Taking Stock Why Bankers Still Aren't Chastened
Bankers have gone from being global elites to universally despised villains. Recent headlines suggest authorities are finally cracking down on illicit practices -- but the truth is very different.
The I Portici Hotel, an art nouveau palace in the historic center of Bologna, promises guests "a new experience, full of discovery and charm, involving all five senses." But Raoul Weil, once one of the most influential executives at Swiss bank UBS, recently had a less-than-charming stay.
At 1:45 on the morning of Oct. 19, Italian police arrested the 53-year-old in the hotel and brought him to the far less luxurious Dozza prison. The reason: US authorities had indicted Weil, the former head of wealth management at UBS, for allegedly helping American clients hide their assets from US tax authorities on Swiss bank accounts.
Weil's arrest was only one of a series of reminders last week that bankers around the globe are no longer the admired elite of the business world. Public prosecutors, financial regulators and politicians everywhere now suddenly seem to be striving to condemn all of the industry's excesses in fast forward.
British authorities recently hit the financial sector with record penalties. Last week, on the other side of the Atlantic, a US court found Bank of America and a former manager guilty of fraud because of a scheme involving shoddy home loans. Shortly before that, Jamie Dimon, CEO of JPMorgan,reluctantly negotiated a record settlement of $13 billion (9.45 billion) to at least put a stop to civil claims that his bank knowingly sold toxic US mortgage-backed securities. Dimon understands that justice has to be served, as the pugnacious bank boss recently grumbled, "but not just, 'Let's find some bankers and punish them.'"
Just a Slap on the Wrist
The truth is, spectacular coups like Weil's arrest are little more than symbolic gestures. The fines and settlements paid by many financial institutions are akin to the indulgences sold by the medieval Catholic Church. The sins of the past may now be forgiven -- but there are no guarantees of improvement in the future.
Regulatory agencies and politicians have not set effective controls on banks and bankers, and although their reputation may be tarnished, their power remains unbroken.
In Frankfurt, Germany's financial center, Deutsche Bank is trying to gradually free itself of the legal burdens of its past, most recently on Tuesday, Oct. 29, when co-CEO Anshu Jain announced he had set aside 1.2 billion ($1.6 billion) to cover impending losses from lawsuits, pulling down the bank's third-quarter pretax profit to 18 million from an expected 642 million. This brings the bank's litigation reserves to a total of 4.1 billion.
Deutsche Bank's legal woes range from courtroom battles with the heirs of Munich media mogul Leo Kirch to allegations of fraud linked to US mortgages in the run-up to the financial crisis. Jain's team has put aside roughly 500 million solely to contend with possible penalties in connection with the scandal surrounding the alleged manipulation of the Libor benchmark interest rate, which affects financial transactions worldwide. The final bill could be even higher: In order to stop further Libor investigations, British banks Barclays and RBS, Switzerland's UBS and the Dutch Rabobank have already reached settlements with government agencies amounting to $3.5 billion.
German Investigation Lags
While their colleagues abroad are racking up such impressive numbers on the Libor front, German investigators are making extraordinarily slow progress. To this day, Germany's Federal Financial Supervisory Authority (BaFin) has still not submitted a final report on its special audit -- only an interim report has been sent to Deutsche Bank. Now, partly at the insistence of BaFin, the bank is once again internally questioning some 50 employees.
Nevertheless, BaFin is not taking the steps one would expect: Four traders who successfully filed a suit against Deutsche Bank at the Frankfurt labor court challenging the termination of their employment have not yet been contacted, despite the fact that their courtroom testimony implicated Alan Cloete, a top bank executive and close associate of Jain's. Cloete was responsible for the bank's interest-rate trading and foreign exchange business at the time. The traders quoted Cloete as saying that he wanted to quickly resolve the Libor issue because Jain would soon become the head of the bank. The bank denies this version of events.
Regulatory agencies now also suspect bankers manipulated the foreign exchange market. Swiss Finance Minister Eveline Widmer-Schlumpf recently said that it is a "fact that currency manipulations have been committed." She later retracted the statement. Investigations are still underway.
Although the focus has been primarily on the Swiss UBS bank, Deutsche Bank will now face a number of awkward questions from BaFin investigators. "I can't imagine that we -- the world's largest foreign exchange trader -- would not have at least known about manipulations if they existed," says an investment banker with the Frankfurt-based financial institution.
Banks Are Not Afraid
But it is no coincidence that these kinds of penalties never seem to shake the foundations of the financial world: The banks can easily afford them. Deutsche Bank, for instance, has achieved an annual net profit of some 13.6 billion since 2009. "A criminal prosecution of the largest financial institutions to the point of revoking their banking licenses is impossible, because the banks involved are too economically important for their existence to be called into question," says Harald Hau, a professor of economics and finance at the University of Geneva.
The six largest US banks have also made fat profits since the outbreak of the financial crisis. Although they had to pay $103 billion to cover litigation cost, JPMorgan and the others have earned $234 billion since the crisis began. JPMorgan alone has made over $80 billion since its competitor, Lehman Brothers, went bankrupt in the fall of 2008.
Not surprisingly, JPMorgan chief Dimon was brimming with bravado when he recently put in an appearance at the annual conference of the Institute of International Finance (IIF), the global association of financial institutions, in Washington, DC. The silver-haired banker sat with his feet planted wide apart during a panel discussion and gave his signature smug smile.
