Reading Taibbi as someone in finance is like watching Bravo's Silicon Valley for much of HN. It's hyperbolically relatable in a way that makes you laugh but simultaneously grimace-inducing as you realise how mis-informative it is to someone without prior knowledge.
Take HSBC. Yes, it is a cock up of grand proportions to allow Iranian money anywhere close to your American subsidiary. And yes, everyone involved in the Libor scandal should go to jail (as I expect many of them will).
Then one notices that this was largely trade financing for buyers in India, Greece, and South Korea. HSBC, like Standard Chartered, grew out of a tradition of giving a great deal of independence to country offices. Sort of like IBM. This increases flexibility but makes miscommunication more likely. Anti-money laundering is hard and margin compression at banks has thinned compliance teams. Financing terrorism suddenly becomes something more banal - a zealous banker shifting records around for a client he may have known from pre-revolutionary days (Iran was a U.S. ally until the 1979 revolution).
Does this excuse the behaviour? No. But it certainly dulls my pitchfork. Just as I avoid Fox News to stay abreast of American politics I would encourage you to seek out sources chasing understanding. Then again, a good outrage isn't a cheap good either :).
Being a trader yourself, your sentiment is well seen and understood. I see how Taibbi's style can be of annoyance to you, but I think you're largely nitpicking. The essence of it stays valid and I yet to see an important executive going to jail, either in relation to 2008 or Libor.
Thank God this is at the top of the page. I'm always shocked to see Taibbi get so much attention on HN. I would take his commentary about as seriously as I would any other polemicist of the Glenn Beck / Michael Moore variety.
Well, the point I take away from Taibbi is that a big bank like HSBC can do things that are (a) criminal and (b) bad for us (US, developed world economy) and they won't be forced to change their ways, even after they are caught, repeatedly. I don't see anything in what you say that disagrees with that. What you say just amounts to "it is their business model." So they have a business model that encourages, or possibly requires, criminal behavior, and this appears to be effectively OK with regulators...
Regarding your point about "giving a great deal of independence to country offices." Why do these country offices need to belong to HSBC? Why do people bank with offices of HSBC rather than local banks? I'm fairly sure that these local offices provide essential connections to the larger financial network -- for example to move funds from African countries to the Gulf countries. But regulators do not, for example, require HSBC to divest itself of any of these country offices which abuse their independence -- which seems like a rather mild sanction under the circumstances, and likely to greatly mitigate the issues.
It amazes and depresses me that it takes bad behavior on a level that is easily explainable (i.e. help terrorist launder money) for people to get upset at how untouchable large international financial institutions have become.
The LIBOR scandal is so much bigger and more important than this HSBC case but it seemingly gets a pass from public outrage since there's no easy TL;DR explanation of it.
You're paying an interest rate on your car, your mortgage and your bank loan right? OK, that interest rate is set by the bank. The way they do that is to use LIBOR, and add a bit on top which is their profit. So your loans follow LIBOR. The banks basically rigged the game, and changed LIBOR as they saw fit, meaning that you paid more in interest than you should. Your neighbour did too. And his neighbour. If you add it all up it's billions.
They fucked everyone to make a quick buck, and it's illegal as hell.
"At the onset of the financial crisis in September 2007 with the collapse of Northern Rock, liquidity concerns drew public scrutiny towards Libor. Barclays manipulated Libor submissions to give a healthier picture of the bank's credit quality and its ability to raise funds. A lower submission would deflect concerns it had problems borrowing cash from the markets."
"From as early as 28 August, the New York Fed said it had received mass-distribution emails that suggested that Libor submissions were being set unrealistically low by the banks."
Ie - you, the borrower - benefited from this manipulation.
You're right, and I know. I have an education in economics :-)
The reason I omitted it was the difficult problem of explaining a complex subject in very few words, and still pointing the finger at banks. If you tell joe six-pack that his mortgage sometimes got cheaper you'll either have to divulge a complex explanation of why this is bad for him (which he won't understand or care about) or have him think that the banks should do some more of that LIBOR rigging so his mortgage can be lower.
