By William K. Black
Kilkenny, Ireland: November 7, 2014
Kilkenomics pairs top professional comedians with economics contributors who share two characteristics: wide-ranging interests and knowledge and candor. This means that the contributors take clear positions and defend those positions with facts and logic. That refreshing willingness to actually be blunt about important things may be what set my teeth so on edge when I read the New York Times’ “White Collar Watch” feature. It is written by Peter J. Henning, who teaches, and writes about, white-collar crime. The problem is evident in the “brand” that Henning has chosen for his columns. Note the deliberate exclusion of the word “crime.” What is Henning doing – writing a column (from Detroit) on the lives of “white-collar” employees, professionals, and officers? His very brand is based on the bowdlerization of his academic specialty through euphemism.
But Henning hasn’t simply branded himself through euphemism, he also has reduced his columns to a series of euphemisms. Henning isn’t an expert in white-collar criminology, but he could at least approach the subject of white-collar crime by elite bankers with candor. Instead, he delivers to the reader an article, and a title, that is one long series of euphemisms – “Banks’ Cycle of Misbehavior.” By “misbehavior” he means “criminality” and “fraud.” Two sentences later he calls an obvious (massive) fraud “misconduct.” The next sentence calls it “misconduct” and says it “never seems to abate” despite prior settlements. While he is describing frauds throughout, Henning never uses the word “fraud.”
“The problem is that the misconduct never seems to abate, shifting instead from one unit to another inside companies whose thousands of employees are under relentless pressure to produce profits. So the intended message from all the expected big settlements seems to go largely unheeded.”
Neither sentence informs the reader that the “misconduct” that failed to “abate” despite the banks’ settlements with DOJ would constitute additional felonies and would have forfeited any concessions DOJ made in those settlements had DOJ been even remotely competent in drafting those settlements. Henning does, however, eventually makes some of these points. I discuss those statements below.
Step back and look at the internal contradiction among the two sentences I quoted. If the bank CEOs had actually “intended” to end the fact that the banks they ran were massive criminal enterprises, then the first thing they would have changed was the perverse compensation systems that are designed by the CEOs to produce “relentless pressure to produce [reported] profits.” The fact that Henning did not use the word “reported” before profits demonstrates a key analytical failure arising from his lack of understanding of how accounting control fraud schemes actually operate. The fact that the bank CEOs invariably left in place the perverse compensation systems they knew created “relentless pressure” to engage in fraud tells us that “the intended [pro fraud] message” of the bank CEOs was “heeded” by the banks’ officers, employees, and “independent” professionals. It was only Holder’s hapless DOJ attorneys who remain clueless about the criminogenic nature of modern executive and professional compensation who may have “intended” to stop bank fraud through settlements that proved that bank fraud paid massively for the controlling officers and could be committed with impunity.
Henning does eventually make the point that violating a settlement agreement should expose the bank to untenable legal risk.
“When banks settle a case, a typical provision in the agreement allows the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.”
Henning does not disclose to the reader that the points he made are far less true in the context of the Department of Justice (DOJ) settlements with the big banks. First, the settlements have overwhelmingly been civil rather than criminal. Henning admits later that criminal settlements against the big banks have been “rar[e].” Second, the “admissions by the bank” in both civil and the rare criminal settlements have been deliberately rendered of minimal benefit by DOJ drafting. As Henning implicitly admits in this passage, this is because these settlement agreements are far from “typical” due to DOJ’s desire to draft them in a manner that minimizes the normal criminal and civil exposure of the banks and bankers. Third, even in the rare cases where there has been a criminal settlement with the big banks DOJ has deliberately drafted the agreements to remove the normal consequences of a bank committing crimes. Henning notes that this is contrary to DOJ’s normal approach to settling criminal cases.
“BNP Paribas had to plead guilty to a criminal charge of conspiring to violate the economic sanctions law, a rarity in resolving a case with a bank. Even then, the Justice Department worked to limit the fallout from the conviction with other regulators before announcing the case. That way, the bank’s global operations were not hamstrung by the loss of operating licenses or exclusion from important lines of business that might be expected after a guilty plea.
