SUMMARY: Only one bank was indicted in the aftermath of the 2008 financial crisis, and it was a very small one. The Oscar-nominated documentary "Abacus: Small Enough to Jail" tells the story of its prosecution for mortgage fraud and its ultimate acquittal. Jeffrey Brown talks with director Steve James.
SUMMARY: Federal Reserve governor Daniel Tarullo was central to the implementation of the Dodd-Frank Act, which imposed tougher regulations on banks in the wake of the financial crisis. Though his term isn't up until 2022, Tarullo is now stepping down, just as President Trump is expected to scale back much of the regulation put in place. Tarullo joins economics correspondent Paul Solman for a conversation.
PAUL SOLMAN (NewsHour): Federal Reserve Governor Daniel Tarullo has been called one of the most powerful U.S. banking regulators since Alexander Hamilton. Appointed by President Obama in 2009, Tarullo was central to the implementation of the 2010 Dodd-frank Act, which imposed tougher regulations on banks in the wake of the financial crisis.
Under his watch, the Fed has sought to curb banks' reliance on short-term loans and to increase the amount of capital they must keep on hand. But President Trump is expected to try to scale back much of what was put in place.
On our visit to the Fed last week, Tarullo's wasn't the only empty office we found. Since Senate Republicans refused to vote on two of President Obama's nominees, there are now three openings on the seven-member board of governors. That means President Trump will have a chance to put his mark on Fed policy going forward.
Daniel Tarullo, welcome to the program.
DANIEL TARULLO, Federal Reserve Governor: Good to be with you.
PAUL SOLMAN: Your appointment's through 2022, right, so why are you leaving now?
DANIEL TARULLO: Well, you know, eight years is a long time. I came here, along with other people, with a sense of the need to rebuild the financial regulatory system.
I think we have made a lot of progress towards that end. And I think there comes a time where everybody individually wants to do something else, and where it's time to let other people try their hand at the job you have been occupying.
PAUL SOLMAN: Well, in this case, try their hand at dismantling what you in particular have been doing.
DANIEL TARULLO: Well, I don't really expect that there's going to be a dismantling of some of the major accomplishments that we have had. And I certainly hope not. And I don't think it would be something the American people would want to see, Democrats or Republicans, particularly with respect to the additional requirements that we and the other banking agencies have placed on the largest, most systemically important financial institutions, those that almost failed during the crisis.
I think there's a broad-based view that stronger capital requirements and better oversight is something that's needed there indefinitely.
Deutsche Bank is Trump's largest lender. While the troubled bank has settled several of the charges against it, it's still undergoing scrutiny by the Justice Department and other federal regulators, and is being overseen by six independent monitors, making conflicts of interest inescapable.
If you measure President Donald Trump's conflicts of interest by the amount of money at stake, or the variety of dicey interactions with government regulators, one dwarfs any other, his relationship with Deutsche Bank.
In recent weeks, Deutsche Bank has scrambled to reach agreements with American regulators over a host of alleged misdeeds. But because the President has not sold his company, the bank remains a central arena for potential conflicts between his family's business interests and the actions of officials in his administration.
“Deutsche poses the biggest conflict that we know about in terms of dollar amounts and the scale of legal exposures,” says Brandon Garrett, a University of Virginia law professor and author of “Too Big To Fail: How Prosecutors Compromise with Corporations.” In trying to clear up its outstanding regulatory troubles, the bank “may have tried to do its best to avoid the appearance of impropriety but it may be impossible for them to do so.”
Deutsche is Trump's major creditor, having lent billions to the President since the late 1990s even as other American banks abandoned Trump, who frequently bankrupted his businesses. While the President hasn't released his tax returns, he has made public some information about his debts. According to these incomplete disclosures and reports, the Trump Organization has roughly $300 million in loans outstanding from the bank. Trump continues to own the business, although he has turned over day-to-day management to his sons.
At the same time that it is Trump's biggest known creditor, Deutsche is in frequent contact with multiple federal regulators. While the bank agreed last week to pay $630 million to settle charges by New York state's top financial regulator as well as the U.K.'s Financial Conduct Authority that it had aided Russian money-laundering, it's still undergoing a related federal investigation into those activities, which it is also trying to settle. That will be an early big test of the Justice Department under Attorney General Jeff Sessions. The Justice Department also has an ongoing probe of foreign exchange manipulation by several banks, including Deutsche Bank.
Even if the bank clears up the ongoing federal cases, it will remain weighed down by past transgressions. During the housing bubble, Deutsche Bank misled buyers about the quality of its mortgage securities and omitted important information. In 2015, its London subsidiary pleaded guilty in connection with the multi-bank conspiracy to manipulate global interest rates and paid $775 million in criminal penalties.
Deutsche will soon have an astonishing six independent monitors monitoring its conduct — the most ever for one company, according to Garrett. Drawn from the ranks of consultancies and law firms, these overseers make sure Deutsche complies with previous state and federal settlements and regulations relating to its foreign exchange manipulations, global interest rate fraud, sales of dodgy mortgage securities, derivatives trading, and sanctions evasion.
Indeed, the independent monitor of Deutsche's derivatives reporting, Paul Atkins from Patomak Partners, has his own conflict of interest. Atkins served on Trump's transition team and played a role in appointing federal financial regulators. He is now monitoring whether Trump's business partner complies with the terms of a settlement with the Commodity Futures Trading Commission on derivatives reporting.
A Patomak spokeswoman declined to comment.
Meanwhile, the Federal Reserve has regulators sitting in Deutsche's offices, as it does with every big bank, keeping a watchful eye on the firm's safety and soundness. Last year, the Fed failed Deutsche Bank during its annual stress test, finding that it had insufficient capital and could not withstand another financial crisis. And the Securities and Exchange Commission and the CFTC regulate its investment banking and trading activities.
A Deutsche Bank spokeswoman declined to comment. The White House did not return an email seeking comment.
The Trump Organization's wide-ranging business dealings could raise quandaries for an array of government agencies, from the Department of Labor, which regulates the company's employment practices, to the General Services Administration, which leases Trump his hotel in Washington, D.C. “Just about everything that every branch, every type of enforcement, every action from every agency could touch on Trump's conflicts. There is no end to the corruption and ethics concerns,” Garrett says.
But the potential conflicts may be most acute at the Justice Department. Whether the Justice Department walks away from an investigation or takes a hard line against Deutsche Bank, its every move will be scrutinized as either too tough or too weak.
With new management, Deutsche Bank has embarked on an effort to rebuild its reputation. Deutsche CEO John Cyran has conducted an apology tour for the bank's multiple and serial misdeeds. The money-laundering settlement isn't Deutsche's only recent move to close out government probes. In January, it agreed to pay $95 million to end a tax fraud investigation by the U.S. Attorney for the Southern District of New York. And in December, it became one of the last of the global banks to resolve civil charges over the creation and sale of misleading mortgages investments, agreeing to pay a penalty of $3.1 billion.
In these agreements, Deutsche capitalized on the Obama Department of Justice's eagerness to settle, according to defense attorneys who don't represent the bank but are familiar with the cases. Outgoing administrations desire to wrap investigations up so departing prosecutors may shine their resumes on the way out the door.
The Obama administration had an added incentive to reach settlements because it worried the Trump administration Justice Department might seek smaller penalties or otherwise go soft on corporations. That helps explain why Deutsche Bank's mortgage securities settlement, which included $4.1 billion in credit for consumer aid in addition to the penalty, was far below the $14 billion figure reported in the fall as Justice's opening bid. While most observers expected that figure to come down sharply, Deutsche's terms were still widely considered favorable.
Even so, Deutsche's share price remains depressed as investors worry about the bank's future payouts and ongoing fragility. The bank faces class action suits alleging efforts to manipulate interest rates and the currency markets.
