Friday, December 14, 2012

This Week in Bank Failures

As 2012 winds down, it may be summed up as a year of larger changes in banking than the preceding years. Occupy Wall Street, Move Your Money, and Bank Transfer Day might have persuaded a few banking customers of the need to change their approach to banking in 2011, but 2012 was the year that saw the beginning of a large-scale shift in opinions and preferences.

That shift continued this week as the phrase “too big to jail” was invoked in describing HSBC’s role in financing international drug-running and terrorist groups — and that was just part of the troubling conduct covered by a $2 billion settlement with U.S. prosecutors and regulators. As part of that deal, bonuses for some of the bank’s executives will be delayed by up to five years — but there will be no criminal charges for the bank or any of its employees. Prosecutors argued in court that a criminal prosecution of the bank could lead to the collapse of the banking system; therefore, they said, such a prosecution could not be undertaken. It is almost the identical argument that prevented the prosecution of pirates ten centuries ago (that was when pirates were economically more important than they are now). The seedy side of the government exposed in this deal, and others like it this year, has not escaped the attention of the public, or of The New York Times, which wrote:

But this case is the opposite of an anomaly. That the most powerful actors should be immunized from the rule of law — not merely treated better, but fully immunized — is a constant, widely affirmed precept in US justice.

The HSBC deal is widely viewed as having been the subject of an agreement between U.S. and U.K. authorities. In this light, it has been described as a new kind of international bailout, rescuing a business by protecting it from the financial burden of the penalty of law.

And HSBC was hardly alone in the banking crime headlines this week.

  • Court papers revealed that Bank of America’s mortgage repurchasing is being investigated by the SEC. The bank this week filed a countersuit against an insurance company that guaranteed some of Bank of America’s fraudulent mortgages. The insurance company had already asked a court to force the bank to honor the terms of its insurance contracts.
  • Deutsche Bank, previously thought to be mostly above the fray, was dragged down into it this week as five employees were arrested, and four held in jail, in connection with what investigators believe is a web of tax evasion, money laundering, and destruction of records in connection with the carbon trade. The bank has already revised and refiled its 2009 income tax statement as a result of the problems with these transactions, and it may face a further penalty for the delay in correcting its tax report. Prosecutors have not said much, but the case appears to center around ill-formed or fabricated carbon permit transactions or related derivatives.
  • UBS is said to be prepared to enter guilty pleas and pay penalties around $1 billion for its part in falsifying the Libor base rate. The bank has been under regulatory scrutiny in the United Kingdom and United States along with its home base in Switzerland, and several former employees have been arrested.
  • Japan’s largest bank, Mitsubishi UFJ Financial Group, announced a settlement with U.S. authorities over transactions it conducted in 2006 and 2007 for countries blacklisted by the United States. Some of those transactions took place in part in the United States and ran afoul of U.S. trade restrictions.
  • Standard Chartered Bank settled money-laundering charges in much the way that reports from last week had indicated.

It is not just banks’ alliances with criminal organizations that hurt the industry’s reputation. This year will also be remembered as the year when student loan debt began to overshadow credit card debt, and what more profound way could you highlight the way banks seem to prey on the most vulnerable people than by thinking of the 17- or 18-year-old who took out a student loan in 2012 that may not be repaid until 2052?

The one area where banks in general have made progress this year is in becoming less intrusive when it comes to routine transactions. You don’t stop to think of how this represents a step forward when a bank shortens its contract language from 40 pages to 28, or keeps you waiting for a gasoline-pump card approval for three seconds instead of five, but it is this kind of scaled-down obstacle that moves banks along the continuum from “necessary evil” status toward where they would prefer to be, a necessary part of the background of life. Still, it seems it will be a long time before people think of the banks they deal with with the kind of free-wheeling pride that the phrase “money in the bank” used to imply.

There was one bank failure tonight, surely the last of 2012. State banking regulators closed Community Bank of the Ozarks, which had $42 million in deposits and two locations in the southwestern part of Missouri. Bank of Sullivan is taking over the deposits and purchasing the assets.