What Will Waivers for Convicted Banks Mean for the Financial System?

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Wharton's Peter Conti-Brown, David Enrich of The New York Times and William K. Black of the University of Missouri-Kansas City discuss waivers given to banks accused of errant trading practices.

In late December, when the Trump administration permitted five global banks to continue managing corporate retirement plans even after they had pleaded guilty to criminal charges relating to errant currency trading practices, it went almost unnoticed amid the holiday season’s distractions. The administration was also not seen as going out of the way to favor the banks; it merely gave formal effect to the Obama administration’s proposals to grant the banks long-term waivers, as the Wall Street Journal reported.

But experts at Wharton and elsewhere pointed out at least two disconcerting aspects about the waivers granted by the Department of Labor. One was the timing of the move, raising suspicions that the government may have sought to sneak it through during the holiday rush. The second was the waiver granted to Deutsche Bank, which happens to have close banking relationships with President Trump. Trump owed Deutsche Bank about $130 million, according to a report last June from the U.S. Office of Government Ethics.

In a separate case, Deutsche Bank is also being questioned as part of the federal investigation into the suspected Russian meddling in the 2016 U.S. presidential election. The other banks that received waivers of restrictions on managing pension funds and individual retirement accounts are JP Morgan Chase, Citigroup, UBS and Barclays, but no red flags rose in those cases.

Too Close for Comfort?

The Deutsche Bank waiver “is drawing attention because of the opacity of the President’s financial holdings and financial dealings, generally,” said Peter Conti-Brown, Wharton professor of legal studies and business ethics. However, there is no evidence of a quid pro quo between Trump’s finances and Deutsche Bank, he added.

In fact, waivers such as those granted to the five banks were “pretty standard” until a few years ago, Conti-Brown noted. Large, global financial conglomerates do business with “tens of thousands of entities,” and criminal activity in one of those may have nothing to do with their dealings elsewhere, he explained. He pointed out that the Department of Labor in the Obama administration had begun to “exact more scrutiny and issued more conditions on the waivers, and made them shorter.”

“The biggest takeaway from all of this is that the yawning gap between the way big powerful corporations and banks are treated by the criminal justice system and the way individuals have been.” –David Enrich

Even so, the waivers are “newsworthy” for two reasons, said David Enrich, finance editor at The New York Times and author of The Spider Network, a book on the LIBOR (London Interbank Offered Rate) currency trading scandal that involved the five banks that received the waivers, among several others.

“One is that it was done essentially in the dead of night,” Enrich said of the Labor Department’s action. “I believe December 29 is a time when absolutely nobody is paying attention, and that does not seem likely to be a coincidence. It seems like they’re trying to do something that no one would notice.”

The second reason is that while Trump is a big creditor of Deutsche Bank, he and the bank have not been fully transparent about their financial dealings, said Enrich. “It invites conspiracy theories.”

However, in reality there’s probably no connection between Trump being a creditor of Deutsche Bank and the waivers, Enrich clarified. “If Trump wants to help Deutsche Bank, there are many other, more direct things he can do that would be much more helpful to them.”

William K. Black, professor of economics and law at the University of Missouri-Kansas City, suggested that Trump’s relationship with Deutsche Bank should be examined by Robert Mueller, the special counsel investigating Russian meddling in the 2016 presidential election. Black is also a white-collar criminologist and former regulator in his capacity as executive director of the Institute for Fraud Prevention (2005-2007), and author of The Best Way to Rob a Bank Is to Own One.

Black estimated Deutsche Bank’s loans to Trump at $300 million. “It’s his absolute vital financial lifeline,” he said. Moreover, “if normal criminal provisions were in place, entities like Deutsche Bank would not be allowed to do business in the United States, given their criminal records and in particular their criminal records with regard to Russia as well,” he added.

“We have to remember that these are very unusual, super favorable provisions for corporations,” Black said about the waivers. “They became scandalous under the Obama administration when they were routinely given to banks that were engaging in felony after felony in area after area and in which LIBOR was the largest price fixing-scheme by three orders of magnitude in world history.”

Conti-Brown, Enrich and Black discussed the controversy surrounding the waivers on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

“Don’t give us the worst of both worlds, which is to criminalize this activity but then not enforce this in the way that we would expect for criminal activity.” –Peter Conti-Brown

Disproportionate Penalties

According to Enrich, “the biggest takeaway from all of this is that the yawning gap between the way big powerful corporations and banks are treated by the criminal justice system and the way individuals have been.” He noted that while the LIBOR scandal saw a few mid-level traders convicted of crimes and sentenced to prison, the top executives of the institutions involved got off with monetary penalties and restrictions on doing business in the U.S.

While those restrictions have been waived now for five of the banks, “[the same] leniency has not existed for the lower level individuals who have to bear the brunt of the law enforcement scrutiny on this,” said Enrich. Deutsche Bank did not get the best treatment, though: It, along with UBS, received three-year waivers on grounds that the two banks had more than one criminal conviction, while the others got five-year waivers.

If the objective of the penalties is to prevent future financial crises and hold institutions and individuals accountable for their misconduct, “this is a crazy way to do it,” said Enrich. “You should be going after people who are much higher up in the pecking order and making it that much more painful for institutions in a way that their shareholders will prioritize these cultural and conduct issues with a much greater weight, rather than just letting them off the hook.”

Conti-Brown agreed with Enrich and said the effort must be to “tie personal incentives to personal behavior with personal consequences.” He noted that while the financial institutions “will fight that tooth and nail” and argue in favor of fines over personal penalties, “the question that [arises is]: Is that the best way to run a global financial system?”

Conti-Brown felt fee-based penalties may not be the correct approach to deal with criminality of the kind the five banks indulged in. “Change the criminal code,” he said. “Don’t give us the worst of both worlds, which is to criminalize this activity but then not enforce this in the way that we would expect for criminal activity.”

“If you’re saying that Deutsche Bank just looks like all these other sleazy massive banks then we have a massive failure of deterrence.” –William K. Black

A Fine Mess

Over the years, Frankfurt, Germany-based Deutsche Bank has had to repeatedly cough up large sums of money for transgressions. In January 2017, it was fined a total of $630 million by New York State and the U.K. Financial Conduct Authority for its role in a $10 billion Russian money laundering scheme. That followed a $7.2 billion settlement with the U.S. Justice Department over allegations that it packaged and sold toxic mortgage assets between 2005 and 2007.

Enrich attempted to put Deutsche Bank’s woes in some perspective. While it has had many problems, many other banks — including several U.S. banks – have received “enormous bailouts and tens of billions of dollars in penalties for ripping off their mortgage customers, and in some cases making up accounts. It’s convenient to point the finger at Deutsche Bank as kind of the evil empire, but that ignores some very significant problems that exist in the U.S. banking system as well.”

Black pointed to a larger casualty of such widespread errant behavior within the financial system: “If you’re saying that Deutsche Bank just looks like all these other sleazy massive banks then we have a massive failure of deterrence,” he said. “[It] results in widespread massive fraud, corruption and predation. We should fix that. We shouldn’t just say, ‘Well, they’re not really much worse than the others.’”

Enrich said that while some of the new regulations put in place after the financial crisis “were not that well-conceived and had some unintended consequences … instead of tinkering and fixing things, there [is now] a wholesale rollback of supervision.”

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