If you didn't know the facts it is excusable mistake, but if you knew the facts and still wrote something that is factually wrong - because "joe six-pack can't handle the truth" - then I can't see how you can consider you're doing anything but plain and simple deception. And when "joe six-pack" with discover it - and he will, eventually - you'd be surprised why he doesn't believe any word you say anymore. If you sacrifice the truth in order to further your goals, you're part of the problem.
Benefited, that's one way to look at it. Another way is to consider that between LIBOR rigging, bailouts, mortgage fraud, bond rigging, money laundering, money printing, securities fraud, and other misc fraud, every single US citizen has undoubtedly realized a net loss on the matters in one way or another. But hey, cheap mortgages!
The first few pages of the OP, which focus on HSBC, were actually nowhere near as important as the last page, on LIBOR. The LIBOR case is much, much more important than whether or not HSBC had dealings with Iran. When he's talking about this, Taibbi sounds weirdly parochial, like he's more upset about America's interests being ignored than he is about any fundamental wrongdoing (I know he's American and Rolling Stone has a predominantly US audience, but still...)
I think he is just depressed that if the self appointed most powerful government in the world can't do anything to curb the behavior of these banks, then we have no hope in stopping them.
In other words, Breuer is saying the banks have us by the balls, that the social cost of putting their executives in jail might end up being larger than the cost of letting them get away with, well, anything.
Libor TLDR: "Organizations set their interest rates to a random number that some banks came up with. The banks changed how they came up with the number without telling anyone, and the organizations got mad because it caused them to lose money while the banks made money."
Not "changed how they came up with the number". What you actually mean is "knowingly supplied false numbers" - note that the numbers were the offer rates, and instead, these banks would give numbers that were preferential to their positions, not an accurate reflection.
Fraud is a crime. When it involves enough money (amount depending on jurisdiction) people are supposed to go to jail. It is my understanding that the amounts involved here were significantly above those required for any jurisdiction.
That is a simplistic assumption. Here is another Rolling Stone article about how some banks were convicted of colluding to suppress interest rates in the US municipal bond market. The Libor scandal is the same thing essentially they were defrauding small towns out of millions of dollars of interest by their collusion.
There are two responses to something like LIBOR. One response is Taibbi's, which is to ask for the US government to crack down on bankers. This fails because of the tacit assumption that the US government is any less corrupt.
The second response is to embrace something like Bitcoin, which decentralizes everything. No central banking, no LIBOR scandal. But also no ability to stop "money laundering", defined as a transaction that a government doesn't want you to engage in. That's the tradeoff: the Bitcoin protocol is based on an adversarial environment and gives no special privileges to government or banking nodes.
LIBOR (banks), QE4 (govt), and the bailouts (both) are all enabled by the fact that some nodes in our system are granted special powers to set rates and print money.
Libor is not a central bank mechanism. It's a rate published by the British Bankers' Association, a private trade association. Similar to the S&P 500 for U.S. large caps, it is simply a metric that private parties have chosen to reference when setting. Libor is influenced by central banks' rates, but so would a Bitcoin economy's reference rate be a function of international money rates.
Right, I knew they were separate things. I meant only that widespread adoption of Bitcoin would obsolesce both; should have phrased that more clearly.
it is simply a metric that private parties have chosen to
reference when setting. Libor is influenced by central
banks' rates, but so would a Bitcoin economy's reference
rate be a function of international money rates.
Yes. My point was that not all private parties would "choose to reference" things like LIBOR, nor be forced to participate in the Fed's quantitative easing schemes by virtue of holding US dollars. That is, with a distributed currency like Bitcoin (or perhaps a descendant of Bitcoin with even greater anonymity), we pull back a lot of control from what is currently a hypercentralized, opaque system.
Bitcoin would not prevent (or disincline) private banks from setting loan interest rates based on LIBOR. You can lend out 100 BTC at LIBOR+5% just as easily as you can with USD, and for all the same reasons. All bitcoin does is remove all control over creation of hard currency (not money in general - just M0, hard currency) - for better or for worse.
