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5 Outright Illegal Scams That Should Put
Wall St. Bankers Behind Bars
By Zach Carter, AlterNet
Posted on
September 21, 2010, Printed on September 24,
2010
http://www.alternet.org/story/148181/
Unchecked greed and financial insanity on Wall Street
crashed our economy. Much of that insanity was legal -- bankers lobbied
hard for weak regulations, and got what they paid for. But much of that
craziness was outright illegal, and in recent months, a number of shocking
scams have come to light that could result in huge fines for banks or even
put bankers behind bars. Though Wall Street has yet to see serious
prosecutions for the current calamity, prosecutions are not at all
uncommon after financial crises -- more than 1,000 bankers went to prison
after the savings and loan debacle alone.
From laundering drug money to scamming you on
overdrafts, here are five recent Wall Street scandals that have "illegal"
written all over them. The SEC is attempting to settle civil fraud charges
it has filed in many of these cases, but in finance, the only difference
between civil fraud and criminal fraud is the burden of proof. If the
Justice Department wanted to go after many of these crooked dealers, it
could.
1) Wachovia Launders $380 Billion in Drug
Money
The financial crisis is full of complex schemes and
indecipherable acronyms, but the most astonishing alleged fraud of the
entire mess is pretty straightforward: Wachovia allowed Mexican drug cartels to launder $380
billion of drug money through its bank, repeatedly looking the other
way and ignoring internal whistleblowers who alerted them to the
problem.
This was a clear violation of federal law, but Wachovia
appears to be getting away with it. The Justice Department is not seeking
an indictment against the company, out of fears that it could destabilize
financial markets. Instead, it's reached a "deferred prosecution
agreement" -- effectively a settlement -- in which the bank agrees to pay
$160 million and promise to never, ever launder drug money again.
Pretty light penalty for, you know, laundering drug
money. The fine amounts to about one-half of one-hundredth of a
percent of the drug money that DOJ says passed through the bank. Outside
the too-big-to-fail world, getting caught laundering billions of dollars
in drug money doesn't just earn you hefty fines, it plants you in
jail.
And Wachovia wasn't alone. According to the U.N., laundering drug money was common
during the darkest days of the financial crisis, as faltering banks sought
to get their hands on any money they could find -- regardless of where it
came from.
2) Chamber of Commerce Launders AIG's Lobbying
Cash
Money laundering has been very profitable for Wall
Street, and not just drug money. The U.S. Chamber of Commerce is a
lobbying front-group for a lot of powerful corporations, and some of its
most aggressive members are Wall Street titans. A watchdog group has filed a complaint with the Internal
Revenue Service accusing the Chamber and notorious AIG kingpin Maurice
"Hank" Greenberg of tax fraud. Greenberg was ousted from AIG in 2005
amid a massive accounting scandal, but not before helping to establish the
insurance giant's ridiculous credit default swap wing, which would destroy
the company only a few years later.
Greenberg and the Chamber are accused of abusing a charity in order to hide millions of dollars in
lobbying expenditures by AIG. In 2003, a foundation handled by
Greenberg gave $5 million to the charitable wing of the Chamber of
Commerce. The Chamber operates a charity called the National Chamber
Foundation. The next year, Greenberg's foundation gave another $10 million
to the Chamber's charity. In 2003 and 2004, 80 percent of the National
Chamber Foundation's budget was coming from Greenberg and AIG. The
charity's main function was to serve as a front for AIG lobbying.
Guess what? According to U.S. Chamber Watch, that money
was turned over to the Chamber's lobbying arm. At the time, the Chamber
was raising tons of money to help reelect President George W. Bush, and
AIG was trying to weaken accounting fraud laws. It's illegal for a
tax-exempt charity to funnel money to political operations. If the
allegations are true, the Chamber's charity would be shut down.
3) The $40 Billion Subprime Lie From Citibank and
Robert Rubin
As the subprime mortgage market was falling apart in
2007, Citibank was trying to calm investor fears about a total meltdown --
just like every other big Wall Street bank. Its chief tactic was to
highlight that it had "only" $13 billion in subprime mortgage holdings,
repeatedly touting the figure publicly.
The statement was true, if you ignored another $40 billion in subprime exposure that
the firm held. Lying to shareholders is a major no-no in Corporate
America -- it's considered securities fraud, and people can go to jail for
it. The SEC is attempting to settle with Citi, but isn't recommending
criminal prosecutions or even charging individuals with formal wrongdoing.
Instead, the SEC wants to fine Citi shareholders $75 million -- a total
slap in the face to basic conceptions of fairness, not to mention American
taxpayers. See, if Citi execs did what the SEC says they did, then they
were hurting their own shareholders. As punishment, the SEC wants to impose a fine on those same
shareholders, the very parties who were wronged.
What's more, the U.S. government took a stake in Citi
as part of its epic bailout of the poorly managed financial behemoth.