The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime.”
Note that Henning assumes, implicitly, that the only DOJ response to additional criminal conduct by the bank and its bankers would be to negotiate “a new settlement with more onerous terms and a new penalty.” This is absurd and shocking, but Henning never points this out to the reader. First, the banks and most particularly the bankers who committed the initial crimes should have been prosecuted and the bankers’ fraud proceeds recovered. Allowing the officers that led the frauds to keep their jobs, and their past bonuses, and to be given new bonuses for settling the case so cheaply is obscene. It is obviously exceptionally and unforgivably criminogenic. The only possible result is to prove that bankers can get rich through fraud with certainty and impunity. That has to lead to increased fraud by elite bankers.
Second, when the elite bank officers who were able to defraud with impunity commit new – massive – frauds it is beyond insane for DOJ to respond by negotiating “a new settlement with more onerous terms and a new penalty” – against the bank, not the officers. DOJ should obviously make the prosecution of such elite recidivists and the removal of their fraud proceeds a top national priority.
Henning discloses, but does not explain to his readers another obscenity about how DOJ has deliberately drafted its settlements with the big banks.
“The Justice Department has extended agreements with UBS and Barclays for manipulating Libor that would have expired this year because of evidence the banks also manipulated foreign currencies.”
UBS and Barclays were two of the roughly 16 massive banks that conspired to commit fraud and to fix prices in what was the largest cartel in world history – by at least three orders of magnitude. As Henning admits, DOJ would “typically” draft such deals to make any new violation by the defendants an act that would result in “stripping the bank of any possible defenses if the case were to proceed further.” Given the staggering magnitude of the Libor frauds, the length of the frauds, and the cover ups of those frauds DOJ should have insisted that the “stripping” of the bank’s defenses would last for at least the length of the frauds (roughly a decade). Instead, DOJ deliberately drafted settlements that treated the largest fraud in history as if it were a minor misdemeanor. The “stripping” provisions were set to expire exceptionally rapidly. This is indefensible and demonstrates again the extent to which DOJ sought to give the big banks and the elite bankers that grew wealthy by leading the frauds kid glove treatment.
The fact that the officers leading the big banks were secretly engaging in new, massive frauds (foreign exchange) as they were negotiating the settlement agreements for the massive prior frauds (Libor) also demonstrates vital points that Henning does not discuss. First, the top bankers were negotiating in bad faith. Second, the fact that they continued such enormous frauds involving “foreign currencies” even knowing what a brief window of vulnerability (to the “stripping” of their defenses) they had under the terms of the deals they were negotiating to settle their Libor frauds demonstrates that they held DOJ in utter contempt. The bankers have revealed through their conduct that they viewed the risk of actually being prosecuted – even if they were caught red-handed violating their promises in the settlement by committing massive new crimes – as trivial. At worst, DOJ would simply fine the banks a bit more and leave the officers unscathed and with both their old and new fraud proceeds. Henning implicitly admits that the bank officers’ cynical fraud calculations were correct.
“But as The New York Times reported last week, federal prosecutors are threatening to reopen cases involving other violations that could subject banks to even higher penalties and broader compliance efforts.”
The key word in that sentence is “banks” and the key word excluded from that sentence is “bankers.” Henning aptly points out that the feeble crew that runs DOJ will never bring a serious action against the banks or bankers.
“So there is no realistic possibility that federal prosecutors will seek a conviction that may threaten the continued existence of one of the banks.”
Henning’s point is accurate, but he treats DOJ’s actions as if they were rational because he assumes that the biggest banks cannot be subject to effective sanctions. He implicitly admits that any effective sanction would require “putting [a bank] out of business.” Henning assumes that such an action is self-evidently absurd, which doubtless reflects the DOJ officials he is channeling. We should, however, make it a national priority to be “putting [fraudulently run banks] out of business.” Indeed, anyone who cannot understand and enthusiastically support that proposition is unfit for public office. Putting a fraudulently-managed bank into receivership, replacing its dishonest managers with honest managers, and ending the bank’s criminogenic executive and professional compensation practices is precisely what needs to be done. The larger the fraudulently-managed bank the more urgent it is to do so. There is no more “creative” form of “destruction” than placing a fraudulently-managed in receivership and replacing that management with an honest team.
