financial innovation? try another name, ponzi

Is it my imagination, or does every week bring news of another financial scandal? No, it’s not my imagination.
First up: Peregrine Financial Group. This long-running fraud, which has apparently been going on almost as long as the Bernard Madoff Ponzi scheme, came to light when the firm’s founder and longtime chief executive, Russell Wasendorf Sr., tried to commit suicide a few weeks ago. (He failed.) Helpfully, he left a lengthy note that laid out what he had done. Peregrine, you see, is a commodities broker, and Wasendorf had been stealing the money that customers had on deposit with the firm. As you’ll no doubt recall from the very similar MF Global scandal, where $1.6 billion in supposedly segregated customer funds went missing as the firm careened toward bankruptcy, this is supposed to be the sin of sins for a commodities brokerage. Sinful it may be, but not all that difficult, it would appear.
Peregrine, which is based in Cedar Falls, Iowa, didn’t operate on the kind of scale as MF Global. But what it lacked in heft, it more than made up for in imagination. In his note, Wasendorf said that, over the years, he had used the money, among other things, to build the company’s $18 million headquarters and to “pay Fines and Fees charged by the regulators.” At the point at which the fraud was discovered, the firm was supposed to have more than $200 million on deposit for customers. Instead, it had $5 million.
And where were the regulators? Fooling them was child’s play, he said in his note. Or words to that effect.
Next up: HSBC. Who knew that the British bank was the favored institution of money launderers everywhere? As it turns out, the Senate Permanent Investigations Subcommittee knew. This week, it released a 335-page report and held a scorching daylong hearing, excoriating a half-dozen of the bank’s executives.
Perhaps because we’re bank-scandaled out, this story hasn’t gotten the attention it truly deserves. Unlike, say, the JPMorgan Chase “London whale” scandal — in which the bank’s traders simply made a big, dumb bet — what HSBC did amounts to serious wrongdoing. It was also a recidivist. Twice before, in 2003 and 2007, the bank had been cited by regulators for what The Times described as its “extensive money laundering ways.” Despite the reprimands, it continued to do business with banks that laundered money for drug traffickers and institutions suspected of having ties to terrorists. At the hearing, HSBC’s top compliance executive strayed from his prepared remarks to announce that he would be leaving that post. The others, of course, promised to do better. Don’t they always?
And where were the regulators? “Subcommittee investigators found that the OCC” — that’s the Office of the Comptroller of the Currency, which is the nation’s primary bank overseer — “had failed to take a single enforcement action against the bank, formal or informal, over the previous six years, despite ample evidence” of money laundering, reads the report.
Let’s now turn to “Liborgate,” where the plot continues to thicken. When last we left this scandal, Barclays had agreed to pay $450 million in fines, and a handful of top officials, including its chief executive, Bob Diamond Jr., had lost their jobs because the bank had been manipulating the London interbank offered rate, a key benchmark for all kinds of loans and derivative transactions. In recent days, however, the story has begun to revolve more and more around ... hmmm ... the regulators.
It turns out that in 2008, Barclays told the New York Federal Reserve what it was up to. Timothy Geithner, then the president of the New York Fed, sent a note to Mervyn King, the leader of the Bank of England, that suggested that the British regulators “eliminate incentives to misreport.” Nothing of the sort took place, and Barclays continued to lowball its Libor reporting well into 2009. The British Parliament has held a series of hearings with King and other top British regulators of the “what-did-you-know-and-when-did-you-know-it” variety.
Meanwhile, it has become clear since the scandal broke that Libor is a problematic benchmark in any case, because a lot of the unsecured interbank lending it is supposed to represent doesn’t even occur anymore. “It is clear that the Libor system is structurally flawed,” Ben Bernanke, the chairman of the Federal Reserve, told the Senate this week.Now he tells us.
But, finally, there’s this: On Wednesday, Capital One, the big purveyor of credit cards,agreed to pay $210 million — including reimbursing customers to the tune of $150 million — because one of its vendors had deceptively marketed and sold customers needless add-on products.
Where were the regulators? In this case, it was the new Consumer Financial Protection Bureau that conducted the investigation and brought the action against the bank. It was the agency’s very first enforcement action.
These days, I guess, that amounts to progress.
Joe Nocera
  • John McBride
  • Seattle, WA

Bigger than these is the failure of us as a society to be aware that while all these scandals were going on and while the 5 largest banks in the country were left unscathed, community banks around the nation had their assets seized and were fed to larger banks.

