
Big Banks Face Another Round of U.S. Charges - orin_hanner
http://dealbook.nytimes.com/2014/10/06/big-banks-face-another-round-of-u-s-charges/?_php=true&_type=blogs&_r=0
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Hario
I'm with Richard Stallman on this. [http://blogs.reuters.com/great-
debate/2013/02/04/fixing-too-...](http://blogs.reuters.com/great-
debate/2013/02/04/fixing-too-big-to-fail/)

Banks have way too much power in both our politics and economy. We have to
change that.

~~~
jxm262
Thanks for the interesting read. I'm not 100% certain splitting the companies
up would be the best alternative, but this definitely makes me ponder a bit.
It makes sense to split up, but who would make the actual call? The
shareholders? I'm assuming any CEO figure of the company would prefer to keep
it growing so they can maximize their collective resources rather than
splitting among smaller ones. Or maybe I'm missing some other incentives?

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hackuser
It's interesting, and troubling, that so many still trust these institutions:

* Banks that have been caught repeatedly both intentionally defrauding people and acting with extreme incompetence (and who knows who often they haven't been caught). Yet most customers, from individuals and to large corporations continue to trust the banks with their money and to take the banks' advice.

* They trust LIBOR and similar services as accurate and fair, when they've been tampered with repeatedly.

* They trust the financial markets as safe, fair places to invest, despite the problems above and others that pervert markets directly, such as high-frequency trading.

* They trust the 'Free Market', a good idea in concept but in execution appears to be a rigged marketplace, where the powerful win and if they don't, they get bailed out.

Do you still invest your savings in the financial markets? Do you have debts
whose rates are tied to LIBOR? If Goldman Sachs offered to advise your
company, would you trust them? Most people, knowing all of the above, still
say yes. I think in part that's because there aren't many alternatives and in
part it's due to lifetimes of of habit. These problems must be hurting trust
and I imagine many people eventually will realize the disconnect at some point
-- maybe in reaction to some big event -- and pull out.

The point of regulation is to make markets safe, which prevents fraud and
attracts more investment. It's good for everyone. It seems like many in the
financial industry, and the knee-jerk anti-regulation crowd, have lost sight
of that.

~~~
rqebmm
How does High Frequency Trading pervert the market? They are acting as middle-
men.

~~~
geekpondering
...middle-men that aren't providing any service or benefit to anyone except
those that profit from those trades.

These "middle-men" are injecting themselves between buyer and seller to take
their cut simply because they have the money, resources, and -- increasingly
these days -- the geographic location to beat someone else to the punch.

~~~
rqebmm
isn't the typical benefit of a middle-man that they have the money, resources,
and geographic location to help facilitate transactions?

~~~
geekpondering
HFT doesn't "facilitate transactions".

What is often happening is Seller A wants to sell something for $10. Buyers B,
C and D submit an order to buy it for $10. The computer sees this, knows that
it might be worth more than $10, and while Buyers B and C get their orders
through, the computer buys it out from under Buyer D because their computers
are faster. Buyer D now gets a notice that "oh, sorry, that thing you wanted
is now $11."

It's the same thing as you overhearing your neighbor saying the Apple Store
only has one iPhone left for sale at the Apple Store and, because you have a
faster car than your neighbor, you get to the store and buy it and then offer
it for resale at a higher price. That's not facilitating a transaction, and it
certainly is perverting the market. When the people with the fastest computers
and best geographical location get items cheapest, that's not a 'free market'.

Middle-men have classically existed to provide a _service_, adding value to a
previously less valuable or more difficult transaction -- wholesalers or
retailers. Wholesalers existed to pare down which goods are offered, and
existed primarily because smaller retailers couldn't afford to purchase in
bulk. Most 'middle men' of these classes have gone away due to the digital age
and/or conglomeration. Grocery stores or websites that provide value by having
multiple items in the same place that you can pay for all in one financial
transaction.

~~~
rqebmm
If Buyer D is still willing to spend $11, how is that perverting the market?
All HFT does arbitrage, which has been around forever and only serves to make
a market more efficient.

~~~
geekpondering
"If Buyer D is still willing to spend $11, how is that perverting the market?"

What if Buyer D isn't willing to spend $11?

"only serves to make a market more efficient"

I would say it's exploiting inefficiencies. That doesn't make the market any
more efficient. In fact, given the sizable number of 'computer errors' leading
to significant volatility when they occur, HFT is in fact a destabilizing
force in the market at times.

