Friday, December 21, 2012

This Week in Bank Failures

There was talk about the “death of Wall Street” when the news came out that the New York Stock Exchange (NYSE) was being bought by ICE. The indignity of the defining Wall Street company being bought out by a relatively new competitor from out of town is compounded by the fact that the stock exchange itself is considered a secondary part of the acquisition, which has more to do with making a quick buck on interest rate derivatives.

It is not just the sale of the stock exchange, along with the almost simultaneous sale of Knight Capital, financially hobbled by a software glitch, that diminished Wall Street and the world of high finance. If last week set new records in banking crime with penalties and indictments, the news this week was even bigger. Every day brought new bombshells, too many to run through them all, but I must mention UBS admitting guilt in falsifying its Libor reports after an investigation that showed a remarkable degree of coordination among regulators and prosecutors in at least four countries. The $1.5 billion in penalties is reason enough to mention the case, but what had Wall Street buzzing was the scale of the documentary evidence. Thousands of internal messages referred specifically to falsifying the Libor reports, and some mentioned improper payments that would appear to meet the legal definition of bribery. The succession of documents makes clear that Libor fraud was essentially a daily occurrence at UBS and deeply ingrained in the company culture.

The wave of legal trouble is most evident in banking in the United States but can also be seen in other countries, such as the former bank executive hauled into court in Ireland, and in other industries, such as the new facts and rumors about Wal-Mart’s bribery practices in Mexico. The wave of indictments can hardly be described as a crackdown, though. Bank regulation is nearly as lax as ever, and prosecutors are still highly reluctant to do anything that might impede a successful large business. It is more that much of the corporate world lost its legal and moral bearings when the global recession arrived about five years ago, to the point where authorities were forced to act.

When the story of the death of Wall Street is written, history will not trace it back to the events of this week, but to a culture of corruption that slowly began to take over the world of finance in the 1980s. It picked up steam in 2001 with the hands-off attitude of the Justice Department toward big business under the Bush and Obama administrations, and unless that policy changes, the wave of corruption will be checked only by the eventual financial undoing of the companies where it has taken root.