Banks could still loan bitcoins. They'd go bust if they loaned too much, like they did in the Great Depression under the gold standard. And governments could still bail them out, with bitcoin-denominated treasury bonds. Quantitative easing wouldn't be possible though, because bitcoins don't work that way, so you might get deflation. I guess the added danger of this lack of flexibility might encourage banks (and governments) to be more cautious but it hasn't stopped them in the past.
What jacquesm said. You could certainly try to trade your Bitcoin-substitutes at par with real Bitcoin, but as long as a (small) number of people insist on real Bitcoins, you can't expect to them survive, or at least be nearly as valuable as the real thing.
> You could certainly try to trade your Bitcoin-substitutes at par with real Bitcoin
I wouldn't be able to pull it off, but banks do this all the time with cash-substitutes. A small number of people do insist on real cash, but there's a huge amount of credit and debt built on top of a small amount of actual currency.
The banks loan your money out, and charge interest to the borrowers. In return they keep your money safe, and pay you enough interest to encourage you to not switch banks, or demand "real" money.
And governments can go into debt on gold, or US dollars (even if they don't have them, and can't get them in the near future). You can get a complete collapse if the government finds itself bankrupt. In that case, you'll have a bank run, or the IMF will step in, or lenders will take a haircut. It's nothing revolutionary (well, it can start revolutions, but that's not really new).
The difference is that with USD and other currencies, there's a central bank to print more money to make up for redemptions (real or potential) when people come to convert their electronic dollars for paper ones. There is no such mechanism with Bitcoin.
What matters in giving the derivative currency units par value to "the real thing" is the lender's ability to maintain liquidity by having a (central) lender of last resort, not the (in)ability of secondary borrowers to print them.
There really is a difference between what would happen if people started demanding real paper USD as payment (i.e., just print more for the right banks) vs. what would happen if people started demanding real BTC as payment.
Money consists of central bank money, or currency and deposits at the central bank, and private money. Bitcoin would replace central bank money. It does not, however, replace private money.
If I paint your fence and you give me an IOU, we just created money - real services were rendered and a nominal claim was accepted in return. Similarly, Bitcoins are as (if not more) theoretically fungible as Treasuries. Banks finance themselves in the wholesale markets collateralised by Treasuries. A repurchase agreement using Bitcoins is not beyond practical contemplation.
Note that fractional reserve banking originated on the gold standard.
Let's say the government does the exact same thing to make money that they do now : legislate that more money is printed. Now bitcoiners have 2 choices : use the modified code that specifically allows this transfer/money creation, or go to jail.
What do you think big players will do ?
Bitcoin is actually extra bad for this since it publishes a full financial record. To anyone with a sufficiently large source of identified transactions your accounts are an open book, if they can find just one transaction they're sure was done by you (say, paying your taxes). They don't have to contact 20 banks to find out where your funds went and who was involved, that information is public record. There is no way to pass through a bank in Saudi Arabia or some other bastard country to obscure and/or delay investigations.
Besides, having undeclared money in bitcoin is money laundering. Just having it. Penalty : up to 10 years jail time (Western Europe, and 50 km from here it's up to life in jail, gotta love the dutch). For the moment nobody's been found guilty, but that's mostly because it's only just starting to surface.
And frankly, this is exactly what we want. We may not like governments printing money and abusing it, but anybody who studied the great financial crises of the end of the 19th beginning of the 20th century, it is plainly obvious that the current situation (regularly "big financial scandal, you're probably overpaying your insurance $10") is better than what happened with the gold standard (regularly "surprise ! All your savings are gone. Oh and the same happened to the government so we're raising taxes 50%. Happy starving").
Let's say the government does the exact same thing to make
money that they do now : legislate that more money is
Which government? The US government? Or the Russian and Chinese governments? The USG is in decline and everyone knows it. Its ability to enforce laws around the world is not absolute. And by coming out and showing that it really wants X (e.g. the death of Bitcoin), it becomes obvious to many other governments that an interesting way to stick a finger in the eye of USG is to allow not X (e.g. free use of Bitcoin).