Given the government's responsibilities, Trump's regulators face a fraught and sensitive task of proving their independence and fair-mindedness when it comes to Deutsche Bank. Prior White Houses have taken great care to avoid interfering in Justice Department investigations and prosecutions. Despite his early support for Trump's campaign and their personal friendship, Sessions has said he will not recuse himself from any Justice Department probe into the President, the Trump family or any of his political advisors.
The relationship Deutsche Bank has with the President cuts two ways, defense lawyers and former prosecutors say. It might be advantageous to be in business with a President who appears to regard the office as an opportunity for brand enhancement and enrichment. The bank might hope for leniency from the President's regulators because of its business ties to him.
There are signs that Deutsche's new management is not eager to continue serving as Trump's financier. Trump sued the bank in 2008 to avoid paying a loan for a Trump hotel in Chicago. The parties settled, but lawsuits have a way of fraying friendships. A former top executive at Deutsche Bank says the current top management does not like the real estate developer. “They don't want to do business with him anymore,” he says.
Given the tension, Deutsche may worry about the mercurial President. The bank's concern is that the Trump administration could use its regulatory powers to secure better business terms. Nationalist strains course through his inner circle. A top Trump economic advisor recently accused Germany of currency manipulation. Trump, some observers fear, may seek to boost American financial institutions over foreign ones like Deutsche.
In recent months, Deutsche has also sought to renegotiate its loans with Trump, according to a Bloomberg report, in an effort to reduce its exposure to the President. The bank hoped to eliminate the President's personal guarantee on loans. But such a move would not eliminate the conflict of interest, since the President's company, which Trump still owns, would remain on the hook to pay back the loans.
Correction, Feb 10, 2017: Patomak Global Partners' Paul Atkins is monitoring whether Deutsche Bank complies with the terms of a settlement with the Commodity Futures Trading Commission on derivatives reporting. This story incorrectly said the settlement was with New York state financial regulators.
SUMMARY: Payday loans are supposed to be a short-term quick fix for those who can't get traditional credit. But the loans are rarely actually short-term, and borrowers frequently need to take out a second loan to pay off the first. Special correspondent Andrew Schmertz reports from South Dakota, where some are trying to cap triple-digit interest rates that many struggle to pay.
SUMMARY: It’s expensive to be poor. Unable to maintain a minimum balance or provide the necessary ID to open a bank account, many low-income Americans rely on fringe financial services like check cashing stores and payday lenders, which charge interest rates that can reach the triple digits. Hari Sreenivasan learns more from Mehrsa Baradaran, author of "How the Other Half Banks."
Wall Street pressed S&P, Moody’s and Fitch to assign more favorable credit ratings to their deals and bragged that the raters complied. Now many of the bonds are headed for default.
When the economy nosedived in 2008, it didn’t take long to find the crucial trigger. Wall Street banks had peddled billions of dollars in toxic securities after packing them with subprime mortgages that were sure to default.
Behind the bankers’ actions, however, stood a less-visible part of the finance industry that also came under fire. The big credit-rating firms – S&P, Moody’s and Fitch – routinely blessed the securities as safe investments. Two U.S. investigations found that raters compromised their independence under pressure from banks and the lure of profits, becoming, as the government’s official inquiry panel put it, “essential cogs in the wheel of financial destruction.”
Now there is evidence the raters also may have succumbed to pressure from the bankers in another area: The sale of billions of dollars in bonds by states and municipalities looking to quickly cash in on the massive 1998 legal settlement with Big Tobacco.
A review by ProPublica of documents from 22 tobacco bond offerings sold by 15 state and local governments shows that bankers routinely bragged about having their way with the agencies that rated their products. The claims were brazen, the documents show, with bankers saying they routinely played one firm against its competitors to win changes to rating methods, jack up a rating or agree to rate longer-term, riskier bonds.
"Bear Stearns is the ONLY firm in two years to have negotiated new rating criteria pertaining to stress tests and tobacco sector fundamentals,” the now-defunct investment bank stated in a typical 2005 pitch for a deal led by Kym S. Arnone, who today chairs the Municipal Securities Rulemaking Board, the industry’s self-regulator.
“Fitch reached out to UBS for input so that they would fall in line with the other ratings agencies,” UBS said after it and other financial services firms dropped Fitch from deals because of its “constraining” stress tests. Following the conversation, “Fitch amended their stress criteria,” UBS told officials in Michigan as it readied a 2006 deal.
In 2007, JPMorgan promised to negotiate Fitch “to their knees” if Ohio hired the bank for a $5.5 billion deal that was the largest sale, or “securitization” of tobacco settlement payments.
The 140 documents, unearthed through public records requests, show that bankers from six Wall Street firms – UBS, Bear Stearns, Citigroup, Merrill Lynch, JPMorgan and Goldman Sachs – claimed they could persuade the rating agencies to make favorable changes to their criteria.
Garnering better grades for the tobacco bonds meant the bankers could sell more of them, get a leg up on their competition and win millions of dollars in fees from the governments issuing the debt. The state and local governments were trading their annual tobacco payments for up-front cash by making the bond deals. As ProPublica has reported in a series of stories, the bonds have proved much riskier than advertised, leading to fiscal headaches for the issuers and losses for investors.
While there are no indications that the bankers did anything illegal, their claims further undermine the argument by the raters that their opinions are only the result of independent analysis – something the firms will soon be required to attest to in writing under reforms enacted in the wake of the financial crisis.
Since the economy tumbled in 2008, the estimated $36 billion of bonds issued in the tobacco sector – like so many other corners of Wall Street – have proven to be founded on shaky assumptions. In this case, the unraveling was caused by weaker-than-expected cigarette sales, which drive the size of the settlement payments. The outlook is now so bleak that in September Moody’s estimated that 80 percent of the money owed on tobacco bonds it rates won’t repay on time.
The future may be even bleaker for a $3 billion sliver of the debt. Those securities, known as capital appreciation bonds, promised balloon payoffs so large – $64 billion, all told – that they are almost certain to default. The documents show bankers pressed rating agencies to ease criteria for evaluating those bonds as well.
ProPublica shared the tobacco bond documents with S&P, Moody’s and Fitch. All denied changing their methodologies, also known as rating criteria, in response to demands from bankers.
In an interview, Nicolas Weill, who oversees Moody’s rating methodologies for tobacco bonds and similar securities, said, “We don’t negotiate criteria.” Those criteria – such as stress tests that gauge how much cash is available to repay the bonds under various scenarios – are "never, ever" open to deal-by-deal changes. He said the firm may evaluate different deal structures but only if they meet those criteria.
In a statement, Fitch said: “With respect to every one of the examples provided to us by ProPublica, we can affirm that no banker or other outside party unduly influenced any of these ratings decisions … We determine our ratings – they are not open to negotiation with issuers and bankers.”
S&P said in a statement: “On the whole, the assertion that S&P’s cash-flow stress assumptions for tobacco settlement bonds were relaxed is false … credit ratings change because factors that affect credit risk change.”
ProPublica shared the documents with each of the banks. All declined to comment except UBS, which said the bankers involved no longer work for the firm, which exited the municipal bond business amid the 2008 market turmoil.
ProPublica also shared the materials with the Securities and Exchange Commission, which regulates rating agencies and has been working to reform the rating process since the abuses in mortgage-backed securities. In August, the agency adopted hundreds of pages of new rules it said will help prevent “conduct and practices that were central to the financial crisis.”
The SEC also has been investigating whether S&P bent its criteria to win ratings of commercial mortgage bonds. The regulator is now seeking to suspend S&P from that part of the business in what would be its toughest action yet against one of the big three raters, Bloomberg News reported this month.
The SEC declined to comment on the documents provided by ProPublica.
