Are Big Banks Trustworthy?

The short answer is no. A news story this week 5 Banks to Pay Billions and Plead Guilty in Currency and Interest Rate Cases

“Adding another entry to Wall Street’s growing rap sheet, five big banks have agreed to pay about $5.6 billion and plead guilty to multiple crimes related to manipulating foreign currencies and interest rates, federal and state authorities announced on Wednesday.

The Justice Department forced four of the banks — Citigroup, JPMorgan Chase, Barclays and the Royal Bank of Scotland — to plead guilty to antitrust violations in the foreign exchange market as part of a scheme that padded the banks’ profits and enriched the traders who carried out the plot. The traders were supposed to be competitors, but much like companies that rigged the price of vitamins and automotive parts, they colluded to manipulate the largest and yet least regulated market in the financial world, where some $5 trillion changes hands every day, prosecutors said.”

This is all well and good but it seems a token punishment for the 5 banks

“To carry out the scheme, which went on nearly every day for five years through 2012, one trader would typically build a huge position in a currency and then unload it at a crucial moment, hoping to move prices.”

$5.6b is a better than a slap on the wrist with a wet bus ticket but given these banks ( and others) traded billions each day for at least 5 years the fines are almost certainly insignificant when compared to the profits these banks made during that time.

“The punishments announced on Wednesday come in addition to the $4.25 billion that some of these same banks agreed pay in November to resolve foreign exchange investigations by a slew of regulators. And yet the penalties may still continue.”

Not surprisingly such fines – even ones that seem quite large may be seen as a cost of doing business.

Guilty Pleas and Heavy Fines Seem to Be Cost of Business for Wall St.

“Yet even as penalty after penalty is paid by big banks in various cases, it seems as though the same cast of corporate characters keeps reappearing. It makes you wonder whether the global banks are acting like teenagers who find it easier to beg forgiveness than actually change their behavior.”

Back in August 2014 Bank of America reaches record $17bn settlement over questionable mortgages

In July 2014

“Citigroup paid $7bn to settle its case and last November JP Morgan Chase agreed to a then record $13bn to end an investigation that alleged it routinely overstated the quality of mortgages it was selling to investor.”

We’ve all but forgotten now, but back in 2011 Wachovia bank received minor fines for laundering drug money. It was let off the hook on more serious charges by regulators at the time.

How a big US bank laundered billions from Mexico’s murderous drug gangs

“As the violence spread, billions of dollars of cartel cash began to seep into the global financial system. But a special investigation by the Observer reveals how the increasingly frantic warnings of one London whistleblower were ignored.”

Wachovia – which was bailed out by the US government indirectly as part of its sale to Wells Fargo. This still taints the Wells Fargo brand in my view.

“Wachovia was acquired by Wells Fargo during the 2008 crash, just as Wells Fargo became a beneficiary of $25bn in taxpayers’ money.”

Ironically Wells Fargo in March, 2014 was recognised as top banking brand in the world. Also top in 2015

Wells Fargo Tops List of World’s Most Valuable Bank Brands, Leads Strong US Growth

The most valuable banking brands of 2015 I’ve added red arrows to show the ones whose brand value should be going down. If I banked at any of the mentioned brands I would change.


JPMorgan Chase shows up at #16 and Royal Bank of Scotland at #63 and both are heading down in brand value which is as it should be. Note: brand value is not the same as market cap.

“Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year’s “deferred prosecution” has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico’s gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.”

Again – those numbers are huge, but at the time no (significant) action was taken against Wachovia.

“For the time period of 1 May 2004 through 31 May 2007, Wachovia processed at least $$373.6bn in CDCs, $4.7bn in bulk cash” – a total of more than $378.3bn, a sum that dwarfs the budgets debated by US state and UK local authorities to provide services to citizens.”

The reality is far more mind blowing than anything a TV series could even make up. Hopefully the latest fines this week for the forex scams represents a harder line from government authorities in the U.S but the scale of the fines seem to be tiny compared to the actual business.

“Is it in the interest of the American people to encourage both the drug cartels and the banks in this way? Is it in the interest of the Mexican people? It’s simple: if you don’t see the correlation between the money laundering by banks and the 30,000 people killed in Mexico, you’re missing the point.”
“New York and London,” says Woods, “have become the world’s two biggest laundries of criminal and drug money, and offshore tax havens. Not the Cayman Islands, not the Isle of Man or Jersey. The big laundering is right through the City of London and Wall Street.

“After the Wachovia case, no one in the regulatory community has sat down with me and asked, ‘What happened?’ or ‘What can we do to avoid this happening to other banks?’ They are not interested. They are the same people who attack the whistleblowers and this is a position the [British] Financial Services Authority at least has adopted on legal advice: it has been advised that the confidentiality of banking and bankers takes primacy over the public information disclosure act. That is how the priorities work: secrecy first, public interest second.