Are the scandals hurting his bank? "Our clients are very happy with us," Dimon said dryly. Isn't the financial world far too complicated? "Airplanes are complicated; computers are complicated," Dimon fired back, noting that even if an airplane crashes now and then, they had nevertheless done a great deal of good. "The perception that people hate banks, I can't stop that," he added. It sounded like indifference.
JPMorgan's Wave of Scandals
This despite the fact that Dimon has been hit with such a barrage of investigations, probes and lawsuits that one would be best advised to mark each one on a world map to avoid confusion. In the UK, a trader dubbed by colleagues as the "London Whale" gambled away $6 billion in 2012 on the financial markets. In China, managers allegedly hired the son of a high-ranking functionary to win lucrative contracts. Meanwhile, in the US, the bank stands accused of using doubtful procedures to collect money from defaulted credit card holders. To make matters worse, it is said to have served happily as Bernie Madoff's house bank while he was orchestrating his Ponzi scheme -- and the bank allegedly manipulated electricity prices in California and Michigan.
Dimon has managed to reach settlements which made most of these allegations disappear in exchange for relatively manageable amounts of money and no admission of wrongdoing. But when it comes to the most recent settlement -- which also covers the bank's potential liability for allegedly fraudulently peddling junk mortgage-backed securities -- the Justice Department wants to set an example, and is insisting on the enormous sum of $13 billion.
Given that the majority of the controversial deals in question were made by Bear Stearns and Washington Mutual, two banks that Dimon saved during the financial crisis at the insistence of the government, that isn't completely fair. That said, Dimon won't have any trouble affording it.
It may be a bitter pill to swallow, but Dimon can easily pay this colossal settlement. "Some, maybe a lot of it, will be tax deductable," says Dennis Kelleher of the organization Better Markets, which is fighting for more transparency in the financial sector. Analysts are also predicting that the bank will continue to enjoy flourishing business: "JPMorgan remains a solid company," says expert Mike Mayo.
Indeed, Dimon remains at the helm of an international financial giant with assets of $2.5 trillion. The bank made record profits even during the crisis. And still, last year when the London Whale dampened the bank's results, Dimon's salary including bonus was $11.5 million.
How Regulation Fell Apart
In the wake of the financial meltdown of 2008, it seemed like the G-20 group, which represents the world's major economies, intended to curb the power of the financial industry. At the time, political leaders were saying no bank should be "too big to fail" -- and there was a lot of talk of introducing new global regulations for all financial institutions, players and products.
But then international unity on the issue fell apart. Now every country and region is cobbling together its own legislation -- regulators are producing mountains of absurd rules and regulations, which are derided by the globally-minded financial elite. Some people are calling it a regulatory tsunami.
But the ensuing chaos is also creating new opportunities for them: Over 2,000 lobbyists are now working on behalf of the financial industry in Washington, which amounts to four for every senator and congressperson. More than 70 percent of these lobbyists are former politicians or financial regulators, and they know how things work: It's merely a matter of producing massive amounts of requests, opinions and statements. Finance expert Kelleher describes it as a "lobbying war" fought with paper.
Members of Congress are weak opponents. After all, many of them only made it to Washington thanks to campaign contributions from the financial industry: Practically no one donates to political campaigns as much as the banking and real estate sectors.
As a result, the Dodd-Frank Wall Street Reform and Consumer Protection Act -- comprehensive legislation introduced by the US government, designed to subject the financial service industry to strict regulations -- is currently being successfully watered down, clause by clause.
Trouble in Brussels
Meanwhile, bank lobbyists in Brussels are also working hard to loosen the grip of regulatory agencies. Last winter, Germany passed the Bank Separation Act (Trennbankengesetz) -- legislation that forces financial institutions to separate their commercial and investment banking operations. It is widely seen as toothless. If EU Commissioner for Internal Market and Services Michel Barnier adopts Berlin's ideas as he drafts Europe-wide legislation, the big banks won't have to fear their business model -- which includes everything from small loans to international transactions to currency speculation -- is in danger.
For the time being, Europe's governments are expending most of their energy keeping their zombie banks alive with help from the European Central Bank (ECB). Although the balance sheet tests the ECB introduced last week are designed to finally help rid the banks of toxic assets, there are still only vague notions about how ailing financial institutions could be closed without endangering the financial system -- and about who should bear the costs.
"We are still a long way away from developing a genuine solution for liquidating major banks," says finance expert Hau. Politicians are afraid of scaring off the banks' creditors. Politicians and financial services providers are afraid of treading on each other's toes.
What About Weil?
The proximity between politicians and banks plays a significant role in the future of Raoul Weil, the Swiss banker currently in Italian police custody. At UBS he was responsible for assets amounting to $1.4 trillion entrusted to the bank by the rich and famous - including, allegedly, several politicians. Weil's phonebook is reportedly a bombshell. As the head of the world's largest asset management department, he was responsible for "politically prominent individuals."
That may have been why Weil felt secure traveling to Italy. Some critics have joked that, had the Italian government received early warning of the police's plan, he would not have been arrested. Ever since French Budget Minister Jérôme Cahuzac had to resign last March amid allegations he hid money on an undeclared UBS bank account, there have been concerns even more politicians could be exposed as tax evaders.
Consequently, it's unclear what will happen when the Italian justice system extradites the Swiss banker to the US -- after all, Weil has excellent connections on the other side of the Atlantic. The former head of UBS's Group Americas division, Robert Wolf, for example, with whom Weil has had a long-standing business relationship, regularly plays golf with US President Barack Obama.
Translated from the German by Paul Cohen