The documents give the bankers’ version of what happened, and some degree of exaggeration can be expected in any sales pitch. Nevertheless, former rating analysts, lawyers and regulatory experts who reviewed the documents said the consistency of the bankers’ claims across multiple years, deals and states, compared with known criteria changes and ratings, suggests the banks’ influence was real.
“Banks have a right to advocate for their clients – that’s normal,” said Mayra Rodriguez-Valladares, a financial regulatory consultant who reviewed the documents at ProPublica’s request. “What’s going on here is very different … this is the banks trying to convince rating analysts to make changes to their methodology, and that’s really crossing the line.”
HARI SREENIVASAN (NewsHour): Let’s turn to a story about Wall Street and banks that’s angered many.
As one of its final acts last week, Congress passed a spending bill for 2015. Tucked into it was a provision to loosen banking regulations on hedges or bets known as derivatives or swaps. These are financial instruments that essentially allow banks to hedge bets on things that rise and fall in value, such as mortgages, currencies and interest rates.
After the financial crisis, the Dodd-Frank Act required big banks like J.P. Morgan to move some of those derivatives, or bets, to other banking units that don’t have a federal backstop or guarantee from the government.
The idea: No federal guarantee means no bailout. But the provision passed last week essentially cancels it and says banks don’t have to move those swaps around anymore.
Liberals were outraged. The most outspoken voice ahead of the Senate vote, Democrat Elizabeth Warren of Massachusetts.
SEN. ELIZABETH WARREN, (D) Massachusetts: Who do you work for, Wall Street or the American people? This fight isn’t about conservatives or liberals; it’s not about Democrats or Republicans. It’s about money, and it’s about power right here in Washington.
This legal change could trigger more taxpayer bailouts and could ultimately threaten our entire economy. But it will also make a lot of money for Wall Street banks.
HARI SREENIVASAN: But others, including Republicans and some Democrats, said that fear was overstated.
GWEN IFILL (NewsHour): .....new questions about how the Federal Reserve supervises big banks.
ProPublica and public radio’s “This American Life” have produced reports focusing on the role of a former supervisor from the New York Fed, Carmen Segarra, who was monitoring Goldman Sachs. Segarra was placed inside the bank, as required by law, but she also made secret audio recordings that seemed to show other Fed officials were going too soft on Goldman, including over a deal one regulator called legal, but shady.
Segarra was fired a few months later. The Fed has denied any connection, but said it will conduct its own review.
Those issues were the subject of a recent Senate hearing with New York Fed President William Dudley.
Jake Bernstein helped break the initial story for ProPublica.
Judy spoke with him recently.
JUDY WOODRUFF (NewsHour): Jake Bernstein, welcome.
So, tell us more about what has sparked interest in the Fed all over again and how it does its job.
JAKE BERNSTEIN, ProPublica: Sure.
The genesis of this is really a bank examiner who was at the Fed in 2011 and 2012. She was fired after about seven months on the job. But before she was fired, she secretly recorded hours, approximately 46 hours, of meetings of her on the job with her colleagues and at the bank that she was supervising, which happened to be Goldman Sachs.
We got access to those recordings and have written some stories based on them.
JUDY WOODRUFF: And how does the Fed explain it? As we mentioned before, they seemed to suggest the Fed going soft on Goldman Sachs. How — is that a fair interpretation? And how does the Fed explain it?
JAKE BERNSTEIN: Well, what is interesting is that that is not our interpretation, or simply our interpretation, because, in 2009, the Fed brought in an outside consultant to do a top-to-bottom review of their supervisory practices involving big banks.
And this outside consultant found that the New York Fed was too deferential to the banks it was supervising and that there was a climate of fear. I mean, he basically said that the culture of the New York Fed was the biggest obstacle to completing its mission.
And so we sort of used that as a baseline to then look at what these recordings showed. And what they seemed to demonstrate was that not a lot had changed since that consultant’s report in 2009.
Examiners are reportedly blocked from doing their job as “London Whale” trades blow up.
As the Federal Reserve Bank of New York moved to beef up its oversight of Wall Street two years ago, the team charged with supervising the nation's largest bank, JPMorgan Chase, was in turmoil.
New York Fed examiners embedded at JPMorgan complained about being blocked from doing their jobs. In frustration, some requested transfers. Top New York Fed managers knew about the problems, according to interviews and secret recordings of internal meetings obtained by ProPublica. Similar frustrations had surfaced among examiners at other banks as well.
"You're not the only one experiencing difficulties at an institution," one New York Fed manager told Carmen Segarra, an examiner stationed at Goldman Sachs who made the surreptitious recordings. "You've heard about all the issues at JPMorgan."
In meetings in early 2012, the manager, Johnathan Kim, described how bosses in the JPMorgan team had stymied examiners by blocking access to bank information and constraining independent inquiries in ways that "grinds everything to a halt."
The revelations of internal strife add new details to the summary of an investigation by the Federal Reserve Board's inspector general into the New York Fed's supervision of JPMorgan before the "London Whale" trading scandal. The disastrous series of trades, which became public in April 2012, cost JPMorgan $7 billion in losses, settlements and fines and forced it to admit to securities law violations.
In the summary of its two-year investigation, which was released last month, the IG stopped short of saying the New York Fed could have detected the trading risk before it blew up. Still, it chastised the bank, saying it had identified risky activities in JPMorgan's investment office years earlier but didn't follow up or tell the bank's primary regulator, the Office of the Comptroller of the Currency (OCC), as procedures demanded.
The IG's office has withheld its full investigation report, saying it contained information that was "confidential" and "privileged." A spokesman declined to provide even a page count.
The New York Fed declined to respond to detailed questions. JPMorgan also declined to comment.
The IG's summary offered only a glimpse into the job performance of what is arguably the most important U.S. financial regulator. The New York Fed's primary responsibility is to protect the safety and soundness of the financial system. After the 2008 financial crisis, Congress gave the Federal Reserve System the task of supervising the biggest and most complex financial institutions whose failure could disrupt the economy. Because of its location, the New York Fed has direct responsibility for many of Wall Street's biggest players. Yet its supervisory culture has been slow to adapt, as ProPublica and This American Life recently reported.
To comply with its new Congressional mandate, the New York Fed went on a hiring spree in 2011, in part to bring in more specialized examiners to station inside JPMorgan, Goldman Sachs, Citigroup and other systemically important financial institutions. These examiners, called "risk specialists," were chosen because of their expertise in areas such as compliance, credit risk and operations. Their task was to continuously monitor their institutions to see how they fared in these key areas. The specialists reported to two bosses – managers for their specialty and the head New York Fed officer at the bank.
By early January 2012, it was clear that this dual reporting system had become a problem at several institutions and that on some teams the new experts were encountering resistance from their non-specialist colleagues and supervisors. In a meeting of legal and compliance specialists caught on Segarra's recordings, examiners complained about management not valuing their expertise and struggles over who had final say over examinations.
In some cases, the senior New York Fed person on site at the bank would not allow the new examiners to act on their knowledge and work independently. The JPMorgan team was widely recognized as dysfunctional in this regard, according to discussions on Segarra's tapes and interviews with two former Fed employees, who continue to work in finance and asked for anonymity to discuss confidential information.
Segarra had joined the New York Fed as a legal and compliance examiner in November 2011. She was fired seven months later after a dispute with her bosses in which she refused to rescind a detrimental finding about Goldman Sachs. The New York Fed says Segarra's firing was unrelated to her supervision of Goldman; her lawsuit contesting the firing was dismissed without a ruling on the merits and is on appeal.
In January 2012, to build her own record of events, Segarra began secretly recording meetings with colleagues. She was among roughly 230 New York Fed supervisors assigned to the largest financial institutions. The risk specialists were a small subset of that group in a given area were called a "risk stripe." The members of each stripe from the different systemically important banks met weekly to discuss the issues they were facing on their respective teams. Tensions within the JPMorgan team were common knowledge, according to a former examiner.
