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Thursday, May 01, 2014

Thursday, May 01, 2014 - If the Cops Never Arrest the Killer, Nobody Really Died

Financial Review with Sinclair Noe

DOW – 21 = 16,558
SPX – 0.27 = 1883
NAS + 12 = 4127
10 YR YLD - .04 = 2.60%
OIL - .39 = 99.35
GOLD – 6.40 = 1285.90
SILV - .13 = 19.12

No record high for the Dow today. The Industrial Average was up and down, up and down throughout the day, but couldn’t hold positive territory. Today’s economic reports showed consumer spending increased, as did manufacturing activity, and unemployment claims.

Consumer spending increased 0.9 percent in March after rising by 0.5 percent in February, the largest gain in more than 4-1/2 years. The top 6 automakers backed up the spending report by reporting year over year gains in sales. The spending report supports the notion that cold weather just paused consumer activity and there is pent up demand that will lead to more economic activity in the second quarter. Income increased 0.5 percent in March, the biggest gain since last summer, but with spending outpacing income growth, the saving rate, which is the percentage of disposable income households are socking away, hit a 14-month low.

The Institute for Supply Management said its manufacturing index of national factory activity rose to 54.9 last month, up from 53.7 in March. A reading above 50 indicates expansion in the nation's factories. Manufacturing activity has now accelerated for 3 consecutive months and last month's gains were driven by a pickup in employment, export orders and inventories; although new orders were unchanged.

The Labor Department reports initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 344,000. Tomorrow morning we’ll get the monthly nonfarm payrolls report; look for 210,000 net new jobs in April and the unemployment rate to dip to 6.6%. That wouldn’t be enough to lift the labor market out of the doldrums but it would be another small step in the right direction.

A couple of news articles caught my attention, one from the Murdoch Street Journal and the other from the NY Times. You are forgiven if you missed them; they deal with banksters, and fraud, and regulators who look the other way, hoping for a post-government job with a golden parachute, and prosecutors without spines.

The Journal story deals with the Swiss units of Goldman Sachs and Morgan Stanley, and how they’ve agreed to hand over potentially incriminating details about how they helped Americans evade taxes; in return the banks won’t face prosecution.  Goldman's Swiss private bank had about $12 billion in assets under supervision as of the end of last year. Morgan Stanley's Swiss private bank had $50.7 billion in assets under management as of last year. The other big US banks likely did the same things, but they haven’t worked out a deal just yet.

Goldman and Morgan Stanley figured out the playbook, and it appears to go something like this: Senior officers of the banks aid and abet tax fraud by wealthy American clients, fail to make legally required criminal referrals, fail to comply with subpoenas, and then demand immunity from prosecution. Department of Justice prosecutors pee their pants and cave in to a slap on the wrist deal. No senior banker or bank was prosecuted. No banker was sued civilly by the government. No banker had to pay back his bonus that he “earned” through fraud. And the tax cheats that they aided and abetted have plenty of time to cover their tracks and might get away scot free, because the banksters aren’t required to turn over the client lists.

Then I read a New York Times story that claims federal prosecutors are getting close to criminal charges against at least a couple of major banks: Credit Suisse, for offering tax shelters to Americans, and BNP Paribas for doing business with countries like Sudan and Iran that the US has placed under sanctions. Prosecutors in New York and Washington have apparently held talks with BNP about a guilty plea from the bank’s parent company. Ben Lawsky, New York’s top regulator reportedly plans to impose steep penalties against BNP and its employees but would not revoke the bank’s license. Prosecutors have secured similar assurances from the New York Fed.

The discussions between regulators and prosecutors and lawyers was obtained under the Freedom of Information Act, and they demonstrate that defense lawyers were pushing prosecutors not to act without assurances that regulators will keep a bank in business. The question of culpability seems fairly straightforward; BNP conducted its own internal investigation that identified significant volume of transactions that could be considered impermissible under sanctions in place between 2002 and 2009, including improperly routing money through its New York branches.

