bank fiascos

Pondering the Foreclosure Settlement – 1

(This was initially posted to my Outrun Change blog.  It’s getting reposted here, on the Attestation Update blog, because I’ve decided to move my banking conversations to this blog.)

I’m scratching my head about the $8.5 billion settlement between 10 banks and regulators. Is it a shakedown or are the banks getting off easy?

Do we need to be asking even more questions about what happened in the Great Recession?

I’ll highlight a few articles so you can start to explore the issue for yourself.


Discussions of banking issues on my other blog

My posts on bad behavior by big banks has been split between here and my other blog, Nonprofit Update.

I’ll post future discussions here, Attestation Update.

For reference, my posts on money laundering at the other blog are here:

One bank gets hit hard for helping U.S. citizens evade taxes. As in capital punishment hard.

Wegelin & Co is a Swiss bank that still does the fabled secret bank account thingie. Correction, make that past tense.

They used to do that.

They will be closing their doors after admitting to a felony in U.S. courts for helping Americans hide untaxed money.

I’m scratching my head about that ‘too big to fail’ cncept.  More on that after some background.

The guilty plea

UBS settles LIBOR manipulation claims for $1.5B and one guilty plea. Looks like some individual prosecutions may follow.

By agreeing to the settlement, UBS also acknowledges that several dozen traders, managers, and senior managers tried to manipulate multiple rates, including the Yen Libor, Euribor, and 4 currencies of the Libor index.  Their subsidiary in Japan will plead guilty to one felony charge in the U.S.

This from multiple media reports. See especially the Wall Street Journal article, UBS to Pay $1.5 Billion to Settle Libor Charges (behind paywall).

One obscure part of the story may turn out to be the biggest – there may be individual prosecutions in the near future

Update:  The U.S. Justice Department has unsealed formal charges against two former UBS employees.  You can read multiple news reports, but can start at the WSJ’s Two Former UBS Traders Charged in Libor Probe, which says:

The former traders, … , who lives in England, and …  a resident of Switzerland, were both charged with conspiracy, the Justice Department said. 

Mr. … was also charged with wire fraud and price fixing.

A quick summary from the WSJ:

As part of the deal, UBS acknowledged that dozens of its employees were involved in widespread efforts to manipulate the London interbank offered rate, or Libor, as well as other benchmark rates, which together serve as the basis for interest rates on hundreds of trillions of dollars of financial contracts around the world. UBS’s unit in Japan, where much of the attempted manipulation took place, pleaded guilty to one U.S. count of fraud

The British regulator, Financial Services Authority, was able to specifically identify over 2,000 attempts to manipulate the rate with knowledge and involvement of at least 45 traders and managers.

Settlement of $1.5B possible for UBS over allegedly playing games with LIBOR. And maybe some individual criminal indictments.

The Wall Street Journal reports $1.5B is the expectation for a settlement next week.  See their article A Shadow Over Banks as UBS Nears Deal.

(Behind paywall, so either grab yesterday’s paper quick or get an online subscription. Or do both.)

Criminal charges?

Euribor, cousin of Libor, may have been cooked too

This was my depressing reading at lunchtime:  Banking Industry Squirms Over European Rate Probe, in today’s Wall Street Journal.  

Oh great.  Looks like Euribor has been gamed by the big banks (pronounced eur-EYE-bore according to WSJ).

The article reports:

The European Union is expected soon to accuse multiple banks of attempted collusion in the setting of Euribor, according to people briefed on the probe.

On the other hand, you cannot say banks are underregulated

Cooking Libor. Money laundering. What are the big banks doing?

Where are the regulators?

I’ve been scratching my head about some of the things banks have been doing lately, such as manipulating Libor. Other people have long been blaming banks and other financiers as the primary cause of the 2008 financial crisis. I am definitely not in that camp, but that’s a topic for another day and a dozen posts. HSBC is setting a $1.5 billion reserve for possible fines related to money laundering, since they apparently allowed $7 billion to move from Mexico to the US in violation of US law.