On the recordings, Kim put the responsibility for the tensions at the JPMorgan team on Dianne Dobbeck, then the senior New York Fed supervisor at the bank. The issue came up when Kim tried to assuage Segarra about pressures she was experiencing at Goldman. In some respects, he said, the situation was worse at JPMorgan.
"You look at JPMC, that is an iron hand woman," Kim said, referring to Dobbeck. "They have already made their determination. They don't care what risk do[es]."
Kim added that the legal and compliance specialist embedded at JPMorgan wasn't allowed "access to anything — nada." Dobbeck expected the risk specialists to follow orders, not think for themselves, Kim indicated.
"You do what we tell you," he said, portraying Dobbeck.
"Hold on. How am I being a risk expert here?" he continued, mimicking the perspective of a risk specialist. "How am I being independent?"
In another meeting, Kim said examinations at JPMorgan had been stymied because the Fed leadership inside the bank wouldn't allow any investigation until they had a complete understanding of all the issues. "They want all the information, and therefore just [Kim makes a crunching sound] grinds everything to a halt until they come to understand it."
Kim declined to respond to questions.
The former examiner, who was not on the JPMorgan team but maintained good contacts with those working under Dobbeck, echoed Kim's characterizations. The continuous monitoring that was supposed to take place bogged down when all meetings and document requests had to be cleared by Dobbeck, the examiner remembers his colleagues telling him. "The examination scope was limited even though the point of risk specialists was there was supposed to be no limit to their scope," he said.
Jamie Dimon, the chairman, president and CEO at JPMorgan, conceded in congressional testimony about the London Whale in 2012 that the bank's risk processes "were not as formal or robust as they should have been."
An exhaustive U.S. Senate subcommittee report last year was more blunt: "[T]he whale trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk metrics were frequently criticized or downplayed, and risk evaluation models were targeted by bank personnel seeking to produce artificially lower capital requirements."
In early January 2012, Sarah Dahlgren, the head of supervision at the New York Fed, attended a meeting of legal and compliance risk specialists that Segarra recorded. Dahlgren listened to complaints about the resistance the examiners were encountering. "Other views on this dual reporting?" she asked the risk specialists. "This is obviously an issue that has come up, and I've heard, on the GE [Capital] team last week, too, and the JPM [JPMorgan] team, this issue is one that is alive."
Dahlgren declined to respond to questions.
The former examiner said that by mid-2012, there was an effort by a number of risk specialists on the JPMorgan team to transfer to other institutions. By the end of the year several left the team to join Fed supervisors at other banks. "A lot of people wanted to leave because they felt their information was getting stonewalled or it was not getting traction," the former examiner said.
Dobbeck did not respond to a detailed request for comment. She is a New York Fed veteran who started as a financial analyst in the policy department in 1997. By September 2005, she had moved to the supervision side of the bank and become the New York Fed's "Central Point of Contact" for Citigroup. Dobbeck held the job until May 2007, a crucial period for Citigroup in the lead-up to the financial crisis.
At the outset of 2005, the Federal Reserve had downgraded Citigroup because of " demonstrated weakness in the company's ability to comply with all rules and regulations." By February 2006, the New York Fed determined that Citigroup had made improvements. The Federal Reserve raised Citigroup's rating. At that point, however, the bank's production of structured mortgage bonds called collateralized debt obligations went into overdrive. The bank increasingly relied on off-balance sheet entities in which to stash these mortgage assets. When their value plummeted, they flooded back onto the bank's balance sheets to catastrophic effect.
After the 2008 meltdown, Congress created the Financial Crisis Inquiry Commission to investigate the causes. The commission focused much of its Wall Street investigation on Citigroup, which got the biggest government bank bailout from the financial crisis, $476 billion in cash and guarantees.
Commission investigators conducted several interviews with Dobbeck, who acknowledged to them that she and her colleagues had missed what was happening at Citigroup. They had looked at mortgages the bank was originating and managing, but not "the potential exposure they had through their structured activity," she told FCIC investigators.
Dobbeck also described the poor working relationship the New York Fed team had with the OCC, the other big federal supervisor onsite at Citigroup. She characterized relations between the two regulator teams as "assertive and tense." The OCC regulators, she said, "would prefer for us not to attend meetings or have discussions with them."
One of the top OCC supervisors at Citigroup at the time was Scott Waterhouse. Years later, in 2012, when Dobbeck ran the New York Fed team at JPMorgan, her OCC counterpart at the bank was again Waterhouse. He did not respond to emailed questions.
Last year's examination of the London Whale trades by the Senate Permanent Subcommittee on Investigations criticized the OCC's efforts but did not look into the New York Fed. But if the primary regulator, in this case the OCC, fails "to notice and follow up on red flags," as the Senate investigation concluded, the Fed is supposed to step in, according to a 2009 review by the Federal Reserve Board.
Bart Dzivi investigated the New York Fed's activities as special counsel for the Financial Crisis Inquiry Commission and conducted the panel's interviews with Dobbeck in 2010. Dzivi told ProPublica that Dobbeck was "smart, pleasant and exactly the wrong type of person to be in charge of any safety and soundness position" because he believed she lacked the resolve to stand up to the banks.
After leading the Citigroup team, Dobbeck was promoted to head of the credit risk department for the New York Fed's Bank Supervision group in June 2007. Two years later she was made a senior vice president. By 2011, Dobbeck was the top New York Fed supervisor at JPMorgan. She left the JPMorgan team in late 2013 for another promotion, this time to be the head of all supervisory policy for the New York Fed.
The Fed inspector general's summary of the London Whale investigation does not name Dobbeck or anyone else, and some of the problems the IG chose to highlight predate her time leading the JPMorgan team. The summary report catalogs several missed warning signs, including reviews in 2008 and 2010 of JPMorgan's Chief Investment Office that were planned but never took place.
In confidential reports before and immediately after the financial crisis, the Federal Reserve Board in Washington, D.C., repeatedly faulted the New York Fed for doing a poor job of supervision. These reports, made public by the financial crisis commission, cite persistent problems and offer recommendations including "leveraging the knowledge and expertise of specialized examiners."
The commission's release of that information in 2011 marks the last detailed public look at the New York Fed's supervision by a government entity.
By comparison, the Senate Permanent Subcommittee on Investigations released more than 1,200 pages of documents, including emails and internal reports from the OCC and JPMorgan, in its London Whale investigation. It held hours of public hearings with key players, including the Comptroller of the Currency Thomas Curry, who pledged to reform his agency and then acted to do so.
To date, the only public review of the New York Fed's handling of the London Whale is the inspector general's summary report. It is four pages long.
The huge cyberattack on JPMorgan Chase that touched more than 83 million households and businesses was one of the most serious computer intrusions into an American corporation. But it could have been much worse.
Questions over who the hackers are and the approach of their attack concern government and industry officials. Also troubling is that about nine other financial institutions — a number that has not been previously reported — were also infiltrated by the same group of overseas hackers, according to people briefed on the matter. The hackers are thought to be operating from Russia and appear to have at least loose connections with officials of the Russian government, the people briefed on the matter said.
It is unclear whether the other intrusions, at banks and brokerage firms, were as deep as the one that JPMorgan disclosed on Thursday. The identities of the other institutions could not be immediately learned.
The breadth of the attacks — and the lack of clarity about whether it was an effort to steal from accounts or to demonstrate that the hackers could penetrate even the best-protected American financial institutions — has left Washington intelligence officials and policy makers far more concerned than they have let on publicly. Some American officials speculate that the breach was intended to send a message to Wall Street and the United States about the vulnerability of the digital network of one of the world’s most important banking institutions.