And what happened to Wachovia whistleblower Martin Woods?  At the time after suffering the loss of his job and related health issues he was reported to be consulting. We forget there is often a very real personal cost for the people who blow the whistle on fraud.

In Feb, 2013 he made this submission to a UK parliamentary committee on banking standards.

Banking Standards – Written evidence from Martin Woods

I have included just a few of his (93) submissions (some redacted) below – but it seems that very little has changed (at least in the U.K) and I suspect elsewhere. I take his statements to mean that there are both systemic issues within the large investment banks as well as cultural issues within business in general.

“14. I will lose friends for stating this, but nonetheless, it needs to be stated, I do not believe the compliance function, the risk function and perhaps other support functions should be within the bonus regimes of the investment banks. I believe it creates the wrong focus and generates a poor outcome. I would pay these employees more money within their salary, but would not pay a bonus that was subject to their performance as in my experience the bonus may be used to compromise their performance.

15. I also believe the industry needs to be better trained about what whistleblowing is all about. It has a very negative image. In July of last year I presented at a financial crime conference ***. A fellow presenter was a solicitor from a major London law firm. ***. Two things she said struck me as negative and damaging, firstly she said “Don’t let lunatic whistleblowers run around your firm.” Secondly she said, “Don’t let people write arse covering emails.”

16. Following the solicitor’s presentation and prior to a panel discussion I told the conference organiser I needed to return to the asylum and I left the conference. This little episode is very enlightening, I later learnt none of the 100+ delegates challenged the solicitor about her comments, which actually demonstrates that whistleblowers are viewed very negatively, they are often seen as the enemy.”


“30. The question needs to be considered in the context of culture, BHP Billiton have a very straight forward process which constantly encourages the whistleblower. This makes the whistleblower’s assessment and analysis quicker and the actual whistleblowing easier. Put quite simply, that is because the firm wants to hear from the whistleblower. This refreshing approach is not one I have identified within banking.”

“39. I believe it is appropriate to examine this proposal in the context of the LIBOR fixing scandal, after all, this was the straw that broke the camel’s back and the reason the Commission is undertaking this exercise. Recent evidence revealed within the FSA enforcement notices against UBS and RBS reveals a gang mentality amongst traders. By which I mean a group of people predominantly, perhaps exclusively, men with considerable power and influence, deriving strength from each other, from the size of their gang, the impact of and the power of their actions.

40. This gang mentality was substantially influenced by a notion of “we fix LIBOR [and other rates] because we can.” It was a belief based upon an ability to influence, perhaps even intimidate others and. Significantly the power and strength was fuelled by a perception that they could do what they wanted, because they would not be caught. This is evidenced within the email and chat room dialogue which has since been reviewed by the Commission and published by the FSA. There was no fear that anyone amongst them would break ranks and report the criminal conduct to the authorities. There was no fear of the authorities, in particular the FSA as there was no credible deterrent for their actions.”


“58. The man who blew the whistle against the convicted fraudster Bernie Madoff is a good friend of mine called Harry Markopolos. He submitted a number of reports and made personal presentations to the SEC in which he stated Bernie Madoff and his companies (which included a UK FSA regulated company, Madoff Securities Ltd.) were running the world’s biggest fraud. The SEC took no action and the fraud continued, causing even greater losses to victims. Harry later wrote a book called “No One Would Listen.” The point being, Harry was talking, he was talking loud and clear, he presented scientific, mathematical evidence that Madoff was a fraudster, but he was ignored by the regulators.”

“60. Ultimately, the regulators did not discover Madoff’s fraud, rather he gave himself up, because his Ponzi scheme had run out of money”….

“93. Ultimately it is all about culture, a culture which promotes the rights morals and values, a culture which encourage people to speak out and rewards them for doing so. The traders criminally fixed LIBOR, because they could, because there was no fear of being caught, there was no credible deterrent, there was there remains a defective whistleblowing system.”

Based on these submissions it sounds like very little has changed in banking culture so far. I hope I’m wrong and that the UK financial authorities have made some positive changes.

FCA fines five banks £1.1 billion for FX failings and announces industry-wide remediation programme

It turns out that this was the first time the FSA had pursued a group of banks for a large fine in this way. On 12th of November 2014 they announced

The Financial Conduct Authority (FCA) has imposed fines totalling £1,114,918,000 ($1.7 billion) on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million) (‘the Banks’).

Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way.”

I don’t know Woods at all but I’m relieved to see he has a job and is still able to speak about the finance sector. Prior to working at the banks from 2001 he was a police officer for 18 years. I suspect he was uniquely qualified and prepared to become a whistleblower.

I suspect that very few of you made it to this part of the blog post. It is long and the numbers are too large to comprehend for most of us. It seems like an intractable problem despite the larger fines that have been awarded this week and last year in the UK and US.

I’ve had some of this post in my draft folder for four years – especially the Mexican story. Hopefully the $5.6b of fines announced this week will help clean up the banking system.

The last word goes to Senator Elizabeth Warren.She doesn’t seem that optimistic to me.