US Senate’s Permanent Subcommittee on Investigations report on money laundering at HSBC, released in July: ‘The last fifty pages cover systemic failures in the Office of the Comptroller of the Currency’s (OCC) supervision of the bank. The report found unwarranted OCC hierarchy toleration of laxity in the bank’s anti-money laundering controls, despite numerous examinations identifying potential risks.’
And it has to be discouraging to note that a decade after passage of the Sarbanes-Oxley Act, which includes a sword for jailing executives who knowingly certify false financial reports, there have been no criminal prosecutions under that Act related to the economic meltdown.
Influence full circle
Not to accuse broad swaths of campaign donors of conspiracy to commit mischief, but when there’s a steady political drum in Congress to cut funds for agency enforcement, one has to wonder. Consider the US Commodities Futures Trading Commission (CFTC), which revealed the long-term pattern of Barclays’ sport with rates. The Obama administration seeks to beef up the CFTC, from 600 employees to 1,100. Based on what might be discovered and saved, that’s likely to prove good bang for the buck. But Republicans want to cut the total to 500.
And they’d like to starve the new Consumer Financial Protection Bureau (CFPB) to death altogether. They won’t even confirm agency director Richard Cordray, and are constantly seeking to end the CFPB’s budgetary independence. Their fondness for the agency hasn’t improved with the agency’s first major action, in late July, clipping Capital One $60 million in damages and $150 million in refunds, for deceptive marketing and billing in pushing credit card products on poor customers who couldn’t use them. What’s in your wallet?
According to Eric Havian, a whistleblower specialist with the San Francisco office of Phillips & Cohen, ‘the entire securities industry is extremely frightened of new whistleblower legislation portion of Dodd-Frank, and its financial incentive to expose financial fraud. The Chamber of Commerce argued it would destroy internal compliance efforts and begged the SEC to make people report internally first. But that would scare people off, and fortunately the SEC didn’t go along. Many claims have been filed, but it hasn’t proved disastrous for business.’ The rules provide whistleblowers with a piece of the sanction action.
'‘When bid-rigging is added to all the shenanigans we’ve seen, such as Libor, HSBC, Peregrine Financial, and TD Bank, it’s about time some bankers go to jail.’''
Hordes of lobbyists descended on government, says Havian, with goals ranging from derailing the CFTC’s efforts on derivatives regulation to cutting the number of investigators in the Department of Justice. ‘The easiest way to gut enforcement is to cut agency budgets,’ says Havian. ‘We’re already in a situation where government lawyers haven’t the money to travel to meetings for high profile cases.’
So, what hope for change? One might think the time is ripe, as Mitt Romney goes abroad on fundraising ventures, from UK events thrown by Barclays executives to fundraisers in Israel, with his sidekick Sheldon Adelson, the casino billionaire who says he’ll spend $100 million to defeat President Obama. With the Koch brothers, Adelson is a contender for Lord of the Super-PACs. He is no fan of unions, taxes or honest brokers in the Middle East. So there’s little mystery as to what shots he’d help a President Romney call, or governing philosophies of people he’d like brought in to help Romney run the country.
Meanwhile, in July a ProPublica/Frontline/University of California investigative journalism venture revealed that the Department of Justice and FBI are investigating Adelson for payments allegedly made to gain project approvals in Macau. This might violate the Foreign Corrupt Practices Act. The SEC might enter the scene on the civil side. Adelson’s company, Las Vegas Sands, denies any wrongdoing. The issue nevertheless begs the question as to how Adelson might advise Romney on funding and staffing those agencies. If you think Romney likes secrecy over his finances, consider the passion of his backers.
But reforms to address the influence of the ‘Big Money’ is not the catchiest tune in Washington. Not when five banks — JPMorgan Chase, Citigroup, Bank of America, Wells Fargo and Goldman Sachs — hold assets equal to 56 per cent of the economy. Politicians can count that eight-and-a-half trillion dollars faster than they can count votes. The gigantism of that kitty intimidates and captures Washington. Many in government are whipsawed between desire to worship at that shrine and fear of bumping into a financial house of cards.