Taxpayers are being asked to help foot the bill for wrongs committed by
the executives we bailed out. Thanks a lot, SEC.
The SEC has filed documents indicating that both Citi CEO Chuck Prince and board member Robert Rubin knew
about the inaccurate statements, but isn't filing charges against them.
The stiffest penalty the SEC wants to impose on a Citi executive under the
settlement is a $100,000 fine against Citi CFO Gary Crittenden. Crittenden
took home $19.4 million in 2007 alone. I'll bet he's really sweating the
rounding error on his bonus.
Fortunately, a federal judge has so far refused to sign
off on the SEC's settlement, calling it far too weak given the seriousness
of the allegations. The SEC shouldn't just be seeking huge fines against
executives, it should be working with prosecutors on criminal cases.
4) Merrill Lynch: Inventing Fake Demand For Subprime
Junk
This beauty of a scandal was uncovered by two
investigative journalists at ProPublica. Like much of what happened on
Wall Street over the past decade, it's complicated, clever and totally
corrupt.
During the boom years of the housing bubble, Merrill
Lynch was top producer of fancy financial products called "Collateralized
Debt Obligations," or CDOs. Thousands of mortgages were packaged together
and sliced up into securities called mortgage-backed securities, or MBS.
Those MBS, in turn, were cobbled together to create a CDO -- creating a
byzantine product that former Merrill CEO John Thain now acknowledges was
simply too complex to value -- even supercomputers couldn't figure the
damn things out.
But creating gimmick securities and selling them to
investors wasn't the scam that caught ProPublica's attention: shady as it
was, just about everybody on Wall Street did that. When Merrill sold its
CDOs to investors, it divided the big mess into different tiers, known as
"tranches," reflecting different levels of risk. The riskiest tranche of
the CDO fetched the highest price, because it was the most likely to
default, while the "safest" tranche fetched the lowest price. But as
investors began to worry about the subprime craze in 2006, they stopped
ponying up for the risky bits.
But this lack of demand was no problem for Merrill.
When it couldn't offload the tranche from one of these garbage CDOs, it
just created a new CDO, and used the new security to buy up the unwanted
junk from the old one. The result was a catastrophic daisy chain, in which Merrill was able to
keep producing new CDOs by inventing fake demand -- all while subjecting
itself to dangerous levels of risk. By 2007, a full 42 of the bank's 92 CDOs included pieces of other
CDOs it had previously sold -- 46 percent.
Often, two newly created CDOs would simply swap assets
with each other. ProPublica says a full $107 billion worth of CDOs were
created and traded assets within days.
Merrill wasn't the only bank to engage in this
behavior. According to ProPublica, Goldman Sachs, Citigroup and Swiss
scandal-magnet UBS all did so as well. But Merrill was the leader,
packaging the most CDOs and the most CDOs with gimmicked demand. These
practices had a significant effect on the real economy -- they kept
mortgage prices inflated and kept the subprime machine moving, allowing
the housing bubble to grow larger and more devastating. The SEC is
investigating the practice for evidence of fraud.
5) Wells Fargo Overdraft Theft
Ever wonder how you managed to rack up such high
overdraft fees? Well, there's a decent chance you didn't. U.S. banks
scored an astonishing $38 billion in overdraft revenues in 2009 -- pretty
impressive for an industry whose total combined profit was just $12.5
billion that same year. For years, banks have been rearranging the order
of their customers' checking transactions, hoping to push account balances
down to zero faster so they can charge more fees.
Say you've got $80 in your checking account, and need
to pay some bills and run a couple of errands. You spend $30 on gas and
another $20 on your water bill. Later, you head to the grocery store and
spend $81 -- oops! -- on groceries. Any reasonable person would believe
that the last transaction put you over the edge and earned you an
overdraft fee, but megabanks aren't reasonable people. Instead, the bank
automatically processes your $81 purchase ahead of your previous
charges. As a result, you do not get hit with one overdraft fee for
your groceries, you get hit with three, because your costliest
purchase was processed before the others -- even though you made the
cheaper purchases first.
Now, there's no reason why banks can't, say, notify you
about your overdrafts before approving them. In the example above, you
could have put the tomatoes back on the shelf and saved yourself $39. But
reordering transactions is beyond the pale -- if bankers did this with
their stock options, it'd be called "backdating" and it could land them in
a federal penitentiary.
A judge in California has now said that this practice
violated state law, and has ordered Wells Fargo bank to
return hundreds of millions of dollars in such ill-gotten gains to its
California customers. But Wells Fargo wasn't alone -- every major U.S.
bank had overdraft programs that worked the same way Wells Fargo's
did.
Zach Carter is AlterNet's economics editor. He is a fellow at
Campaign for America's Future, writes a weekly blog on the economy for the
Media Consortium and is a frequent contributor to the Nation magazine.
© 2010 Independent Media Institute. All
rights reserved.
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