~~~
rqebmm
>What if Buyer D isn't willing to spend $11?

If Buyer D isn't willing to spend $11, then he simply doesn't buy the item.
The HFT took on risk by buying the item and needs to either find someone else
willing to buy it for >$10 or lose money.

>I would say it's exploiting inefficiencies.

Exploiting Market Inefficiencies == A More Efficient Market. The whole idea of
"buy low, sell high" is exploiting inefficiencies in pricing, which is all
HFT's are doing. As a result, they bring the buy/sell prices closer together,
making it easier to trade. In return for making the market more efficient,
they get a profit, and everyone wins except those who are acting in an
inefficient manner. (Remember, buying something for less than it's worth is
ALSO an inefficiency!)

The point about volatility is fair, but that has to do with market stability,
not market efficiency. The HFTs are HIGHLY incentivized to not destabilize the
market because they stand to lose a LOT of money if they make a mistake. Now,
it _is_ possible someone could concoct a scheme where they profit from a
destabilization caused by faulty HFT, but HFT is the means by which that actor
perverted the market, not the reason the market is perverted.

~~~
geekpondering
> Exploiting Market Inefficiencies == A More Efficient Market. The whole idea
> of "buy low, sell high" is exploiting inefficiencies in pricing, which is
> all HFT's are doing.

There's a difference between pricing inefficiencies and technology
inefficiencies. In theory there should be equal access to markets. This is why
SEC laws on disclosure exist. When people with greater technological ability
can, in effect, toll everyone else, you are eliminating this idea of equal
access.

> The HFTs are HIGHLY incentivized to not destabilize the market because they
> stand to lose a LOT of money if they make a mistake.

So are all traders, but that doesn't stop things like Enron and Lehman
Brothers from creating smoking holes in our economy. When you start creating
legal fictions and technologies that are barely understood by those that
create them, much less those that provide executive oversight, government
oversight, or the general public, you are getting into very dangerous waters.

Software only works as long as the assumptions of the programmer stay valid.
HFT quants are incentivized to make their companies money, not to protect the
market at large. An application on a desktop computer crashing and exhibiting
weird behavior isn't a big deal. A HFT process going rogue is going to cost a
company millions or billions of dollars at best.

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tibbon
These companies (bank in specific) often repeatedly do these type of things
trying to get away with m/billions in profit. When caught, the penalties just
aren't enough to dissuade them from it. They probably get away with it most of
the time, so there is no incentive to do otherwise. I really wish we would
push for real penalties (jailtime, as we have done in the past during bank
scandals) or even entire shutdown of the companies when they act unethically.

~~~
rqebmm
This was only true up until recently. In the last year B of A and JP Morgan
settled for $17b[1] and $13b[2] respectively. Each settlement was more than
their net income for the preceding year. That hurts. A lot.

Furthermore, the settlements since 2008 have largely not precluded the banks
from facing criminal charges[2]. The Justice department needs to get these
initial settlements out of the way before they can pierce the corporate veil
and pursue criminal action against individuals and these giant banks
unsurprisingly have spent lots of money and lawyers dragging these
investigations out for the last 6 years. I'm ever an optimist, but I think
it's inevitable that some criminal charges are still coming. Those charges
will likely fall on scapegoats, but still.

[1][http://www.masslive.com/business-
news/index.ssf/2014/08/bank...](http://www.masslive.com/business-
news/index.ssf/2014/08/bank_of_america_weighs_17_billion_settle.html)
[2][http://money.cnn.com/2013/11/19/investing/jpmorgan-
mortgage-...](http://money.cnn.com/2013/11/19/investing/jpmorgan-mortgage-
settlement/index.html)

~~~
malandrew
Part of the problem in the past is that we've expected the justice department
to go after the heads of the bank. This has been wholly ineffective when we do
try because the people at the top do a great job as shielding themselves from
hard evidence that implicates them. What I like about this new approach is
that the focus is on the rank and file traders and other employees. The great
thing about this new strategy is that it gives all these lower level employees
caught in a criminal investigation net and incentive to produce the hard
evidence necessary against their bosses as part of a plea bargain.

Once we go through at least one round of these types of criminal
investigations, any future lower level employees would be stupid if they
didn't intentionally keep hard evidence against their bosses in their
possession as a get out of jail free card next time the shit hits the fan.

All in all, splendid news.

------
Someone1234
Another round? When was the first round. The banks have been caught with they
hands in the cookie jar at least half a dozen times in the last ten years and
nothing at all has been done about it (either from the US or UK side).

