2012 may well be remembered in times
to come as the year of the financial scandals. Not that scandals in
the finance industry are anything new, but this year seems to have
seen a greater number of scandals, and of larger scope, than anything
that has come before. It is now clear that fraud and manipulation
are widespread in the finance industry, even more so than many
cynics, myself included, had previously believed.
In what may be the biggest financial
scandal of the year, the United States Department of Justice (DOJ)
announced that it would not be indicting HSBC (one of the world's
largest banks) on money laundering charges, despite having amassed
mountains of evidence showing that HSBC has assisted Mexican drug
cartels and others to launder over $60 trillion. Instead, HSBC
announced last Tuesday that they had agreed to pay $1.92 billion to
settle the allegations. The reason that the DOJ gave for not
bringing criminal charges is that a successful prosecution might
bring down the bank entirely and destabalize the global financial
system.
You're already familiar with Too Big
To Fail...now meet Too Big To Prosecute.
The fine is being portrayed by the
mainstream press as a win for prosecutors, since $2 billion sounds
like a lot of money to most people. But when one recalls that HSBC
likely laundered something in excess of $60 trillion, and that 1
trillion is equal to 1,000 billion, the fine actually seems
ridiculously small.
Let's knock off a few zeros and put
this in terms we can all understand: 60 trillion is 60,000 billion,
so HSBC laundered $60,000 and got fined $2. All of a sudden those 2
billion dollars don't seem like such a big deal. The question one is
led to ask is, did HSBC make more than 2 billion dollars for
laundering 60,000 billion? The
obvious answer would be “yes,” since 2 billion is only .003%
of 60 trillion. Even if HSBC was only charging the Mexican drug
lords 1% to launder their loot, they still would have made $600
billion.
What
this means is that the biggest banks no longer need fear prosecution,
even for laundering gargantuan piles of cash on behalf of drug lords,
terrorist-funders and embargoed states (HSBC was doing illegal
business with both Iran and Cuba). The fines they are likely to pay
if they get caught can be written off as merely a “cost of doing
business,” and a vanishingly small cost at that. The “Too Big To
Fail” banks and financial institutions are now, officially, above
the law.
What
is even more disturbing than the money laundering itself, is the
DOJ's reasoning for its refusal to bring criminal charges. Their
concern, in part, is that a guilty verdict or plea in such a case
would disallow pension funds from investing in HSBC. You read that
correctly, the Department of Justice is refusing to bring indictments
for criminal acts committed because doing so would hinder the
criminals from having access to your retirement savings. DOJ is now
in the somewhat awkward position of fining HSBC for criminal money
laundering, while at the same time trying to maintain that HSBC was
not engaged in criminal money laundering, since if they were, your
pension fund would have to take its business elsewhere, which the DOJ
apparently thinks we need to avoid. Welcome to Wonderland, folks; we
are definitely through the looking glass, here.
But
what if the Department of Justice has a point? What if being too
harsh on HSBC and its executives really would destabilize the global
economy and lead to another 2008-type crisis? Shouldn't we avoid
that at all costs?
There
are a number of problems with this line of thinking. The first is
the assumption that criminal prosecution of individuals within HSBC
will necessarily lead to the total collapse of the bank. HSBC is a
massive, highly profitable bank, with a value of $174.38 billion and
a profit margin of 27%, according to the New York Times Dealbook.
Even without pension fund investors HSBC might still be able to make
money, if on a considerably smaller scale.
But
even if the withdrawal of pension funds led to the bank's collapse,
there is no reason to think that HSBC couldn't be wound down in a
relatively orderly manner. Iceland did just this, when it let its
biggest banks fail during the financial crisis of 2008, paid off
depositors using the banks' assets and made investors take a
haircut. As a result, Iceland has been quicker than other European
countries to recover from the Global Financial Crisis and, unlike the
U.S., now has a banking system cleansed of frauds and criminals.
Iceland's example puts the lie to the “Too Big To Fail” meme,
proving that letting big banks collapse when they engage in unsound,
fraudulent behavior, is a real possibility.
The
actual reason that banks in the U.S. and elsewhere get bailed out,
and that they only pay a .003% fine when they get caught breaking
the law, has more to do with their large contributions to political
campaigns and parties, than it does with their importance to our
economic system. In fact, and not at all surprisingly, allowing
criminality at our largest financial institutions to go virtually
unpunished is an extremely bad thing for our economy.
The
economy as a whole, and the financial industry in particular, runs on
trust. When frauds and criminals are given a free hand to do
whatever they like with little-to-no chance of meaningful
prosecution, trust becomes a non-existant commodity in the market
place and the system grinds to a halt. This is what happened in 2008
during the credit-crisis. Banks refused to lend to each other, none
trusting that the others were reporting their financial positions
correctly, no one being sure who was actually solvent and who was one
step away from bankruptcy. Everyone knew that fraud was widespread,
since everyone was engaging in it on a systematic basis, and
therefore no one trusted anyone else. As it turns out, individual
greed is not enough to make a market function: trust is also
required.
And
where does that trust come from? It comes from knowing that those
who would cheat and defraud are being hunted by authorities, that
they are being punished and eliminated from the marketplace. But now
the authorities in charge of prosecuting the bad guys have come out
and stated openly that they do not intend to prosecute the crimes of
the largest players, that they will be given free reign to do
whatever they like, whether it's knowingly selling pension funds
lemon MBS (mortgage-backed securities) or laundering money for the
Sinaloa cartel. Even a cynic like me has to shake his head in
disbelief.
