Someone must go to jail in financial fraud cases
“I believe that banking institutions are more dangerous to our liberties than standing armies.” – Thomas Jefferson, 1816
When Thomas Jefferson spoke those words, banks were local and very small compared with the financial behemoths of today. Banks are more dangerous now than in Jefferson’s time, and they are totally out of control.
During the Depression of the 1930s, President Franklin Roosevelt referred to banks as the “money changers in the temple of our civilization,” and little has been done since. It is well past the time that people on Wall Street live by the rule of law — not just pay fines — and some executives go to jail for their conduct.
Consider just a few examples:
HSBC: This Wall Street bank is one of the largest in the world. The latest revelation is that it has been doing business with terrorist-linked businesses and helped launder money for Iran and Mexican drug cartels. A Senate panel said HSBC Mexico shipped $7 billion in cash to its parent bank in 2007-08, money that could have come only from the illegal drug trade. The bank ignored terrorist ties of its affiliate bank in Saudi Arabia and had banking transactions with Iran that violated American sanctions. The comptroller of the currency fined the bank for repeated violations of its money-laundering controls.
Barclay’s Bank: This banking giant has admitted that it put together one of the biggest financial frauds in history, Libor, by rigging interest rates on trillions of dollars of mortgages, loans and investments. Its recently stated defense is that all the major banks do it. This will cost cities, counties and states hundreds of millions of dollars, and no one will end up in jail, but the firm will pay fines and pledge not to do it again.
Bank of America: The bank has admitted to the Department of Justice that it defrauded schools, hospitals and state and local government entities by engaging in bid-rigging activities involving the investment proceeds from municipal bond sales. It has been fined for so many banking violations in recent years that one cannot keep track of them all — from foreign financial frauds to failing to tell its shareholders the full details of its acquisition of companies like Merrill Lynch.
Citigroup: It has agreed to pay more than $3 billion in fines and legal settlements for its role in financing the fraud at Enron Corp. In 2004, Citigroup paid $2.65 billion for its role in selling stocks and bonds for the fraud at WorldCom. In 2005, it paid millions for fines for the scam at Global Crossing. In 2010, Citigroup agreed to pay a fine of millions because it misled investors over potential losses from high-risk mortgages after it falsely certified the quality of loans to qualify for insurance from the Federal Housing Administration.
JPMorgan Chase: The bank has paid millions in fines for deceiving investors with fake research on the sales of stocks and bonds. Chase was fined $2 billion in a settlement for its role in financing Enron Corp. In 2009, the bank agreed to an almost billion-dollar settlement with the SEC to end a probe into sales of derivatives that caused public entities to lose millions. And in 2011, Chase was charged with overcharging several thousand military families for their mortgages, including active-duty personnel in Afghanistan and Iraq.
Morgan Stanley: It has paid fines for improperly using customers’ accounts as collateral for management loans. It settled a sex-discrimination suit brought by the Equal Employment Opportunity Commission for millions and paid the National Association of Securities Dealers a $2.2 million fine for more than 1,800 late disclosures of reportable information about its brokers to cover mistakes and fraud. The bank has paid millions in fines imposed by the New York Stock Exchange for inaccurate reporting of trading information, short-sale violations and failure to file required disclosures. The SEC has accused the firm of deleting e-mails and failing to cooperate with its investigators. Morgan agreed to pay a fine for having employees improperly execute fictitious sales in Eurodollar and Treasury note contracts. No one has gone to jail.
Wells Fargo: Wells has paid fines for failing to monitor alleged money laundering in narcotics trafficking and, in an agreement with the Justice Department, it will pay a multimillion-dollar fine to subprime borrowers in cases in which its allegedly discriminated against African American, Hispanic and other minority borrowers.
These are just a few of the scams that have put our economy in such trouble. Yet these firms are bailed out of their own mess with our tax dollars. In 2008, the much-publicized Troubled Assets Relief Program bailed out banks and Wall Street to the tune of $700 billion with taxpayer money. While the banks were bailed out of the trouble they caused, they continued to pay out enormous executive bonuses with taxpayers’ money in multimillion-dollar year-end gifts. JPMorgan received $25 billion from the government in 2008 and gave out nearly $9 billion in bonus money that year.
When the derivative-driven housing market collapsed in 2008, Citigroup and Bank of America, the major banks in that market, and eight other top Wall Street firms got $1.2 trillion in then secret loans of taxpayer money from the Federal Reserve. The Fed even went to court in an attempt to hide the identities of those banks from the public. With secrecy the watchword both on Wall Street and in Washington, we are lucky to know as much as we do about the relationships between Wall Street banks and the government agencies that are supposed to regulate them.
Who pays the fines? Not the executives — the shareholders, the teachers, police, firefighters and many public pensions end up paying for the criminal acts of the executives.
Regulating the banks and bringing the rule of law to Wall Street banks is necessary now. Sending a few Wall Street banksters to jail would stop some of the abuse as well. Joseph W. Cotchett is a trial lawyer who tried the case against Charles Keating in the S&L scandal, and he is the only lawyer to interview Bernard Madoff in jail as he pursued his Ponzi scheme. He is the author of “Greed and the Casino Society” (Matthew Bender & Co.) and is a resident of San Mateo and San Francisco. Send your feedback to us through our online form at sfgate.com/chronicle/submissions/#1