Russia recently made it almost impossible to extradite Russian citizens to the US:
And I don't think the USG is going to be renditioning Chinese citizens from the mainland anytime soon, given how broke the Americans are and how much they owe to China (not to mention that they are a nuclear power).
A lot of people wanted a multipolar world. We're going to get it, and among other things it means the USG will not be able to print money (and thereby dilute your stake, and seize your work product) for much longer.
> Loaning out bitcoins you don't have is going to be pretty hard.
> Bitcoins are closer to cash than it may seem at first glance and just like cash you can't really fake having it.
Really? Banks do the same thing with cash. It's called "fractional reserve banking", and unless you want to outlaw it (and have more lobbying power than all of Wall Street) it's not going away just because you've substituted paper money for a digital equivalent.
If you want to keep cash under your mattress, you are free to do so. Bitcoins offer no massive advantage here. If you want to have the bitcoin equivalent (a digital wallet), go for your life. But normal people will want the 1% interest the banks pay, and the security of not having their life savings stolen if some bot cracks their computer.
There's only 3 differences between bitcoins, and paper money - they are easier to send, much easier to steal (since crackers can do it), and don't lose value to inflation (which isn't really a new thing - it's just a return to the "gold standard").
People aren't going to stop using banks any time soon. I don't even see which way bitcoins will shift the balance - a few cipherpunks will build their own vaults, and a few grannies will no longer bury their savings under their tulips.
now what we need is a bit-tally-stick to handle IOU's in bitcoin the way that split tally sticks were used to handle IOU's in medieval times. In this way I could loan out the same money I have several times, with the assumption that I get it back before I have to pay it out really.
This may sound a bit far-fetched but there were cases in the Middle Ages of artisans doing exactly that. In fact sometimes they'd even issue their own token-based currency and settle the accounts with other artisans after market day.....
Try borrowing me a bitcoin that you don't have so I can spend it as a bitcoin.
Then imagine doing that 'as a bank', either you have a bitcoin or you don't, you can't borrow one you don't have. Bitcoin is very subtle in this way and it seems as though lots of people underestimate the amount of thinking that went into it.
> "Had the U.S. authorities decided to press criminal charges," said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."
Corporations don't commit crimes, people do. Executives employed by this company were responsible for all of the illegal activities that this story describes. They get paid a shitload of money because they take risks on behalf of the company and are supposed to be responsible for the results of those actions. When they perform well, they get a huge bonus. When they don't, their punishment is that they get "only" their salary and no bonus. Fine, whatever. But when they authorize actions that are clearly illegal, they should go to jail.
The attorney general should be finding the responsible executives and prosecuting them. If the company doesn't cooperate, then throw the board in jail. The company can then hire/elect replacements who will be properly scared shitless of doing anything illegal. These guys are supposed to be compensated for the risks that they take. You can't have a multi-million dollar (personal) upside and no comparable downside. In a just society, the downside needs to be that if you're caught breaking the law, you go straight the fuck to jail like everybody else.
If you don't make people personally responsible for their actions, you're effectively giving them a blank check to do whatever the hell they want and then hide behind an operation that won't be touched because it's too big to fail. You also have employment contracts that require the corporation to pay legal fees and use their enormous resources to protect them from personal liability.
Obviously there are situations when a company needs to defend its executives in order to conduct normal operations, but the line in the sand needs to be drawn at accusations of criminal behavior.
There are some very obvious issues here, like the deliberately un-investigated SARs; but I'm inclined to side with HSBC in some places here. Where transactions with and accounts held by persons or countries against whom the US has sanctions in place are concerned, I think HSBC was entirely correct in saying "these accounts aren't in the US, so we're not going to report them to the US government". The US government has the power to regulate banking in the US... not throughout the entire world.
I never claimed that they were. If HSBC wants to transfer money between (e.g.) Turkey and Iran, then the US has no say, even if they don't like it.
| If the US wants to stop funds/goods from
| leaving/ending up in Iran they should stop those
| funds/goods from entering/leaving the US in the
| first place.
This is a straw-man. I'm not talking about attempting to prevent every possible thing that ever leaves the US from ever entering Iran under all possible circumstances. That's obviously impossible.