“It could be in retaliation for the sanctions” placed on Russia, one senior official briefed on the intelligence said. “But it could be mixed motives — to steal if they can, or to sell whatever information they could glean.”
The JPMorgan hackers burrowed into the digital network of the bank and went down a path that gave them access to information about the names, addresses, phone numbers and email addresses of account holders. They never made it into where the more critical financial information and personal information are stored.
The bank’s security team, which first discovered the attack in late July, managed to block the hackers before they could compromise the most sensitive information about tens of millions of JPMorgan customers, said several security experts and others briefed on the matter. The attack was not completely halted until the middle of August and it was only in recent days that the bank began to tally its full extent.
American officials say they have been working with JPMorgan since the intrusion was detected, chiefly through the Treasury, the Secret Service and intelligence agencies that seek to find the source of the attacks. But that is slow work and one official cautioned against leaping to conclusions about the identities or the motives of the attackers.
“We’ve been wrong before,” he said.
JPMorgan, the nation’s largest bank, has begun contacting customers and making clear that no money was taken from any accounts. There has been no evidence of any fraudulent use of customer information. Most of the household accounts belong to United States residents. The hackers ended up with the addresses, email addresses and phone numbers of everyone who logged into JPMorgan’s websites and mobile applications in the recent past.
Still, the recent attacks on the financial firms raise the possibility that the banks may not be up to the job of defending themselves. The attacks will also stoke questions about regulations governing when companies must inform regulators and their customers about a breach.
“It was a huge surprise that they were able to compromise a huge bank like JPMorgan,” said Al Pascual, a security analyst with Javelin Strategy and Research. “It scared the pants off many people.”
Several financial regulators have warned that a coordinated attack on the banking system could set off another financial crisis.
On Friday, George Jepsen, the Connecticut attorney general, opened an investigation into the breach at JPMorgan, while Benjamin M. Lawsky, New York’s top financial regulator, began calling bank officials to warn them to take the threat more seriously.
“There needs to be far more urgency,” Mr. Lawsky said in an interview.
JPMorgan has also been working with law enforcement, including the F.B.I., since shortly after detecting the intrusion, which affected about 90 of the bank’s computer servers. The bank said it believed that its systems were now secure and that the threat of the hackers’ returning was over.
“To date, we have not seen any unusual fraud activity related to this incident,” said Kristin Lemkau, a bank spokeswoman. “We have identified and closed the known access paths. We have no evidence that the attackers are still in our system. We have apologized to our customers.”
But much remains unanswered about the intrusion, including just who the hackers are, which other financial institutions were hit and why the hackers went down a path inside JPMorgan’s computer system that contained troves of customer information, but not financial data.
The intrusion also highlights a possible gap in United States regulations. Banks are not required to report data breaches and online intrusions unless the incident is deemed to have resulted in a financial loss to customers. Breach notification laws differ by state, but most laws require only that companies disclose a breach if customer names were stolen in conjunction with other information like a credit card, Social Security number or driver’s license number.
In some states, companies can wait up to a month to inform customers of a breach. Other state laws are more vague.
In California, for example, banks, companies and large organizations must inform the state attorney general’s office and consumers about a breach without unreasonable delay — a rule that some companies interpret liberally, officials say. This year, Kamala Harris, the California attorney general, sued the Kaiser Foundation Health Plan, saying that it took more than a year for the foundation to disclose to some employees that their personal information may have been compromised.
For years, there have been attempts in Congress to force companies to inform customers more quickly when their information has been compromised, but recent bills have failed to muster enough support. One bill, sponsored by Senator Edward J. Markey, Democrat of Massachusetts, would create a clearinghouse where companies could exchange information about attacks.
United States bank executives say privately that they already share intelligence informally about attacks, which are occurring frequently on their systems.
This summer, Treasury Secretary Jacob J. Lew called on Congress to pass legislation that he said would bolster the information sharing process.
“As it stands, our laws do not do enough to foster information sharing and defend the public from digital threats,” Mr. Lew said.
That the hackers were apparently able to move around JPMorgan’s computer system undetected for several weeks is perhaps the most troubling aspect of the recent breach, officials at other large banks say.
The hackers were able to attain high administrative privileges within JPMorgan’s network, rooting more than 90 servers and rummaging through customer databases with detailed information for 76 million households and seven million small-business online accounts.
As they looked around, according to one person with knowledge of the breach, the hackers gleaned some critical details of customers’ accounts. With these, the hackers were able to determine whether the accounts fell within the private bank or in other business categories like mortgages.
Some people briefed on the results of the attack contend that it was only a matter of time before attackers could have gained access to customer funds and critical personal data.
Weeks into the attack, in mid-July, unusual behavior on the bank’s network was spotted, and the attackers were stopped before they had a chance to pull any customer data back to their servers abroad.
But they did make off with one file which has unnerved executives. That file contained a list of every application and program deployed on standard JPMorgan computers that hackers can crosscheck with known, or new, vulnerabilities in each system in a search for a backdoor entry.
Swapping out those programs is costly and time-consuming, people say, because the bank would have to renegotiate licensing deals with technology suppliers and swap out programs and applications for hundreds of thousands of bank employees.
As one former employee explained: “It’s as if they stole the schematics to the Capitol — they can’t just switch out every single door and window pane overnight.”
The attack came after a recent turnover within JPMorgan’s information security group.
A number of staff members followed Frank Bisignano, JPMorgan’s former co-chief operating officer, to First Data last year. This year, First Data agreed to pay JPMorgan over accusations that by wooing other executives to the payment processor, Mr. Bisignano had violated the terms of his former employment contract.
By then, First Data had already hired JPMorgan’s chief information officer, Guy Chiarello; its cybersecurity czar, Anthony Belfiore; its head of compliance, Cindy Armine; and Tom Higgins, JPMorgan’s head of operation control.
Anish Bhimani, the bank’s chief information risk officer, remained. Mr. Bhimani, who is well respected in the cybersecurity industry, is a co-author of a 1996 book on cybersecurity, “Internet Security for Business.”
Ms. Lemkau said the bank was pleased with its current cybersecurity personnel. “This is the highest-quality team we have ever had,” she said.
Last December, JPMorgan hired Dana Deasy as chief information officer from BP. Greg Rattray, a former Air Force lieutenant colonel who specialized in cyberdefense was named the head of information security in June.
Challenges quickly followed. That same month, hackers found a way into the bank’s systems.
JUDY WOODRUFF (NewsHour): Credit Suisse is the first big bank in more than two decades to plead guilty to a felony crime in the U.S. The Department of Justice announced the charges late yesterday, saying the Swiss bank had conspired to aid tax evasion over decades by helping thousands of people hide wealth.
Credit Suisse, which has an American investment bank, will pay $2.6 billion in penalties.
Attorney General Eric Holder has been emphasizing of late that — quote — “No bank is too big to jail.”
The Credit Suisse case, he said, was a good example.
ERIC HOLDER, Attorney General: This announcement should send a firm and unequivocal message to anyone who would engage in dishonest or illegal financial activity that the Justice Department doesn’t and we will not tolerate such activities.
When a bank engages in misconduct that is this brazen, it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as has happened here.
JUDY WOODRUFF: Holder’s comments come after many experts have frequently asked about why the Department of Justice has not pursued more serious charges against some of the banks connected with the financial crisis.
SUMMARY: Timothy Geithner, key architect of the government’s response the financial crisis, joins Gwen Ifill to discuss his new book, "Stress Test: Reflections on Financial Crises." As the former treasury secretary, Geithner offers perspective on the government’s response to the crisis, what response Americans deserved and how close the country came to another Great Depression.
Federal regulators on Tuesday approved a simple rule that could do more to rein in Wall Street than most other parts of a sweeping overhaul that has descended on the biggest banks since the financial crisis.