Today the FDIC failed 4 community banks, two in Georgia, 1 in Florida, and 1 in Missouri.


Hundred of community banks have gone under over the last 4 years while Wall Street parties on, wealth become more concentrated in the hands of fewer Americans, and income for the rest declines.

5 banks in the U.S. control over 50% of the nations GDP. The top 7 control 2/3's. And they're TBTF. That's "Too Big to Fail" for novices.


Wealth in the U.S. is far more concentrated now than it was before the crash. That money that vanished in the crash? The cash that traded hands for stocks and very real assets? It didn't go away people. It went into bank accounts.

So, Mr. Nocera, writing on this Friday night after checking the FDIC failed bank list and leaving happy because I'm not on it and sad because small community banks across the nation are, keep in mind that there are easy scandals.

And then there are the oh, so ever so quiet abominations that newspapers can't sell advertising space for.

Like George Carlin said: "The wealthy and powerful? They're a club. And you ain't in it."

  • Laurel
  • Nellysford, VA

The OCC proudly proclaims that it has allocated 75% of its auditing staff to community banks that hold 15% of the assets, deposits, loans and employees in the system, and 25% of the staff is tasked with monitoring the other 15 banks that hold 85% of the assets, deposits, loans and employees. The new Comptroller of the Currency maintains that this allocation of resources is about right.

It appears that the regulatory system is set up to let the "too big to fail" institutions conduct their affaris without much oversight, and that's the way they like it. Is it any wonder that these cases of fraud are occuring? 50% of the community banks in this country are operating under some type of regulatory enforcement action, while its business as usual at the big bank serial offenders.

This is one of the more obvious examples of how the system is rigged in favor of the big players.

  • Meredith
  • New York

Tut, tut. Ain’t it awful? You ask ‘where are the regulators’? Isn’t it a bit behind the times to be asking such a question? Especially from an experienced business journalist? The regulators have been systematically underfunded and rendered powerless starting about 30 years ago. Clinton signed repeal of glass steagall. The vulture enablers were deep into the cabinets of Clinton, Bush and Obama. Obama admires Reagan and shuns too stiff regulations. Why do I even have to write this in a comment to Mr. Nocera?

During all this time, if the business and regular media had challenged this destructive process, and held centrist politicians and moderate pundits accountable for their excusing of it, maybe things wouldn’t have cascaded so far down, But the financial press didn’t want to be criticized as sounding too liberal.

Indeed we’ve seen a sort of Niagara Falls type surging cascade of financial crime—because it’s been legalized, normalized, blessed by courts and media. Nobody can prove it’s actually illegal. Nobody goes to jail. After they pay fines they then crank up the looting machine right away. The financial writers use their contacts, and make money selling books exposing the shame and get interviewed on TV. We have tumbled down so far over the Falls that the strong current is carrying us away down stream. How can we ever have the strength to reverse, and start swimming up stream, back to a lawful economy?

  • joe
  • ny

With regards to Peregrine, they are one of many. The most underreported story in the annals of high finance malfeasance is that, over the past 4 years, the SEC has literally been overwhelmed by the emergence of hundreds of cases of fraud by brokers and hedge fund managers. That is not an exaggeration. Over the past ten years, luxurious lifestyles all over the country were supported by outright theft and Ponzi schemes. This was possible because the line between normal activity and sociopathic fraud had been wiped away by the lack of oversight and anything-goes accounting standards.
With regards to money laundering at HSBC, one of the dirty little secrets of secret markets and offshore accounts is that, for good reason, that's where criminals launder their dirty money. Counterparties in OTC transactions do not have to prove their legality. Aided by secrecy, bankers make oodles with access to this cash. It is even possible that U.S. taxpayers paid off credit default swaps contracts held by criminals in the bailout of AIG.
With regards to LIBOR, the settlement with Barclays involved no admission of guilt, despite incontrovertible evidence and represents a most disgusting miscarriage of justice. What must be said is that Tim Geithner, upon being informed of years of widespread criminal activity, did effectively nothing. He must resign as Treasury secretary immediately. He is complicit in fraud.

  • G. Recco
  • NYC

Frog-march a dozen of these high-ranking bank execs into the back of a paddywagon on live TV, while freezing all their assets, and watch how quickly these banking shenanigans come to an end. But, thanks to regulatory capture, there is no fear of this happening, so the Wall Street scandals will continue.

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