Ian Fraser: HSBC’s $1.9 Billion Settlement Sets (Another) Dangerous Precedent

Yves here. One of the things that has too often gone missing in the many discussions of why massive scale money launderer HSBC was not prosecuted is the basis of the “doing that would be destabilizing” excuse. When a company is indicted (mind you, indicted, not convicted), pretty much all Federal and many (most?) state agencies are required to stop doing business with it, immediately. The effect of the loss of so much business, particularly for a large financial firm, is seen as a death knell.

Of course, that’s the point. The threat of indictment of the company provides tremendous leverage to go after individuals. The Wall Street Journal’s editorial page went on a rampage against Eliot Spitzer when he used that cudgel to force the resignation of CEO Hank Greenberg. Now of course there is a different way to use this power. A prosecutor could just as well inform a board that it is ready to indict the company unless it secures the full cooperation of executives in order to secure prosecutions of all individuals involved in a meaningful fashion, top to bottom. That includes waving the company’s attorney-client privilege on this matter. Sending executives to prison has far more deterrent value that bringing a company down, since many will argue that employees who had nothing to do with the criminal activity would also be harmed.

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser.

The ‘settlements’ that London-headquartered banks HSBC and Standard Chartered have reached with the US authorities over serious criminal offences — including sanctions-busting and aiding and abetting terrorism and the global drug trade — are a travesty of justice. Even The Economist, a publication of which I am not usually fan, had a go at the ‘settlements’ saying:

The agreements put an end to uncertainty over the banks’ ability to operate within America, a key link in their global networks; their share prices both rose on the day the fines were announced. And the penalties are, in effect, levied on shareholders; not one corporate employee faces charges (although HSBC, at least, has clawed back payments to those responsible). Indeed, at a news conference this week Lanny Breuer, head of the Justice Department’s criminal division, suggested that an outright prosecution of HSBC was considered and rejected because of how damaging the impact could be on the bank’s viability, and thus on jobs and the American economy. Has a handful of banks become not too big to fail, but too big to jail?

Andrew Bailey, chief executive-designate of the Prudential Regulatory Authority, seems to believe they have. Bailey told the Telegraph’s Harry Wilson that some banks had grown too large to prosecute.

It would be a very destabilising issue. It’s another version of too important to fail. Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment.

So let’s get this straight. In Bailey’s universe protecting a bit of money is more important than the rule of law? Large banks and their senior executives must have an immunity from criminal prosecution — i.e. carte blanche to do whatever they want, including plundering the real economies, forming price-fixing cartels, rigging rates and markets, ransacking communities and funding terrorism, irrespective of the harm caused to others — for fear of upsetting financial stability? I am afraid this won’t wash.

If Bailey really believes it, he is unfit for regulatory office and should be forced out of his job. Writing on AlterNet Lynn Stuart Parramore said:

Senator Carl Levin, chairman of the U.S. Senate Permanent Subcommittee on Investigations, a congressional watchdog panel, observed that “the culture at HSBC was pervasively polluted for a long time.” Now we can be certain it will remain so. Criminal activity has been legitimized. In the world of banking, crime pays, big-time.

Anyone with half a brain must realise that such a stance is unsustainable in the long term. If it were allowed to persist, there’s zero chance of trust being rebuilt in the financial system. Without wishing to sound alarmist it could lead to anarchy and even civil war. After all, why should anyone else bother to obey the law if banks don’t have to? What is the point of having laws? What is the point of having regulators? The state would lose all legitimacy.

Here is what the Rolling Stone journalist Matt Taibbi said about the deals UK banks Standard Chartered and HSBC have pulled off with the US Department of Justice (introducing the clip):

Had pleasure of appearing on Eliot Spitzer’s Viewpoint last night to talk about the hideous Eric Holder/Lanny Breuer HSBC settlement, in which the government elected not to push criminal prosecutions against bank officers who admitted to laundering billions of dollars in drug money. Spitzer was the first guy I thought of when I saw the softball settlement, so it was cool to hear the prosecutorial take on the deal. When I came home after the show, my wife laughed. “It’s like you guys were fighting over who was more pissed off,” she said.

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