The rule increases to 5 percent, from roughly 3 percent, a threshold called the leverage ratio, which measures the amount of capital that a bank holds against its assets. The requirement — more stringent than that for Wall Street’s rivals in Europe and Asia — could force the eight biggest banks in the United States to find as much as an additional $68 billion to put their operations on firmer financial footing, according to regulators’ estimates.
Faced with that potentially onerous bill, Wall Street titans are expected to pare back some of their riskiest activities, including trading in credit-default swaps, the financial instruments that destabilized the system during the financial crisis.
In that respect, some regulators and advocates for tougher financial regulation said, the new rule is a more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking. Capital is important to banks because it acts as a buffer for potential losses that might otherwise sink an institution.
“It’s real, it’s tangible, it makes a difference, and improves the banks’ loss absorbing capacity,” said Sheila C. Bair of the Pew Charitable Trusts and a former chairwoman of the Federal Deposit Insurance Corporation, a bank regulator. “Many of the other rules are about controlling behavior, but there is only so much behavior you can control.”
The banks and the shareholders have had time to brace for the rule, which was originally proposed in July. It is also scheduled to take effect at the start of 2018, giving the banks considerable time to adapt and raise capital.
The F.D.I.C., the Office of the Comptroller of the Currency and the Federal Reserve wrote the rule. But tensions among the agencies increased when William C. Dudley, the president of the Federal Reserve Bank of New York, raised the concern that the new rule could complicate the Fed’s efforts to conduct monetary policy. In the final rule, however, regulators said that they expected the impact on monetary policy to be limited.
“Banks with stronger capital positions are in a better position to lend, to compete favorably in any market and to achieve satisfactory results for investors,” Thomas M. Hoenig, vice chairman of the F.D.I.C., and a firm proponent of the rule, said in a statement. “Without sufficient capital, the opposite is true.”
As regulators approved the rule, they also proposed a crucial adjustment that would most likely make the rule tougher for firms with large Wall Street businesses. The regulators said that they expected that adjustment to be part of the rule by 2018, but banks are certain to lobby against it, as they did with the main rule. The financial industry contended that it was blunt and, in many ways, unnecessary.
KARLA MURTHY (Newshour): For most of us, going to the local bank to deposit a check is second nature, but for many poor people in the New York neighborhood of the South Bronx, it’s not.
More than half the residents there don’t have a bank account, so on a Friday afternoon customers trickle into Ritecheck, a check cashing store. They are paying bills, buying money orders and cashing checks at a type of business often criticized for seeming to exploit the poor - by charging high fees.
But on this day, one of these tellers is not like the others.
Lisa Servon is actually a professor of urban policy at the New School in Manhattan, and her job at this check cashing store is part of a research project to find out why people choose to come here, despite the fees, rather than going to a bank.
KARLA MURTHY to SERVON: What were your impressions of check cashing places?--
LISA SERVON: I thought the same thing that you see in the press. I would cite the literature that called check cashers abusive and predatory and-- you know, being businesses that were really taking advantage of the poor. So I believed that.
KARLA MURTHY: But that belief was challenged when a man who runs one of these businesses visited Lisa Servon’s class as guest lecturer five years ago.
GWEN IFILL (Newshour): J.P. Morgan's $13 billion settlement brings months of delicate, high-stakes negotiations to an end.
Under the terms of the deal, $4 billion will go to struggling homeowners in the form of reduced mortgage payments, lower loan rates and other assistance; $7 billion will go to investors as compensation. The remainder will be fines paid by the bank.
The agreement comes as investigators are said to be pursuing cases against other financial institutions as well.
Some assessment now of the deal's significance and its problems.
Lynn Stout is a professor of business law at Cornell University. She closely watches financial regulation. And Bert Ely is a banking consultant. He joins me here.
The operators of a global currency exchange ran a $6 billion money-laundering operation online, a central hub for criminals trafficking in everything from stolen identities to child pornography, federal prosecutors in New York said on Tuesday.
The currency exchange, Liberty Reserve, operated beyond the traditional confines of United States and international banking regulations in what prosecutors called a shadowy netherworld of cyberfinance. It traded in virtual currency and provided the kind of anonymous and easily accessible banking infrastructure increasingly sought by criminal networks, law enforcement officials said.
The charges announced at a news conference by Preet Bharara, the United States attorney in Manhattan, and other law enforcement officials, mark what officials said was believed to be the largest online money-laundering case in history. Over seven years, Liberty Reserve was responsible for laundering billions of dollars, conducting 55 million transactions that involved millions of customers around the world, including about 200,000 in the United States, according to prosecutors.
Richard Weber, who heads the Internal Revenue Service’s criminal investigation division in Washington, said at the news conference that the case heralds the arrival of “the cyber age of money laundering,” in which criminals “are gravitating toward digital currency alternatives as a means to move, conceal and enjoy their ill-gotten gains.”
“If Al Capone were alive today, this is how he would be hiding his money,” Mr. Weber said. “Our efforts today shatter the belief among high-tech money launderers that what happens in cyberspace stays in cyberspace.”
Just as PayPal revolutionized how people shop online, making it possible to buy a microwave oven or concert tickets with the click of a button, Liberty Reserve sought to create a similarly convenient way for criminals to make financial transactions, law enforcement officials said.
The charges detailed a complicated system designed to allow people to move sums large and small around the world with virtual anonymity, according to an indictment, which was unsealed in federal court in Manhattan.
“As alleged, the only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes — the coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers and traffickers,” Mr. Bharara said at the news conference, where officials from the Justice and Treasury Departments, as well as the Secret Service and Homeland Security Investigations, also spoke. “The global enforcement action we announce today is an important step toward reining in the ‘Wild West’ of illicit Internet banking. As crime goes increasingly global, the long arm of the law has to get even longer, and in this case, it encircled the earth.”
Liberty Reserve surfaced as a preferred vehicle to transfer money between parties in a number of recent high-profile cybercrimes, including the indictment of eight New Yorkers accused of helping to loot $45 million from bank machines in 27 countries, officials said.
Liberty Reserve was incorporated in Costa Rica in 2006 by Arthur Budovsky, who renounced his United States citizenship in 2011, and was arrested in Spain on Friday. He was among seven people charged in the case; five of them were under arrest, while two remained at large in Costa Rica. All were charged with conspiracy to commit money laundering, conspiracy to operate an unlicensed money-transmitting business, and operating an unlicensed money-transmitting business. The money laundering count carries a maximum sentence of 20 years in prison, and the other two charges carry a maximum of 5 years each.
In addition to the criminal charges, five domain names were seized, including the one used by Liberty Reserve. Officials also seized or restricted the activity of 45 bank accounts.
The closing of Liberty Reserve last week seemed to have an immediate chilling effect on its customers, who were suddenly unable to access their funds and who posted anxious comments in underground forums, according to law enforcement officials. Mr. Bharara said the exchange’s clientèle was largely made up of criminals, but he invited any legitimate users to contact his office to get their money back.
The charges outlined how the money transfer system operated, offering a glimpse into the murky world of online financial transactions where money bounces between accounts from Cyprus to New York in the blink of an eye.
To transfer money using Liberty Reserve, a user needed only to provide a name, address and date of birth. But users were not required to validate their identity.
“Accounts could therefore be opened easily using fictitious or anonymous identities,” the indictment states. Prosecutors cited “blatantly criminal monikers” used by Liberty Reserve clients, like “Russia Hackers.”
Essentially, all a customer needed to open an account was an e-mail address.
One undercover agent was able to register accounts under names like “Joe Bogus” and describe the purpose of the account as “for cocaine” without being questioned, officials said. That no-questions-asked verification system made Liberty Reserve the premier bank for cybercriminals, prosecutors said.
