Financial Scandal Scorecard
By JOE NOCERA
Published: July 20, 2012 201
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, which has apparently been going on almost as long as the Bernard Madoff Ponzi scheme, 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 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 scandal, where $1.6 billion in supposedly segregated customer funds went missing 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. Who knew that the British bank was the favored institution of money launderers 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” 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 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, 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,” where the plot continues to thicken. When last we left this scandal, Barclays had agreed 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, 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 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 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. Now he tells us.
But, finally, there’s this: On Wednesday, Capital One, the big purveyor of credit cards, agreed to pay $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 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.