Criminal Fraud is Routine in the Biggest Banks: Time to Prosecute the Bankers

There was a period of remorse and apology for banks- I think that period needs to be over.

Bob Diamond, Group Chief Executive of Barclays plc.


On Wednesday, the Commodity Futures Trading Commision (CFTC), US Department of Justice and UK Financial Services (FSA) authority released their statements on Barclays, which is facing a fine of some $450 million. They revealed systematic, routine fraud in the organisation, via the manipulation of the Libor and Euribor rates, the effective interest rates at which banks lend to each other, between the years 2005 and 2009.

These rates set the price for derivatives markets and tiny changes in the rates can yield enormous profits for the company manipulating them. For example, according the CTFC, Libor forms the basis for the Chicago Mercantile Exchange, with a trading volume exceeding $564 trillion, among others, and Euribor is used in derivatives with a notional value of $220 trillion. The value of these markets is many times greater than the economic output of the entire world: global GDP stands at a mere $63 trillion.

Between 2005-2007 Barclays distorted Libor and Euribor rates to favour the bank in derivatives trading. After the financial crash of 2007, after worrying that the high rates would make the bank look vulnerable, they altered the rates in the other direction. The CTFC states:

The Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition

The evidence shows that this culture of fraud and corruption was routine and permeated right the way to the top of the organisation. Yet Barclays was by no means alone in this scandal. The investigation is now going to spread to other companies: it is believed that Citigroup, JP Morgan, Deutsche Bank, HSBC and Royal Bank of Scotland (RBS) were all manipulating rates in precisely the same way. In other words, almost every major banking firm was taking part.

Although the scandal has been unusually large in scale, it is hardly unique. Since the rapid deregulation of the 1980s and 1990s, criminal activity has a mainstream activity of the most powerful banks. Charles Ferguson’s brilliant documentary Inside Job (which I cannot recommend highly enough- film here, transcript here) details multifarious cases fraud within the largest and most powerful banks.

In 2002, ten investments banks (Bear Stearns, Credit Suisse, Deutsch Bank, J.P. Morgan, Merril Lynch, Morgan Stanley, UBS, Goldman Sachs and Citigroup) were collectively fined 1.4 billion dollars for promoting and profiting from internet companies they knew would fail. J.P. Morgan bribed US government officials, Riggs Bank laundered money for General Pinochet, Credit Suisse helped to launder money for Iran’s nuclear program, violating government sanctions, Citibank funnelled $100 million of drug money out of Mexico. Fannie Mae faced fines of $400 million for overstating earnings by more than £10 billion between 1998 and 2003. Freddie Mac was fined $125 million for accounting fraud in 2003.  UBS (as mentioned in a previous article) was fined $780 million for illegal tax evasion. It was forced to release information which eventually helped to expose the recent Libor scandal. Citibank, J.P. Morgan and Merrill Lynch were fined $385 million for helping ENRON to conceal its fraud.

Banks were routinely committing fraud to profit from the mortgage market in the run up to the financial crisis of 2007. According to Charles Ferguson:

Goldman Sachs bought at least 22 billion dollars of credit default swaps from AIG. It was so much that Goldman realized that AIG itself might go bankrupt; so they spent 150 million dollars insuring themselves against AIG’s potential collapse. Then, in 2007, Goldman went even further. They started selling CDOs specifically designed so that the more money their customers lost, the more money Goldman Sachs made…

Hedge fund manager John Paulson made 12 billion dollars betting against the mortgage market. When John Paulson ran out of mortgage securities to bet against, he worked with Goldman Sachs and Deutsche Bank to create more of them. Morgan Stanley was also selling mortgage securities that it was betting against.

Fraud was at the heart of how the financial services industry operated at the time of the financial crisis (and how they still do). Executives knowingly awarded larger bonuses to themselves and colleagues, based on illusory profits which were then wiped out by subsequent losses on the same assets. Executives at Lehman Brothers deceived officials about their company’s financial position in 2008. Executives as Bear Stearns seem to have pocketed money that should have gone to investors.

The Department of Justice has decided not to prosecute these and other matters. Almost no senior bankers have been prosecuted in the USA and UK since the Savings and Loans crisis in the early 1980s. Even since the financial crisis, prosecutions have been scarce, one exception being Angelo Mozilo, chief executive of Countrywide Financial until 2008,  who was sentenced for insider trading and fraud. He faced a fine of just $67.5 million, a small fraction of the $470 million he made from the housing bubble. Partly, the lack of prosecutions is because no authorities have the power and scope to deal with international crimes on this scale, but also due to new guidelines issued by the Justice Department in 2008 urging a “softer approach” to corporate crimes.

It’s hard to explain this lax approach to the largest financial crimes in history. Part of the reason must surely be the huge influence that these corporations hold over the government and the bodies that should be regulating them, in both the USA and the UK.  Lynn E. Turner, former Chief Accountant of the US Securities & Exchange Commission (SEC) argues that it is “the influence of the Wall Street lobby that has resulted in a lack of prosecution”. The top leadership at the Department of Justice draws almost exclusively from White Collar Criminal Defence practices at large firms that represent the very firms that it should be investigating. As Forbes has pointed out:

Covington and Burling,  the firm from which both Attorney General Eric Holder and Associate Attorney General and head of the criminal division Lanny Breuer hail, has as its current clients Goldman Sachs, Bank of America, JP Morgan, Wells Fargo, Citigroup, Deutsche Bank, ING, Morgan Stanley,  UBS,  and MF Global among others. Other top Justice officials have similar connections through their firms.

So we shouldn’t be surprised that the culture of fraud and criminality is ubiquitous. The largest banks believe that their power puts them above the law.  By and large, they are right. The fines have been large, but the profits being made by these schemes have also been huge. As long as they think it statistically unlikely that they will get caught, this sort of fraud remains a rational activity for the most powerful firms. Given that the risk of facing criminal prosecution for even the largest fraud is minuscule, and the potential profits astronomical, there are significant incentives for the largest banks to commit financial fraud. In his recent Reith Lecture, economic historian Niall Ferguson, by no means a radical left-winger, argued:

But greedy people will only commit fraud or negligence if they feel that their misdemeanour is unlikely to be noticed or severely punished. The failure to apply regulation – to apply the law – is one of the most troubling aspects of the past five years. In the United States, the list of those who have been sent to jail for their part in the housing bubble, and all that followed from it, remains laughably short.

If we are to avoid future financial crises, and cases of wide-scale corruption, we need to enforce the rule of law, even on the most powerful corporations. This must involve serious sentences -including imprisonment- for those found guilty of significant fraud. This is possible: in the Savings and loans crisis of the 1980s, more than 800 bank officials were jailed. Iceland’s socialist government has insisted on prosecuting fraudulent bankers, including Kaupthing Bank’s the former chief executive and chairman. Even former Prime Minister Geir Haarde is facing trial for criminal negligence. If we are to change the incentives of our powerful corporations, to prevent future cases of fraud and future financial crises, it is essential that we follow this example. It is time to prosecute corporate criminals.



  1. […] Libor scandal in Barclays and other banks is only the latest scandal. Chief Executive Bob Diamond (worth £105 […]

  2. […] routine, not just in Barclays, but across the financial services industry. I’ve outlined in an earlier post how I think this forms but of a wider practice of corruption. Clearly, there is something very […]

Leave a Comment

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s