JEFFREY BROWN (Newshour): And we turn to a major cyber-theft, global in scope and raising new questions about our vulnerabilities in the digital age.
The thefts took place in broad daylight at ATM machines, and the thieves wore no disguises.
U.S. ATTORNEY LORETTA LYNCH, Eastern District Of New York: This was a 21st century bank heist that reached through the Internet to span the globe.
JEFFREY BROWN: U.S. authorities say the reach of the international cyber-crime was wide; 27 countries -- Russia, Japan, Egypt, Colombia, Canada and beyond.
The criminals hacked into companies that process prepaid debit cards for two banks in the Middle East, stole the data and then copied it onto doctored cards with magnetic strips. Yesterday in New York, U.S. Attorney Loretta Lynch explained what happened next.
LORETTA LYNCH: They become a virtual criminal flash mob, going from machine to machine, drawing as much money as they can before these accounts are shut down.
JEFFREY BROWN: On Dec. 21st, thieves hit 4,500 ATMs in some 20 countries, stealing five million dollars. Then on Feb. 19th, they upped their game. In 10 hours, they stole $40 million dollars in 36,000 transactions worldwide.
In Manhattan alone, a team of eight so-called "cashers" allegedly made their way from ATM to ATM making 2,900 withdrawals totaling $2.4 million dollars.
Two of the suspects took photos of themselves and the stacks of cash they allegedly stole. To round out the crime, authorities say the suspects laundered the money by purchasing luxury goods in the form of Rolex watches, Gucci bags and expensive cars.
SUMMARY: The global network of thieves who targeted ATMs struck 2,904 machines over 10 hours in New York alone, withdrawing $2.4 million. For more on the attack and the aftermath, Jeffrey Brown talks with Loretta Lynch, the U.S. attorney for the eastern district of New York and the federal prosecutor in the heist case.
JEFFREY BROWN (Newshour): With Tax Day looming for millions of Americans, a new investigation exposes the global use of offshore bank accounts to hide trillions of dollars and evade laws.
Again to Hari, who has the story.
HARI SREENIVASAN (Newshour): Uncovering the complex workings of offshore tax havens has led to one of the largest cross-border collaborations ever between journalists.
The International Consortium of Investigative Journalists has been combing through more than two million files of financial transaction data for more than a year. It's taken this long because the digital file size is 160 times larger than the State Department cables published by WikiLeaks in 2010.
A team of 86 investigative journalists from 46 countries has collectively examined more than 120,000 offshore accounts belonging to individuals and companies from more than 170 countries. The records show how government officials and individuals in a number of countries use covert accounts and companies to shield their wealth and how some of the top global banks work within these offshore tax havens as well.
The investigation is already leading to a series of reports, including one spotlighting the transactions of a Canadian senator's husband, who has hidden money from their equivalent of the IRS, an Australian tied to arms dealing through shell companies, and a Mongolian lawmaker who may resign over the revelations of his finances overseas.
Gerard Ryle directs the International Consortium of Investigative Journalists and joins us to discuss the findings.
MARGARET WARNER (Newshour): Ten of the country's major banks have agreed to pay $8.5 billion to settle claims that they improperly foreclosed on homeowners during the height of the housing crisis. The companies include giants J.P. Morgan, Bank of America, and Wells Fargo.
The settlement stems from the way they handled some millions of foreclosures during 2009 and 2010. More than $3 billion of that will go in direct payments to borrowers foreclosed on during those years. Another $5 billion is earmarked for other assistance to homeowners who are struggling now.
In a separate housing crisis-linked settlement today, Bank of America also agreed to pay mortgage giant Fannie Mae more than $10 billion to settle claims that it sold Fannie risky mortgages.
For more, I am joined now by two people who track the housing industry from different perspectives.
Guy Cecala is publisher of "Inside Mortgage Finance," a housing industry research publication.
And Diane Thompson is an attorney with the National Consumer Law Center.
JUDY WOODRUFF (Newshour): Now: The U.S. government brings its highest profile case yet of international money laundering against one of the world's biggest banks.
For years, American officials have sought and sometimes struggled to crack down on the practices. Today, the Departments of Justice and Treasury announced a settlement with HSBC.
The bank agreed to pay almost $2 billion in fines and penalties. It was charged with violating sanctions laws by conducting business with customers in Iran, Sudan, and Cuba. It was also party to helping them launder almost $900 million for Mexican drug cartels.
SUMMARY: After the fall of Lehman Brothers in 2008, Congress passed the Troubled Asset Relief Program, disbursing money to hundreds of banks, including AIG. Ray Suarez talks to University of Michigan's Michael Barr and Better Markets' Dennis Kelleher on whether the bailouts resulted in financial reform or banks are still too big to fail.
As many have noted, this summer has seen one bank after another slapped with fines or rocked by reports of wrongdoing. You’ve probably heard something about Libor, or credit card overcharges, or money-laundering, but it can be hard to keep track. We’ve laid out the details on some of the most notable cases, including fines, resignations, and which investigations aren’t over yet.
Libor Fixing
The Banks
Barclays, JPMorgan Chase, Citigroup, UBS, Deutsche Bank and more
The Details
In late June, Barclays settled with British and American regulators over charges that it manipulated the Libor, a critical international interest rate set in London each day by a panel of banks. Barclays traders tried to rig the rate (and its Eurozone counterpart, the Euribor) in order to benefit particular trades, schemes clear from emails where traders promised one another bottles of champagne for their help. Also, during the financial crisis, Barclays submitted artificially low rates to make the bank look stable.
This kind of behavior wasn't limited to Barclays, and the investigation is still growing. Regulators first started getting worried about Libor in 2008. And in the wake of Barclays’ settlement, officials at the Bank of England and the New York Fed have come under fire for not pressuring the British Bankers’ Association, the industry trade group that oversees the Libor, to do more to reform the way the rate was set then.
Who’s been hurt
Ordinary consumers and investors.
Libor is used as a benchmark for trillions of dollars in financial contracts, from derivatives on down to student loans and credit cards. If the rate was messed with, consumers could have paid artificially high rates, or investors could have lost out if rates were too low. And submitting artificially low rates during the financial crisis could have misled the public and regulators about the health of the banking system.
Who’s taken a fall
Barclays' CEO, chairman, and chief operating officer have all stepped down. The Libor itself is also being targeted for reforms by the British government.
Penalties
$453 million in a settlement from Barclays to the U.S. Justice Department and Commodity Futures Trading Commission, and the U.K.’s Financial Services Authority.
What does Barclays say?
In their settlement with the Justice Department the bank admitted that traders tried to rig rates and also acknowledged lowballing rates during the financial crisis. CEO Robert Diamond has said no one "above desk supervisor level" knew about traders' scheming, and that he did not know about rate-suppression by the bank until the settlement was reached this summer.
Who’s still under investigation
More than a dozen banks have disclosed that they are under investigation by U.S. or other regulators. They have all said they are cooperating with requests for information.
- UBS reported in early 2011 that some regulators—including the anti-trust division of the Justice Department—had promised them leniency in exchange for cooperating with the investigation, but the bank could still face charges from other regulators. Some individual traders have also reportedly been offered non-prosecution agreements. The bank has reportedly fired or suspended more than 20 staff in the wake of the scandal. UBS was sanctioned by Japanese regulators in December for traders trying to manipulate the Tibor, Tokyo’s Libor equivalent.
- Citigroup disclosed ongoing investigations in a recent filing. Japanese regulators also sanctioned Citigroup in December as part of their investigation into rate-rigging by Tokyo traders.
- Deutsche Bank: In July, the bank said that an internal investigation had identified a "limited number" of staff who were involved in rate manipulations, and cleared all senior management.
- Royal Bank of Scotland: RBS says they have fired four employees and maintains that the wrongdoing is confined to a "handful" of individuals.