The article paints a picture that HSBC provided the service of routing money around so that people in Iran could transfer money to the US and vice versa. The entire purpose of this service would be to obfuscate the origin or destination of the transfer from the US government.
I wouldn't say that requiring HSBC to not do this would be requiring them to 'police the world,' but if they want to be chartered as a bank in the US, it certainly makes sense that they should 'play by the rules.' If they were specifically offering/advertising a service to clients where-by they would actively skirt those rules, it doesn't seem like there is an issue with (at the least) revoking their charter.
> if they want to be chartered as a bank in the US, it certainly makes sense that they should 'play by the rules.'
It appears they are not doing that and it appears their charter won't be revoked.
The point I tried to make was that no matter what you do to restrict such transactions from happening, they will happen. The only people that suffer from sanctions are the poor, the rest will continue underground.
If you want to play global policeman and if you want to limit access to goods/funds for some country you have but one option, to close your borders. Once stuff leaves your sphere of influence anything can happen, and making it illegal to do something typically has only one effect, it will drive up prices.
HSBC saw an opportunity to make money, and being a bank they acted on it and did not care about the consequences. If you want to make a principled stand then yes, by all means have their US banking charter revoked and jail their execs. But if you don't do that then this will simply repeat, different names, different labels same principle.
Having principles costs, sometimes it costs a lot.
She does get a straight answer. Regulators don't sue; they have a steady-state relationship with the banks where their concerns are addressed with consent decrees. Lawsuits are insanely expensive in the best of cases, but they're worse when you're suing a megabank, because the suit impacts the broader economy.
It is a little disingenuous for Warren to act surprised about this. She knows not only why regulators don't sue, but also how unlikely it is that we're going to start doing that (it'd be economically irrational for us to do so).
Her heart is in the right place. Too Big To Fail is a real problem. But if you've got a bunch of wasp nests in your back yard, you don't fix the problem by jamming sharp sticks into them.
> [...] but they're worse when you're suing a megabank, because the suit impacts the broader economy.
I don't disagree with the factual correctness of this statement, but the implication is unsettling. Any kind of legal action from the government - from throwing someone in jail for possession of marijuana to suing banks over financial crimes - has negative economic consequences. If we send someone to jail for drug possession, we spend a lot of money investigating and prosecuting them, we pay to keep them locked up, we happily give up their productivity and any taxes they would have paid, and we reduce their long-term value to society by hanging a public arrest record on them. So, where do we stop using economic consequences as a reason for not enforcing laws?
I'm somewhat highly-compensated and I contribute a lot back to the economy, though consumption and taxes. Should the government prosecute me and someone who only earns minimum wage differently, since prosecuting me and throwing me in jail will have a substantially higher negative impact on the economy? Maybe I get 2 or 3 free misdemeanors per year, your average millionaire gets a free felony, and if you are on Fortune's top 100 list you get 3 free felonies?
I'm seeing more and more justification of not going after big companies and powerful executives due to the economic impact, and I think that is getting awfully close to codifying different legal systems for rich people and poor people. Certainly it already exists to a degree, but at least we sort of pretend that it is distasteful now.
I don't mean to be uncharitable. I'm glad Elizabeth Warren is there. She's demagoguing, but so is everyone else, and her side of the argument is underrepresented.
But it's not at all clear --- in fact, it seems unlikely --- that the core problem we face is a refusal by regulators to sue.
It seems more likely that the core problem is that the economic incentives in the finance industry, or at least in commercial banking, favor rapid and aggressive consolidation. Not enough disincentive exists to offset the externalities this creates. Maybe we should tax banks based on their sizes; maybe we should do that in the form of some kind of insurance premium.
But since anything we'd do to address any of the real problems is going to require bipartisan cooperation, first we need to be candid about what the problems are.
Completely different meaning. If ate a bar of chocolate in the library despite posted signs against eating and drinking. I broke a rule. If I threw my chocolate bar at the librarian's face with an intent to injure him, I broke a law (assault and injury etc.)