Campaign contributors’ interests cover a lot of territory and cross a lot of lines. But there are common denominators. They don’t like oversight. They don’t like regulation. They don’t like agencies to have resources or enough personnel to do the job. They sure don’t like taxes. Some enjoy pollution. Lowering the bar in one area lowers it elsewhere, in this they have common purpose. Investor interests also cross lines, as do many board members’ interests.
Apologists for influence say ad nauseam that Americans spend far more on sodas than they do on campaigns. True. But it’s the laser focus of politicians clamouring for funds, in tandem with the laser focus of what contributors want for their money that puts soda pop in perspective. In Washington, we’ve mastered the low art of the thinly disguised bribe.
Indeed, in July the Disclose Act, an already watered down attempt to reveal who’s giving contributions over $10,000 in campaign-related expenditures — yes, one could give a buck less and slip by – was successfully filibustered by Senate Republicans, many of whom used to defend disclosure as the panacea to curbing contributor influence.
Washington was broken long before the Citizens United case put legalized bribery on steroids and made even more murky the deep waters concealing who is giving what for what. In its wisdom, the Supreme Court had already divined that corporations were people and later, in the 1976 case Buckley v Valeo, that money was speech. Citizens United then evaporated the complicated if sometimes fanciful veneer of restrictions on amount, purpose, timing and organisation.
As Harvard law professor Lawrence Lessig testified on 24 July before the Senate Judiciary Subcommittee on the Constitution, Civil Rights and Human Rights, the Citizens United decision has changed the business model of campaign funding. ‘The Framers gave us a …representative democracy…dependent upon the people alone.’ That’s been replaced, says Lessig, by a Congress not dependent on the people alone, but on ‘the Funders’.
How concentrated are the new and improved ‘Funders’? Lessig says only 0.26 per cent of Americans give over $200 to congressional campaigns. One one-hundredth of one per cent give over $10,000 per election cycle. Out of 310 million people, less than 200 provide 80 per cent of all Super-PAC donations.
Now, says Lessig, it isn’t just the money and airtime Super-PAC’s can contribute that wrangles politicians. It’s the loosely veiled threat that if they don’t do their masters’ bidding, they’ll get walloped in the final stretch of their campaign by massive attack ads they can’t possibly counter. It’s a protection racket. Whatever it is that facilitates politicians leaving Washington much richer than when they came, they like to stick around.
And the game is as important at the state level, where the action is often beneath the radar, as at the federal. Consider the American Legislative Exchange Council, (ALEC), with membership including 2,000 state legislators and corporate executives. They draft model bills that call the marching tunes in one statehouse after another. ‘Hands off’ is a good summation of model legislation affecting all regulatory oversight. According to the Center for Media and Democracy, over 98 per cent of ALEC is funded not by the 50 bucks yearly dues of legislator members, but by sources including foundations supported by folks like the Koch family. It counts one Democrat among 104 legislators in leadership positions.
If the White House changes, Havian predicts, these efforts will ramp up, with greater success. According to the Center for Responsive Politics, for Federal level campaign donations, the finance, insurance and real estate sectors remain the biggest gorillas. Since 1989, it’s given nearly three billion dollars, not including tax-exempt political non-profits that don’t track donors, or sources concealed by the latest gimmickry. It’s increasingly lopsided to Republicans. And it doesn’t include the vast sums spent on lobbyists. Is there anyone out there unable to see the connection between what the finance sector has got away with and the ability of the Big Money to wield ever more influence? Maybe the current legal travails facing banks will bring their hubris to heel. But for how long, if they hold fast to the levers of influence?
And there are many levers, including the whisper of future careers for those making nice with the big boys. Never mind legislators making money on their version of insider trading, related to legislation before them, a practice hurriedly curbed in this election year after media coverage.
Long ago, this writer asked a top staffer of the late US Senator Alan Cranston – a senator eventually damaged by a banking influence scandal — how his boss coped with the flood of campaign cash. His deadpan reply: ‘People think if they give you a lot of money, they’re buying influence. But all they really buy is access.’ Even attempting that distinction seems quaint now.