There doesn’t seem to be a big concern at BNP about the possibility of criminal convictions that might result in loss of the bank’s charter, much less worry over executives facing jail time. It’s as if the criminal acts were performed by ghosts or phantasms.  BNP has set aside $1.1 billion in legal reserves; they expect a fine; it’s the cost of doing business.

Of course this is nothing new; two years ago, HSBC escaped criminal charges for violating economic sanctions and what appeared to be clear cut money laundering. JPMorgan recently paid a $2 billion dollar fine for its role in assisting Bernie Madoff’s Ponzi scheme, without having to admit guilt. Of course no one goes to jail. Almost no one. In January, Kareem Serageldin, a mid-to-upper level executive for Credit Suisse (not a CEO or CFO) was sentenced to 30 months in prison for concealing hundreds of millions in losses in the bank’s mortgage backed securities portfolio. Why this guy ended up going to prison and not somebody from Lehman, Bear Stearns, AIG, Countrywide, Bank of America, Merrill Lynch, Citigroup, HSBC – go figure; there is no rhyme or reason beyond the notion that regulators and prosecutors are simpering little cowards.

It didn’t used to be this way. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. When FDR took office he immediately announced a banking holiday and the bankers snapped to attention. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks and S&Ls. In the late 90s and the turn of the century, when the tech bubble burst and revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison. And the accounting firm of Arthur Andersen was criminally convicted for its complicity in the fraudulent steaming scam that was Enron; Andersen went out of business in 2002; delivering pink slips to many good and decent accountants along with the pond scum. Since then prosecutors have walked lightly for fear of collateral damage.

Since then, the bankers realized they could act with impunity, and they have. There has been no crackdown following the meltdown of 2008. From 2004 to 2012, the Justice Department reached 242 deferred and nonprosecution agreements with corporations, compared with 26 in the previous 12 years. The idea behind a deferred prosecution agreement, or DPA, is that the banksters stop doing the illegal stuff and if they do any other illegal stuff, the deal is off the table, and prosecutors can come down with full weight for past and current wrongdoing. Instead, there is no follow-up. It’s like a criminal is released on parole, violates parole, violates parole again, and again, and again; and the courts turn a blind eye.

So, now, with the BNP and Credit Suisse cases, the prosecutors goal seems to be criminal prosecution without making the banks actually suffer the consequences of criminal charges. Prosecutors consider them test cases; BNP and Credit Suisse aren’t the biggest banks; prosecutors aren’t sure what would happen with criminal charges; they don’t really know what to expect if they actually get a criminal guilty plea. If they start small, it might mean the end of the BNP tennis tournament or it might mean 200-thousand pink slips for bank employees, or it might be the spark that ignites a financial panic. They overlook the slow, insidious, systemic rot of the foundations of all global financial transactions – trust. In the long run, that seems far more dangerous.

Attorney General Eric Holder has testified before the Senate “that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute, if we do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

The bank lawyers play on this fear; they claim bank clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution labeled a criminal enterprise.  Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank’s business could lead to broader fallout across the financial industry, just as Lehman’s collapse in 2008 prompted investors to withdraw from other firms on concern its exit would set off a wave of losses. Even the threat of criminal action must be handled in such a way as to not spook customers.  

It seems to be a spurious argument; akin to a doctor telling you that surgery to remove a cancerous tumor is dangerous and painful, so there is nothing to do but let the cancer overwhelm the host, curl up and wait to die. And then there is the more absurd part of the defense; the idea that pension funds would be forced to cut ties with criminal banksters; as if it is perfectly fine to have pension funds and trustees doing business with bankers involved in criminal activity, just so long as there are no official criminal charges. A complete denial of wrongdoing based upon a lack of enforcement. If the cops never arrest the killer, nobody really died. Yea, that’s it, pay no attention to the bloody corpse, pay no attention to the wreckage and devastation of the global financial meltdown; whistle past the graveyard.

You know the meltdown involved criminal wrongdoing; the regulators know it; the prosecutors know it. What they don’t seem to know is the collateral damage from non-enforcement and non-prosecution. Every action has a consequence, and non-action is a form of action.

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