- Credit Suisse, HSBC, JPMorgan Chase, Bank of America, and a few other international banks have also acknowledged they are part of the Libor probe.
Key reads
For a history of the Libor, and how it got so important, see this London Review of Books essay from 2008. Also see the Wall Street Journal’s early reporting about banks lowballing Libor, and the Financial Times’ interactive explainer.
A Blind Eye to Money Laundering
The bank
HSBC
The details
A scathing report released by the U.S. Senate this July alleged that HSBC failed over the last decade to perform basic anti-money-laundering protections and evaded Treasury sanctions against Iran, Myanmar, and others. The report says HSBC allowed billions in cash to flow between Mexico and the U.S. despite warnings drug money was involved, opened Cayman Island accounts for customers with little-to-no background information, and provided cash to banks with terror ties. The report also faulted the government’s Office of the Comptroller of the Currency for taking virtually no action against the bank despite being aware of problems for years.
Who’s been hurt
Well, we know who’s not been hurt: Mexican drug cartels, Saudi Arabian banks, and others who may have moved money with little scrutiny.
Who’s taken a fall
HSBC’s head of compliance resigned July 18.
Penalties
$27.5 million, in a fine to Mexican regulators.
In a recent financial disclosure, HSBC said it had put aside $700 million as a "best estimate" of what it may have to pay U.S. regulators. The Justice Department, OCC, Treasury, and others are investigating.
What does HSBC say?
The bank has apologized and promised reforms are already underway. (It made similar claims back in 2003, when it was cited for similar violations.
Key Reads
Here’s the Senate’s full report. If you don’t have time for all 340 pages, Reuters has long been covering the bank’s lapses. And if you want a quick overview of the report itself, we broke out the most remarkable stats.
The London Whale’s Big Losses
The bank
JPMorgan Chase
The details
This spring JPMorgan Chase reported staggering losses from a risky derivatives trade run by the bank's London office. Since then the estimated losses have almost tripled to $5.8 billion.
Who’s taken a fall?
Bruno Iksil, aka the “London Whale,” who was the trader in charge of the blown-up trade, left the bank in July. Ina Drew, who was in charge of the bank’s investment unit, resigned in May, and in July agreed to return two years of pay to the bank.
What’s the bank say?
CEO Jamie Dimon has apologized for inadequate risk management, and for initially dismissing reports of losses as “a tempest in a teapot,” but maintained that it was shareholder money lost—not customers’ or taxpayers’.
Who’s investigating?
At least eleven state, federal, and British agencies are investigating the losses as of August. In June, the Securities and Exchange Commission, and the CFTC told Congress they are looking into how JPMorgan disclosed risks to shareholders and regulators. The OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation each said that they were examining JPMorgan's risk management oversight.
Why does it matter?
JPMorgan has lobbied heavily against regulations that could put a damper on risky trades like this one. For example, the Volcker Rule is meant to ban proprietary trading—when a bank trades for profit, using its own, rather than customers’ funds. The rule hasn’t yet been fully implemented. The head of the OCC said in June that the agency hasn't determined whether the rule would have covered JPMorgan’s trade.
Key reads
For a blow-by-blow, start with the Wall Street Journal’s coverage of the London Whale. See also New York Magazine’s recent interview with Dimon,who says the bank has “crossed the t’s and dotted the i’s and put in new rules, and we’re fine.”
Steering Minorities into Subprime Loans
The bank
Wells Fargo
The details
On July 12, Wells Fargo settled with the Justice Department over claims that the bank steered African-American and Hispanic customers into high-interest subprime loans and charged them more than it did white borrowers with similar qualifications. The Justice department described a pattern of systemic discrimination between 2004 and 2009.
Who’s been hurt
Roughly 34,000 black and Hispanic borrowers in 36 states.
The settlement
$175 million. $125 million will go to harmed borrowers, and $50 million will go to help with down payments in areas of the country hit hard in the crisis and where the Justice Department found widespread evidence of discrimination.
Did Wells admit wrongdoing?
Nope. The bank still denies the DOJ’s claims, saying it settled to avoid a long legal battle.
Key Reads
The Washington Post recently detailed the lasting impact on black and Hispanic communities of credit scars from subprime fiascos. We’ve also reported on complaints that Wells Fargo has fallen short in its upkeep of foreclosed homes in black and Hispanic neighborhoods.
Misleading Customers on Credit Card Services
The bank
Capital One
The Details
On July 18th, Capital One settled with the Consumer Financial Protection Bureau and the OCC for pressuring customers to buy unnecessary and costly account features and misleading them about benefits, requirement, and eligibility.
Who’s been hurt?
The settlement estimates some two million Capital One credit card holders were affected.
The settlement
$210 million. $150 million will be returned to harmed customers, for a payment of about $70 each.
Did the bank admit wrongdoing?
Kinda, sorta. In a statement, the bank blamed third-party vendors for the swindling, but apologized and said it was accountable for its contractors’ actions.
Wrongful Foreclosure on Members of the Military
The bank
Capital One
The details
On July 26th, Capital One settled with the Justice Department over allegations that the bank violated the Servicemembers Civil Relief Act, which gives active-duty military a temporary break from some debts, and puts a cap on interest rates they can be charged. Capital One violated those provisions, resulting in wrongful foreclosures and overcharges.
Who’s been hurt
Roughly 4,000 members of the military with Capital One credit cards, loans, or other products between June 2005 and November 2011.
The settlement
$12 million, to be paid to harmed servicemembers.
What’s the bank say?
Capital One says it cooperated with the Justice Department’s investigation, and has already taken some extra steps to offer bonus benefits to the military.
Key read
Similar violations may be flying under the radar. A Government Accountability Office report released in July faulted regulators for not watching banks more closely. The report found that the government reviewed less than half of U.S. banks for compliance, and relied on banks to identify which loans actually involved members of the military.
Doing Business with Iran
The banks
Standard Chartered, ING Bank
The details
In June, ING Bank settled with the Treasury for violating sanctions against Cuba, Iran, and other countries. In more than 20,000 transactions—totaling $1.6 billion—ING removed or disguised references to embargoed countries in order to skirt sanctions.
In what seems to be a much larger scale case, New York state filed an order on August 6th, alleging that Standard Chartered had also flouted Treasury sanctions by allowing as much as $250 billion worth of transactions from Iranian clients to pass through its New York office, and like ING, taking deliberate steps to obscure the country of origin. Most of the action happened in “U-Turn transactions,” which involved Iran and passed through the U.S. but started and ended in non-U.S. banks. They were legal until 2008. New York alleges the bank didn’t keep accurate records and sought to mislead regulators about even legal trades.
Settlements
$619 million from ING to the Justice Department and the Manhattan District Attorney (who were investigating alongside the Treasury).
$340 million from Standard Charted to New York, in a settlement announced August 14th. Standard Chartered will keep its license to operate in New York, which the state's financial regulator had threatened to revoke.
What does Standard Chartered say?
When New York first filed its order, the bank responded that only $14 million of the $250 billion in transactions actually violated sanctions. Standard Chartered’s announcement on the settlement last week doesn’t mention that figure (the bank did not respond to our requests for comment). The precise wording of the settlement is still being worked out, but New York says that Standard Chartered agreed that the “conduct at issue” involved $250 billion. (The New York Times explained the gray area behind the huge disparity in these numbers).
More to come?
Standard Chartered could still see fines from other regulators, though the Treasury, Fed, and Justice Department were reportedly taken by surprise by New York’s order, as they hadn’t yet determined the scope of wrongdoing. Standard Chartered had previously disclosed that they were cooperating with inquiries from those and other agencies
They’re not the only bank in hot water here. Remember HSBC’s money-laundering lapses? The Senate’s report also alleged a pattern of evading sanctions, and the bank says it is still under investigation by the Treasury.