In the midst of that head scratching, many people are wondering, where were the regulators? In the Libor issue at least, they were well aware of what was going on.

Watching and learning from the money laundering cases

Those of us auditors outside the huge firms may not have to deal directly with the impact of banks engaging in money laundering, yet we can still learn by watching.  Here’s the background in one sentence –  – Many of the largest banks were systematically ignoring U.S. laws against sending money into certain countries.

On my other blog, Nonprofit Update, I have several posts discussing the mess.

Of interest to me as an auditor is the apparently intentional violation of laws and how the corporate tone at the top could have prevented the fiasco.

See that swirl on the weather map? Looks like a cat 5 hurricane headed for landfall on the big banks

In Blood in the water’, The Economist describes the swelling number of lawsuits against the big banks who are accused of manipulating LIBOR.

From the article:

So far, at least 28 serious lawsuits have been filed. The most recent, for fraud, came from Berkshire Bank, a small lender, on July 25th. It echoes a case filed in May by Wisconsin’s Community Bank & Trust under Wisconsin racketeering statutes against Citigroup, Bank of America, and JPMorgan Chase (the American banks on the LIBOR panel).

That would be 28 suits since the issue exploded about a month ago.

Q: If LIBOR fiasco is a world class scandal, then where were the regulators? A: They knew all along.

We are now supposed to think that cooking the LIBOR index is the crime of the century. Yet U.S. and U.K. regulators knew of it in 2007 and 2008. If this is now considered a horrid crime, then why didn’t the regulators do something about it at the time?

The nonchalant reaction of the New York Fed is described in The Wall Street Journal’s editorial New York Fed to Barclays: “Mm hmm”.

Here’s what the Fed says they did:

In June 2008, Timothy Geithner, then head of the New York Fed, sent Bank of England Governor Mervyn King two pages of recommendations for “Enhancing the Credibility of LIBOR” and wrote that he would be “grateful if you would give us some sense of what changes are possible.”

This is not exactly the language of a regulator who has just uncovered what we’re now told is the financial crime of the century.

Let’s keep an eye on the role of regulators in the LIBOR fiasco

In addition to the now-denied wink and nudge from Paul Tucker to Barclays that their LIBOR rates didn’t need to always be so high, the New York Fed was told repeatedly of the possible problems with LIBOR.

The Washington Post’s article, In 2007, New York Fed was told about problems with Libor, summarizes the communication from Barclays to the NY Fed.

The picture is starting to emerge on the severity of LIBOR scandal

The Economist has a very depressing article that describes the range and depth of the LIBOR disaster: The rotten heart of finance.  If you are following LIBOR scandal, you will really want to read this article. Be forewarned it makes for sad reading.

There are two different ways LIBOR rates have been manipulated.

First is a longer running and less severe manipulation. For number of years, at least since 2008, perhaps as long ago as 2005, and perhaps even earlier, the article says traders inside the banks have been moving the rate a little bit. Second is a larger amount of movement for a shorter period of time. This took place during the financial crisis of 2008 in order to understate borrowing costs.

Who suffers from playing games with LIBOR?

Earlier post discussed the blooming scandal over LIBOR rates.

Short version – Barclays has admitted it underreported borrowing costs which in turn affected the LIBOR rate, which is the base for calculating the interest rate on many loans.

The populist-type comments I’ve seen so far suggest that consumers are being ripped off. 

I don’t think so. Consumers aren’t the ones who suffer.  Here’s why:

Might be time to start paying attention to the LIBOR scandal

The fiasco over calculating LIBOR is a bit complicated, but it might be time to start paying attention.

The story is manipulation of LIBOR, a key interest-rate benchmark. Barclays Bank is one of the biggest banks in England. During the economic crisis in 2008, Barclays was underreporting their borrowing costs, which in turn artificially pulled down LIBOR.

So what?

This is a big deal because of the way LIBOR is calculated and how it is used.