James S. Henry is a leading economist, attorney and investigative journalist who has written extensively about global issues. James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times. He was the lead researcher of the recently released report titled ‘The Price of Offshore Revisited.’
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries coming to you from Baltimore.
The five biggest banks, Citigroup, JP Morgan Chase, Barclays, The Royal Bank of Scotland, and UBS, have all pleaded guilty to multiple crimes involving foreign currencies, interest rates, and collusion. The traders, according to the New York Times, had formed a, quote, an invitation-only club where the stakes were so high that newcomers were warned: mess this up, and sleep with one eye open. The pleas are expected to be heard this afternoon in federal court. Joining us now from Sag Harbor, New York to discuss all of this is James S. Henry. James is a leading economist, attorney, and investigative journalist.
Thank you so much for joining us today, James.
JAMES S. HENRY, SENIOR ECONOMIST, TAX JUSTICE NETWORK: You’re very welcome.
PERIES: James, so let’s start off, and can you explain to us exactly what these banks were involved in?
HENRY: They set up a cartel to rig one of the largest financial markets in the world. The $5.3 trillion per day foreign exchange market. And some of them, most of them were also involved in rigging what’s called the LIBOR interest rate market, as well. Which is a–.
PERIES: Explain that.
HENRY: –of fundamental importance for all kinds of interest rate markets all over the world.
PERIES: Explain the LIBOR scandal.
HENRY: Well, the LIBOR scandal was very similar to the foreign exchange scandal. You had traders who were involved in colluding on pricing financial securities and agreeing on what interest rate they would bid on the part of their banks, rather than compete on an arm’s-length basis. So this is a clear cut [inaud.] case of where the invisible hand was nowhere to be seen.
These are critical markets for all kinds of corporate investors, financial investors of all kinds, housing markets, you know. It’s trade–anyone involved in international trade. This is absolutely outrageous, and it’s an example of really bad behavior by essentially a cartel of very large institutions that have been behaving as if they are too big to jail, too big to penalize.
PERIES: Now, explain further in terms of what this pleading guilty actually means, and what is expected in terms of the next steps in this case.
HENRY: Well, they’ve agreed under this settlement to pay $5.89 billion in fines in disgorgement of profit. But they’ve also, the five institutions here, four of them have pleaded guilty. Which is a corporate plea submission. And that’s really unusual. The problem is that in advance of this settlement, essentially the collateral consequences that would have applied to a guilty plea by a corporate institution such as losing the right to be a prime dealer for Federal Reserve securities, or losing other rights to represent the pension funds and the U.S. pension fund system, those rights were all shielded, protected. So essentially this is a plea that has been deprived of any collateral consequences.
So we also see nobody going to jail here. The traders involved may have lost their jobs. But the profits from this activity were recorded by these banks years ago, and now finally after six or seven years, lots of litigation, they have finally come to this settlement.
You know, you have to ask whether the settlement has any real impact on their bottom lines. And I think the best answer to that is given by today’s stock market price. Which, for this bank group as a whole, their market capitalization actually rose. In the case of UBS the stock price rose 3 percent. In the case of Barclays it rose 3.7 percent.
PERIES: What’s the calculation there? Why is that happening?
HENRY: I think investors are looking at this as a light, as a kind of slap on the wrist. I mean, if you look at JP Morgan for example. JP Morgan is being fined under this agreement about a billion dollars. Little bit less than that. About $900 million. But JP Morgan in the first quarter of 2015, this largest U.S. bank, had net income of $5.9 billion. On a year basis–I mean, if they describe this penalty as less than 3 percent of JP Morgan net income last year, it would come off as a more realistic appraisal of how light the penalty is.