Oh there's no doubt that laws were and are being broken by top banks every single day. The problem is that they have enough concentration of power on their side (in most western countries) that it's almost impossible for the feeble democratic institutions to effectively punish them.
Lawsuits (or filing charges) may be insanely expensive, yes. But I really doubt they are as expensive as never bringing charges against anyone or suing anyone, and the damage that eventually causes due to pervasive, unchecked corruption of the entire system.
Can anyone here answer Warren's question, even if the regulators couldn't? I'd be interested to learn about any court trials prosecuting larger banks (that is, if any exist), but it's proving difficult to Google.
The fact that the people in that room couldn't (who certainly know of any single time a wall street bank has gone to trial in the past years) and that Warren is so sure of her position is enough evidence for me personally
And that's the reason term limits are needed for each and every political office. Of course nothing on the order of a constitutional amendment is even remotely possible in the current US political system (that's likely to persist for a long long time to come).
Term limits are not the solution! In fact it will just exacerbate the problem. If Congress ends up as perpetual freshmen, who do you think will end up with an even higher proportion of power in Washington? The lobbyists and the staffers. These people have the insider knowledge, the connections, and the influence and they will be able to steamroll over an endless parade of newbie lawmakers.
As someone said higher up, the reason nothing is ever done is because the congressmen's incentives align with the banks and the power brokers. The only solution is to ensure that those with voting power in Washington have incentives that are the opposite of the banks. Term limits do not do this.
Possible solutions: Pay Congress and important oversight positions a salary proportional to their importance--somewhere in the multiple millions per year. Make lobbying any government official illegal (anything beyond writing a letter to your Congressmen). A lifetime ban from working for any company that is affected by decisions made while in office. 100% publicly financed campaigns.
Bought off, some maybe, for those that won't be bought, they'll either play along, or face fierce opposition within their own party, lose financial support and hence, have a slim chance to be reelected. Consider some of the things Ted Kaufman said in the recent PBS special about this exact issue.
People on HN have a warped view of how leverage works in American politics. The prevailing meme of congresspeople who are bought off has a lot of appeal, but its far from the facts. My wife was a lobbyist so I have a bit of insight into the situation. Fact is, the usual suspects don't need to bribe congressmen. Who needs bribes when you have beliefs? You just need something like the heritage foundation or AEI to say that suing banks or regulating them will cost jobs and boom: you can count on tons of votes from people whose ideological interests are aligned with those of the banks.
Corruption in the US looks different than in say China. Its puritan corruption. Convincing true believers that what's good for big corporations is good for everyone and for the all important jobs. Everything starts from there.
About 8 years ago an investor in my first company was defrauded by a con artist. This led me on a crazy 4 year chase which resulted in the discovery of a series of pump and dump stock frauds worth over $1 billion (think Enron, divided into smaller pieces) and possible ties to terrorism. This was a result of class action lawsuits, SEC investigations etc. None of which resulted in any type of jail time, and one of the individuals lives nicely in a 20 bedroom mansion in Barbados.
The sad part about all of this, was that I notified the SEC on multiple occasions with physical proof that people were defrauding the government and individuals. The SEC's responsibility wasn't "to handle foreign citizens." Homeland Security "didn't handle securities cases." The IRS needed the person's Social Security Number, name and address. When someone moves from one state to another, the states stop communicating on any type of prosecution.
The whole process was a fascinating/scary insight into how easy it is to commit fraud in the United States.
So as a word to the wise for first time entrepreneurs, don't be afraid to ask investors, VCs or others where their money comes from.
I think it is easy to commit fraud because USA, even with myriads of regulations, is a relatively free state. If USA moved to be more of a police state, where you'd have to report every transaction to the authorities, and every "suspicious" action would have you explain yourself to men with guns, fraud would probably much harder. So would be the life of millions of people who are honest and lawful. It is very hard to be strict on fraud without causing trouble to regular activity, ask anyone who designed a security system.
Yes, I've only learned about this after experiencing such fraud firsthand. The worst part is that many of the parties that operate the financial markets also have incentives to remain willfully ignorant. They can profit indirectly from the scam, too, and they have ample deniability.