[Vision2020] The Dark Side of Unregulated/Poorly Regulated Enterprise

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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July 20, 2012
Financial Scandal Scorecard By JOE NOCERA

Is it my imagination, or does every week bring news of another financial
scandal? No, it’s not my imagination.

First up: Peregrine Financial Group. This long-running
fraud<http://www.cbsnews.com/8301-505123_162-57472240/ceo-of-iowa-brokerage-charged-over-alleged-$200m-fraud-scheme/>,
which has apparently been going on almost as long as the Bernard Madoff Ponzi
scheme<http://topics.nytimes.com/top/reference/timestopics/subjects/f/frauds_and_swindling/ponzi_schemes/index.html?inline=nyt-classifier>,
came to light when the firm’s founder and longtime chief executive, Russell
Wasendorf Sr., tried to commit suicide a few weeks ago. (He failed.)
Helpfully, he left a lengthy
note<http://blogs.wsj.com/deals/2012/07/17/excerpts-from-russell-wasenforf-sr-s-confession/>that
laid out what he had done. Peregrine, you see, is a commodities
broker, and Wasendorf had been stealing the money that customers had on
deposit with the firm. As you’ll no doubt recall from the very similar MF
Global<http://topics.nytimes.com/top/news/business/companies/mf-global-ltd/index.html?inline=nyt-org>scandal,
where $1.6 billion in supposedly segregated customer funds went
missing <http://money.cnn.com/2012/04/24/news/companies/mf-global/index.htm>as
the firm careened toward bankruptcy, this is supposed to be the sin of
sins for a commodities brokerage. Sinful it may be, but not all that
difficult, it would appear.

Peregrine, which is based in Cedar Falls, Iowa, didn’t operate on the kind
of scale as MF Global. But what it lacked in heft, it more than made up for
in imagination. In his note, Wasendorf said that, over the years, he had
used the money, among other things, to build the company’s $18 million
headquarters and to “pay Fines and Fees charged by the regulators.” At the
point at which the fraud was discovered, the firm was supposed to have more
than $200 million on deposit for customers. Instead, it had $5 million.

And where were the regulators? Fooling them was child’s play, he said in
his note. Or words to that effect.

Next up: HSBC<http://topics.nytimes.com/top/news/business/companies/hsbc_holdings_plc/index.html?inline=nyt-org>.
Who knew that the British bank was the favored institution of money
launderers<http://www.hsgac.senate.gov/subcommittees/investigations/media/hsbc-exposed-us-finacial-system-to-money-laundering-drug-terrorist-financing-risks>everywhere?
As it turns out, the Senate Permanent Investigations
Subcommittee knew. This week, it released a 335-page report and held a
scorching daylong hearing, excoriating a half-dozen of the bank’s
executives.

Perhaps because we’re bank-scandaled out, this story hasn’t gotten the
attention it truly deserves. Unlike, say, the JPMorgan Chase “London
whale<http://www.nytimes.com/2012/05/15/opinion/nocera-make-banking-boring.html>”
scandal — in which the bank’s traders simply made a big, dumb bet — what
HSBC did amounts to serious wrongdoing. It was also a recidivist. Twice
before, in 2003 and 2007, the bank had been cited by regulators for what The
Times described<http://dealbook.nytimes.com/2012/07/17/hsbc-says-official-will-step-down-as-bank-vows-to-fix-scandal/>as
its “extensive money laundering ways.” Despite the reprimands, it
continued to do business with banks that laundered money for drug
traffickers and institutions suspected of having ties to terrorists. At the
hearing, HSBC’s top compliance executive strayed from his prepared remarks
to announce that he would be leaving that post. The others, of course,
promised to do better. Don’t they always?

And where were the regulators? “Subcommittee investigators found that the
OCC” — that’s the Office of the Comptroller of the
Currency<http://www.occ.treas.gov/>,
which is the nation’s primary bank overseer — “had failed to take a single
enforcement action against the bank, formal or informal, over the previous
six years, despite ample evidence” of money laundering, reads the report.

Let’s now turn to
“Liborgate<http://www.nytimes.com/2012/07/07/opinion/libors-dirty-laundry.html>,”
where the plot continues to thicken. When last we left this scandal, Barclays
had agreed<http://www.nytimes.com/2012/07/14/business/in-barclays-inquiry-the-calculation-in-making-a-deal-common-sense.html>to
pay $450 million in fines, and a handful of top officials, including
its
chief executive, Bob Diamond Jr., had lost their jobs because the bank had
been manipulating the London interbank offered
rate<http://topics.nytimes.com/top/reference/timestopics/subjects/l/london_interbank_offered_rate_libor/index.html?inline=nyt-classifier>,
a key benchmark for all kinds of loans and derivative transactions. In
recent days, however, the story has begun to revolve more and more around
... hmmm ... the regulators.

It turns out that in 2008, Barclays told the New York Federal
Reserve<http://money.cnn.com/2012/07/18/investing/geithner-libor/>what
it was up to. Timothy Geithner, then the president of the New York
Fed, sent a note to Mervyn King, the leader of the Bank of England, that
suggested that the British regulators “eliminate incentives to misreport.”
Nothing of the sort took place, and Barclays continued to lowball its Libor
reporting well into 2009. The British
Parliament<http://topics.nytimes.com/top/reference/timestopics/organizations/b/british_parliament/index.html?inline=nyt-classifier>has
held a series of hearings with King and other top British regulators
of
the “what-did-you-know-and-when-did-you-know-it” variety.

Meanwhile, it has become clear since the scandal broke that Libor is a
problematic benchmark in any case, because a lot of the unsecured interbank
lending it is supposed to represent doesn’t even occur anymore. “It is
clear that the Libor system is structurally flawed,” Ben Bernanke, the
chairman of the Federal Reserve, told the Senate this
week<http://www.latimes.com/business/money/la-fi-mo-libor-bernanke-manipulation-federal-reserve-barclays-20120717,0,5923739.story>.
*Now* he tells us.

But, finally, there’s this: On Wednesday, Capital One, the big purveyor of
credit cards, agreed to
pay<http://www.businessweek.com/news/2012-07-18/capital-one-to-pay-210-million-in-first-cfpb-enforcement-case>$210
million — including reimbursing customers to the tune of $150 million
— because one of its vendors had deceptively marketed and sold customers
needless add-on products.

Where were the regulators? In this case, it was the new Consumer Financial
Protection Bureau <http://www.consumerfinance.gov/> that conducted the
investigation and brought the action against the bank. It was the agency’s
very first enforcement action.

These days, I guess, that amounts to progress.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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