And this is an important thing for us to look at. These 22 largest global banks, in general, I have compiled a database of all the corporate crimes they’ve been fined or had to pay penalties for, or settle private lawsuits for from 1998 to 2015. There’s a grand total of 255 felony-scale offenses. Not only LIBOR rigging and currency markets, but money laundering, bribery, mortgage fraud, financial sanctions and [inaud.], wrongful foreclosures. Total of 14 different offenses, and a grand total of, for this group of the largest 20 banks in the world, more than 650 such fines. For which they received a grand total of $246 billion of fines.
But it hasn’t affected their behavior.
PERIES: And it’ll continue to not affect their behavior, unless key leaders of these organizations or banks are held accountable. Now, I know in other countries like Ireland actually took the bankers to court and convicted them. Why is that not happening here?
HENRY: I think there’s a mentality in the part of the Justice Department that they really can’t hold senior bankers responsible. In the 1980s under the first Bush administration something like 880 bankers went to jail in the United States for the savings and loan crisis and the financial fraud that was committed there. Here we have banks that are engaged in much more damaging global activity, costing tens of billions of dollars to financial markets, and no one’s going to jail.
There may be jail for lower-level traders going forward. But none of the CEOs at these institutions have experienced any kind of penalties. In fact, their payment schedules are going up as the stock market increases. JP Morgan’s stock price has appreciated 20 percent in the last year alone.
The main point about this is that if you look at this strictly on a business basis, this is a very profitable kind of crime. Because the profits are all realized five or six years ago, at least, from this kind of activity. It’s been going on for a long time. And finally, after a lot of litigation, a lot of settlement negotiations, maybe five to six years after the fact, they finally have to pay a fine. So on a net present value basis, putting aside the ethics or the morality of this, it’s been a profitable business for the banks and there’s no reason they shouldn’t be expected to continue doing it.
PERIES: And the Department of Justice here in this case, why haven’t they moved more swiftly?
HENRY: These are institutions that are not without influence in Washington. Eric Holder, if he goes back to Covington and Burling, joining Lanny Breuer, who used to be head of the white-collar crimes unit of the Department of Justice, that’s a big law firm at Covington. They represent all of these institutions. There’s a tremendous amount of political influence on the part of the large institutions and, and Jamie Dimon basically taunted Elizabeth Warren back in the fall, saying you know, go ahead, fine us. He’s been complaining about being targeted by the regulators. But the history is that these banks have not changed their behavior. And these fines are just passed along to customers. They’re not borne by the executives involved at all. And the behavior goes on.
PERIES: James, do you think Loretta Lynch, the new Department of Justice head, will have anything to add to this case, and bring it to greater conclusion?
HENRY: I think going forward you’d like to believe that she would have a tougher stance towards the banks than her predecessor. But she was deeply involved in the slap on the wrist settlement with HSBC in 2012, which was, where HSBC was caught red-handed laundering billions for the cartels in Mexico, and also busting sanctions against U.S.–sanctions that have been imposed on countries like Iran and North Korea.
The track record suggests that she will be as accommodating as her predecessors. But that’s not the way we’re going to bring these–essentially banking has become a kind of criminal enterprise. And we’re talking about multiple crimes over multiple years, committed by the same institutions under the administration of the same senior executives. So it isn’t a quick case of one or two rogue traders or bad actors here. We have an institutional problem, a real culture of crime and opportunism within these financial institutions.
PERIES: And in spite of what we have seen over the years since 2007 and 2008 crises, things really haven’t changed. There has really been no reform of the system in any way.
HENRY: Well, I think the banks are very busy right now trying to undermine the reforms that were made. There were some efforts on the part of Congress to toughen up on bank regulation, to establish new bank regulators. But right now they’re spending a lot of money on lobbyists to undermine that and to roll it back, and I don’t think there’s much support for tougher regulation in Congress, on the part of this Congress.
I think we’re, the problem is that we’re looking at a situation that hasn’t fundamentally changed from a standpoint of tough penalties. What you need to stop this kind of behavior is proactive regulation. This kind of ex-, post-facto, cleaning up after the fact takes years, it imposes a fine that is a fraction of profits or cash flow or trivial, and I think the behavior underlying it just goes on.