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December 13, 2012

The HSBC Money Laundering Case as a Perfect Symbol of Too Big to Fail

Posted in: Uncategorized

Maybe I was too blasé about the federal government letting HSBC off the hook; certainly the story has effectively shown how Too Big to Fail continues to be the watchword of the financial regulatory community. My pet theory here is actually that, because practically every mega-bank engaged in this same type of money laundering for drug cartels and countries under sanction – all of the big four in the US, including Wells Fargo (who admitted it in court), Bank of America, Citi and JPMorgan Chase – if they threw the book at HSBC, they would have to do the same to everyone else. So we’ve migrated from Too Big to Fail to Too Caught Up In The Same Criminality to Fail.

Neil Barofsky writes:

One of the reasons why we have a criminal justice system, of course, is to deter criminal behavior. If you know that you will be punished for putting your hand in the cash register at your local supermarket (or illegally stripping out information from a monetary transaction that identifies the source nation as Iran), you are less likely to do so. But if the government offered a blanket waiver from criminal accountability for a certain group — let’s say all left-handed people over six feet tall or a handful of banks deemed so large and so significant that their indictment could destroy the global financial system — we would expect that those exempted would no longer be deterred from committing criminal acts. And although lefty giants may otherwise lack a predisposition for boosting cash, in recent years the largest banks have demonstrated an unbridled zeal for pushing the boundaries of the law as part of their relentless pursuit of profits. DOJ’s actions with regards to HSBC are beyond unfair: They are downright terrifying for weakening the general deterrence for megabanks, both foreign and domestic, which could rationally interpret yesterday’s actions as a license to steal.

For those who would say that this is the price you have to pay to have a vibrant financial sector, a couple things. First off, the Bank of England has shown that economies of scale for big banks do not exist beyond $100 billion in receipts, far less than what the biggest banks in America hold. In other words, the mega-banks have no social value, while being corrosive to the rule of law and the political economy of the nation.

Second off, it is entirely possible to make a large bank accountable for criminal sanction if they violate the law. You merely have to look at what German authorities did yesterday to that nation’s largest bank:

Deutsche Bank co-chief executive Jürgen Fitschen has been drawn into a widening tax evasion investigation related to carbon trading at Germany’s biggest lender as hundreds of police and tax inspectors raided the bank’s offices.

Prosecutors said they were investigating 25 staff on suspicion of tax evasion, money laundering and obstruction of justice, and searched the headquarters and private residences in Berlin, Düsseldorf and Frankfurt.

“Two of Deutsche Bank’s management board members, Jürgen Fitschen and Stefan Krause, are involved in the investigations as they signed the value-added tax statement for 2009,” the lender said. In 2009, Fitschen was Germany chief and Krause was chief financial officer, a post he has retained.

About 500 police and tax inspectors raided Deutsche Bank, arresting five staff in an inquiry linked to a tax scam involving the trading of carbon permits. Tax officials clutching backpacks and suitcases were seen leaving the bank’s twin-tower headquarters in Frankfurt. About 20 police minibuses and two coaches were parked outside.

Name the last police raid you’ve seen at a Wall Street bank. Name the last time a Wall Street Bank’s board members were under investigation for their complicity in an illegal profit-making scheme. Or don’t bother, because it doesn’t happen. Not in a country where the financial sector basically exists outside the law. Heck, we know that Deutsche Bank’s US operation mismarked securities to hide up to $12 billion in losses, and the SEC did nothing about it.

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