~~~
spinchange
Came here to mention what's linked to in @comatose_kid's response. There have
been some really _huge_ settlements with many/most of the banks, but it's
happened so long after the fact, it's kind of out of the limelight. Obama's
DOJ really hasn't gotten a lot of political mileage out any of it at all.

~~~
toomuchtodo
If they want political mileage, settlements are useless. You'll need to
dismantle organizations, similar to what happened to Arthur Anderson after
Enron.

~~~
anigbrowl
That would generate political mileage with the left, but probably generate
howls of 'socialism!' from the right, since the systemic nature of the
financial crisis and the widespread abuses would mean multiple institutions
being dismantled or split up.

Financial crimes are generally slow and difficult to prosecute because of the
vast quantity of documentation that has to be sifted through for evidence, so
when you look at the DoJ's financial fraud page you see a bias towards smaller
firms - not necessarily because they're weaker legally, but simply because
it's easier to pinpoint individuals (eg some of the insider trading
prosecutions). Another issue specific to the financial crisis is that in some
cases large firms erred by being negligent and/or overconfident in their
market strategies, resulting in huge losses and/or bailouts, but they
imprudent rather than mendacious and their conduct did not cross the line into
criminality. In a normal market those firms would have gone out of business
and things would have been resolved through civil lawsuits, which was what
happened with Lehman bros. and Bear Stearns. But in the financial crisis so
many institutions were over-leveraged, and so many markets were moving in sync
with each other (eg Europe and US both having huge housing bubbles) that the
options were government stepping in to backstop the financial industry as a
whole or the collapse of the payment system, which would have been a disaster.

Getting back to politics, my read of the US landscape is that about 20% of the
US electorate leans to the left and wouldn't object to hanging all the
bankers. About 30% leans to the right, and they've convinced themselves that
the whole financial crisis was caused by Those Bums on Welfare and the
Democratic party who forced the banks to give money to TBoW. The other 50% of
the electorate is more fact- than narrative-driven and while they have
misgivings about who should bear responsibility for the crisis they're also
more pragmatic and primarily concerned about economic stability. There's a
danger in this, insofar as many of the socioeconomic conditions that led up to
the crisis remain unresolved or have even worsened in some respects, which
means greater political tension and potential for crises; on the other hand
revolutionary change is notoriously difficult to manage which is why no
developed country has so far attempted to grasp that particular nettle.

------
parennoob
These bankers have indirectly stolen millions of dollars from people. Why are
they not going to jail for hundreds of years? Why is there even talk of a
settlement? That is only going to incentivize similar behavior.

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wahsd
So they'll be barred from doing business as a corporate form of prison, and
barred for live, i.e., all eternity, from doing business related to currency
or finances, right?

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whyenot
How about going after some of the _human beings_ who directed and profited
from all this illegal activity instead of just milking banks for more money.

This country is so screwed up. We send in a SWAT team when someone is growing
okra in their backyard (apparently it looks like marijuana from a helicopter)
yet let the rich and connected get off scot free after stealing billions of
dollars.

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jobu
_" Prosecutors have explained publicly that banks would earn credit for
exposing their misbehaving employees or face charges for protecting them."_

Hopefully they offer extra credit for exposing C-Suite level involvement.

Also, where was this deal when the Fed was investigating toxic asset fraud?

~~~
thefreeman
Doubtful. Also ftfa: _The charges will most likely focus on traders and their
bosses rather than chief executives._

This seems akin to the drug enforcement policy of targeting the users. Which
has been shown to be completely useless.

------
jafaku
Better call Bitcoin.

