There was a collective sigh of relief on Wall Street this week as Standard Chartered Bank reached a settlement with New York state regulators. The bank will pay a fine of $340 million to settle claims of keeping false records in connection with the laundering of an estimated $250 billion in international transactions. In the Wall Street way of measuring things, that works out to a rate of 0.14 percent, or something banks can live with as part of the cost of doing business in areas of business that may sometimes require money laundering and keeping false records. If Standard Chartered had had to forfeit its banking license, that would have been a different matter.
Standard Chartered surely now regrets the hostile stance it took with U.S. regulators for at least four years leading up to this week, which culminated in a threat to sue the state of New York. The bank thought it could avoid large fines and public embarrassment through tough behind-the-scenes negotiation. Obviously, that strategy had its limits. The foot-dragging is over, executives say, as they hope to reach a quick settlement with the Fed, Treasury, and other federal regulators and put the bank’s money-laundering days behind it.
Besides the regulatory hurdles ahead of it, Standard Chartered may also face civil litigation from U.S. plaintiffs who have won judgements in court against defendants in Iran. Courts will eventually decide how much liability the bank faces for keeping false account records that may have prevented plaintiffs from collecting funds they were entitled to.
With the decline in real estate in Spain, non-performing loans at Spanish banks edged up toward 10 percent for the first time ever, in June data released this week.
Finland is preparing for the breakup of the euro zone. Public comments from cabinet-level officials suggest they believe such a scenario is almost as likely as not.
A criminal probe into the collapse of MF Global continues, but indications so far are that risky investments, compounded by management confusion in the final months and weeks, led to the large losses at the brokerage. Observers are not expecting criminal charges.
Fannie Mae and Freddie Mac are not ever expected to return to steady profitability, and Treasury has changed their bailout terms accordingly. The two businesses will use all future profits, whenever they are fortunate enough to earn any, to repay Treasury. Both companies are also required to reduce their portfolios by a minimum of 15 percent a year. Realistically, stockholders and bondholders should not be expecting much. Fannie Mae and Freddie Mac will have to go into wind-down mode eventually, and that transition presumably will come around January.
For their part, Fannie Mae and Freddie Mac are forcing banks to buy back more bad loans that were not properly documented in the first place. This is a trend that will result in more loan losses on the books at banks.
Details of subpoenas issued to giant banks in the United States show that law enforcement authorities are looking for evidence of coordinated planning of Libor manipulation. If collusion between banks can be shown in court, then the banks’ liability is larger and more automatic.
As the glow of the Olympics faded, lawmakers in London voiced discontent over the problems with Libor and Barclays this week. In the United States, the political season is well underway, and without the Olympics to distract the public on a Friday night, I do not expect to see more than a few token bank closings over the next nine weeks.
