Last July, CFR reviewed how governments were responding to bankers who profit through criminal fraud, and ruin others’ economic lives. We led with Iran and four death sentences for billion-dollar bank fraud. In all, 39 persons in Iran were tried for fraud, with four sentenced to hang, two to life in prison, and others with jail sentences ranging to 25 years.
Which brings us to last week, and the Financial Times‘ report that Britain’s banking commission is considering a new law to jail bankers “who behave recklessly.” (Leave it to the Brits to be polite even when describing cannibals of capital.)
The proposed law would call for both imprisonment and also holding bankers personally liable for catastrophic financial losses. Notes FT:
One member told the Financial Times: “Banks benefit from a public subsidy, in that they know they will be bailed out if they fail. I think we want to see a sense of personal responsibility to match that.”
The commission is also considering recommendations to “remodel” the banking sector, including splitting commercial banking from investment activities. Says FT of the proposals:
One [proposal] is to enforce what one member called an “internal Glass-Steagall split”, which would require banks to separate their trading functions from the rest of their operations.
Under this system, riskier trading activities would be overseen by a separate chief executive, with the bank’s overall CEO in charge of making sure that governance is upheld across the group.
The US Congress approved the Glass-Steagall Act in 1933 as a shield to protect the nation against another Great Depression by limiting affiliations of commercial banks and securities firms. Congress and President Clinton scrapped Glass-Steagall through 1999’s Gramm-Leach-Bliley Act. Within nine years, a world economic meltdown had occurred. In 2008, Clinton argued that the financial crisis had occurred primarily because of banks merging with securities firms. Two years later, the American Bankers Association challenged that view.
The Financial Crisis Inquiry Commission, the 10-member government-appointed panel that investigated and reported on the economic collapse’s causes, listed 10 conclusions for the worldwide meltdown. They included widespread failures in financial regulation and supervision; dramatic failures of corporate governance and risk management at many systemically important financial institutions; a combination of excessive borrowing, risky investments, and lack of transparency; government being ill-prepared and inconsistent in its response; collapsing mortgage-lending standards, and massive marketing of over-the-counter derivatives.
Will the US follow the UK banking commission’s lead in jailing banksters? Don’t bet on it.
Congress approved a new law, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, aimed at regulating the financial sector. But little has occurred to truly implement penalizing lawbreaking bankers. And attempts have been made to reintroduce Glass-Steagall, but the Obama Administration has opposed those.
The White House has also been reluctant to pursue criminal actions against banks. The Justice Department has said publicly it feared prosecution of executives with major banks would disrupt the international economy. One of the most horrible examples of this occurred last December when Assistant Attorney General Lanny Breuer signed off on a settlement deal with HSBC. The British banking behemoth had admitted to laundering billions of dollars for Colombian and Mexican drug cartels. The bank had also broken important banking laws including the Bank Secrecy Act and the Trading With the Enemy Act.
Neil Barofsky, a former New York prosecutor and special inspector general for the federal TARP funds, said the Justice Department was ready to prosecute HSBC execs, but Treasury Secretary Timothy Geithner, a friend of Wall Street, blocked the effort.
Congress has also been reluctant to shackle Wall Street and the banking industry. And probably won’t until the public has had enough, then gets organized, gets educated, and gets active in initiating real change in bankers’ control over Washington.