Michael Maiello's picture

    Re-Free Martha Stewart

    This week brought news that five large global banks had admitted to felonies and agreed to pay $5.6 billion in fines to the U.S. Treasury for colluding to rig global currency markets.  The amount of the fines captured headlines but the amounts are actually relatively small.

    For scale, let's pick on JP Morgan Chase, the largest bank in America by assets and one of the five banks that admitted to criminal acts.  Its market capitalization is $247 billion.  That means that it could, if it wanted, cover the fines for all five banks by handing the Treasury 2% of its outstanding shares.  Over the last four quarters, JP Morgan cleared profits of $31 billion.

    This was really a big story because the banks admitted to crimes.  In the past, companies have been allowed to settle criminal cases without admitting wrongdoing. That practice has come under increasing criticism over the years, most notably from U.S. district judge Jed Rakoff.  The arrangements never really made sense.  A company would pay a fine but admit nothing while agreeing to never again commit the acts that it never admitted committing in the first place.  From the standpoint of shareholders, it s a truly bum deal.  If management believes the company is innocent of wrongdoing, then management should fight to protect shareholder assets. Of course, these absurdities exist because it's all theater.

    Forcing the companies to admit to criminal acts is supposed to take the theater out of it. But it's still theater because there are no consequences to the admission beyond the relatively small fines.  Even SEC rules that would prevent companies that have committed felonies from running mutual funds or issuing stocks for public investment have been waived in this case.

    The Daily Beast asked me to take another look at Martha Stewart's five month jail sentence handed down in 2004 through the lens of the slap on the wrist that the Department of Justice called a victory this week. You might recall that Martha Stewart stood accused of insider trading in order to avoid $45,000 in losses on ImClone stock. But that's not why she went to jail.  The government never came close to proving insider trading.  They didn't have the goods. Instead, they nailed her for obstruction of justice.  She lied to investigators about the insider trading that investigators couldn't prove in the first place.

    The inescapable conclusion, I think, is that in the eyes of the law, it's way better to be a bank than it is to be a person.




    Great DB piece!

    Well done, Michael.

    The fines that they paid was very small considering what they made rigging the rates every night. They underpin $350 trillion dollars worth of money in the world with borrowing rates.  You can make millions of dollars everyday by fixing the rates in your favor. This price fixing started back in the early 90's.  It is staggering how much was made dishonestly and how a group of traders benefited personally from it. 

    When this story first caught my attention, I was still active in a quilting group about 5 years ago. I remember telling the ladies about it and explaining what LIBOR was and what that office did in London.  This would be probably a big international banking scandal.  There was a couple that was interested and chatted along about it.  Later after we were leaving one other women took me aside and told me not to talk liberal politics.  Politics was never mentioned all evening.  It was only about how interest rates that are set for banks to borrow back and forth. This person saw it as a liberal plot to undermine the banks and hurt her investments. She could not comprehend that banks could be anything but on the up and up. It was just too complicated for her to follow. 

    I think this is why people aren't upset with these kinds of deals.  They just don't understand them.  It is the size of this that protects the banks from punishment that fits the crimes. The deals are made to protect the consumers from turmoil that will happen when a bank is forced to give up customers and there is a run on  all the banks.   This is really a case for smaller banks. They don't have to be this large we have the Federal Reserve to be the big dog. 

    New LIBOR rules went into place in 2013 to try to keep this from happening again. Big banks can and do hurt people and countries.

    The way I see what happened to Martha was over ambitious persecutors trying to get a conviction under the attitude of putting women in their place. She was high profile personality. How about sending some of these bank CEO's to jail.  Martha never hurt anyone.  I have learned many things  from her that have helped me to get through the day.    

    This is really a case for smaller banks.

    Absolutely.  While I find it ridiculous that LIBOR is set the way it is, as a rig-able assortment of bank expectations, I also think that such a system would be less rig-able if it depended on the views of thousands of small banks rather than a few influencers.

    Same for the currency market rigging... it's possible because so few institutions have such sway over massive markets.  A system of smaller dealers and trading desks will have its own drawbacks, including higher transaction costs and less pricing efficiency, but those drawbacks might not be so bad as the power wielded by tier one banks.

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