Conservatives love “creative destruction” even when it cost tens of thousands of workers their jobs. Placing fraudulently-managed banks into receivership would have prevented the non-creative destruction of $21 trillion in GDP and 10 million American jobs (both figures are far larger in Europe). It is time for conservatives to champion the most creative forms of creative destruction – the prompt appointment of receivers for fraudulently-managed banks.
Henning will never aid, much less lead, such a charge to hold fraudulent bankers accountable. He suggests that the fraudulent bankers’ strategy of recurrently making themselves ever wealthier by leading massive frauds is a winning strategy because DOJ is made helpless by its refusal to support placing fraudulent-managed banks in receivership.
“No doubt the Justice Department is frustrated by repeated instances of corporate misconduct, with banks like JPMorgan, Barclays and UBS subject to multiple settlement agreements for violations. But prosecutors appear to have few tools available to coerce banks to change corporate cultures that put profits ahead of compliance with the law — at least short of putting one out of business.”
Oh well, Henning thinks we should learn to live with the growing fraud epidemics that drive our recurrent, intensifying financial crises. Embarrassingly, he states that regulators can bring prosecutions. “Regulators could also try to obtain greater compliance by bringing more prosecutions of individuals for their role in the violations.” Henning knows that only the prosecutors can prosecute. It is true that regulatory criminal referrals are essential for DOJ to have any material success in prosecuting elite bank officers, but Henning ignores the destruction of the criminal referral process at the banking regulatory agencies under President Bush (and Obama’s failure to restore it).
The last sentence of the quotation above demonstrates again that Henning is not someone with expertise in white-collar criminology. “Banks” do not create or “change corporate culture.” Bankers do. Honest CEOs will create an honest corporate culture in which the world’s largest frauds will not occur. They will do so in large part by junking criminogenic compensation systems that Henning admits create “relentless pressure to produce profits.” The fact that Henning uses the word “produce” rather than “report” is a further indicator of his failure to understand even the basics of accounting control fraud. There are fraud schemes that actually “produce” real bank profits, but there are many fraud schemes that only (fraudulently) “report” high profits in order to “loot” the firm.
Henning ends his article by returning to this same butchered discussion of corporate culture, replete with his trademark euphemisms, and ignoring completely the regulators’ ability to clean up management through receivership and “removal and prohibition” and to end criminogenic compensation.
“The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is ‘too big to jail.’ The greater hurdle is whether global banks will ever go far enough to truly reform their cultures and make compliance with the law something more than an easily ignored motto. And it is one that prosecutors and regulators may not have the tools to overcome.”
Henning implicitly admits that the claims of bank CEOs to have reformed their “culture” and make their officers understand that they are not supposed to be felons are shams consisting of “easily ignored motto.” Gosh, you mean that the officers believe that the CEO’s real message is sent by the compensation system he imposes rather than say the bank’s version of Enron’s “code of ethics”? How strange that they would think that actions, and bonuses measured in millions of dollars, would speak louder than words!
It is embarrassing to claim that DOJ fines are “an effort to show that no company is ‘too big to jail.’” No “company,” regardless of size, can be put in “jail.” By fining the banks amounts that Henning concedes are by definition capped at a level that will never be large enough to put the bank at risk and by refusing to prosecute the elite bankers (or even to sue the officers to recover their fraud proceeds) the DOJ proves, not refutes, that it treats the elite bankers as “too big to jail” and big banks as “too big to fine enough to be effective.”
Henning was with the SEC, which does not conduct “safety and soundness” regulation so he is not aware that the banking regulators have all the “tools” they need to fix the problem. The problem is that they lack the will, knowledge, and courage. Presidents Clinton, Bush (II), and Obama have all refused to appoint bank regulators who are even pale imitations of Edwin Gray, Joe Selby, and Michael Patriarca. Obama could change this, but no one believes he will do so.