An HSBC subsidiary is in the news for helping wealthy clients to evade millions in taxes. So what else is new? Lots of big banks have been fined for corrupt practices in recent years.
In the headlines last week: a Swiss-based private banking subsidiary of HSBC, one of the world’s biggest banks, has been found to have had a lucrative practice focused on systematically helping thousands of wealthy clients to hide looted money and dodge taxes – including dictators, arms dealers, and other unsavoury characters.
Are you the least bit surprised? So many big banks have paid huge fines for various forms of major financial crime in recent years, it’s impossible to keep track of them all. The pertinent question isn’t whether one or two big banks have routinely engaged in criminal practices as a core element of their business models.
The question is whether there are any that haven’t.
Is better tougher regulation the answer?
“Much better, tougher, properly enforced regulation is necessary in order to prevent these kinds of problems,” says Gustav Horn, head of the Düsseldorf-based Institute for Macroeconomic Policy.
But people have been saying that for decades, and the scandals continue.
The global financial crisis of 2007-8 was caused by the cumulative impact of years of fraudulent mortgage banking in the US. Hundreds of billions of dollars of worthless “liar loans” and “ninja loans” were given to people who couldn’t afford them.
The “sub-prime” loans were bundled by the thousands into mortgage-backed securities –a type of bond which gives its owners the right to receive the combined cash flows from the underlying mortgages.
The sub-prime MBSs were polluted with fraudulent ratings to give investors the false impression that MBSs were very safe investments, and sold off to suckers –including to some German Landesbanken, French, Spanish and Italian state-owned regional banks, who naively believed the US rating agencies’ AAA ratings for subprime MBSs, and lost billions as a result.
It’s not clear that even the well-known problem of bad MBS origination has been put permanently to bed, despite the memorable crash it caused just seven years ago. IMF economist Miguel Segoviano was lead author of a 2013 IMF working paper on mortgage securitization, entitled “Securitization – Lessons learned and the road ahead”. He echoes Horn’s “better regulation” theme – but points to an inherent difficulty in achieving it.
“We [the IMF report’s authors] believe that a high-quality loan origination process is paramount. Loan originators have to be held responsible for fraudulent originations,” says Segoviano. “Rating agencies, servicers, and trustees have to fulfil their functions. Those kinds of market participants, who are often forgotten in the discussion, need to be remunerated sufficiently so they do their job.”
But banking is a vast, complex business, with countless thousands of deals done behind closed doors every day, including deals deliberately structured to escape the attention or even comprehension of regulators. How are regulatory agency workers, incomparably fewer in number than deal-doing bankers, supposed to achieve proper implementation of regulations, no matter how well they’re remunerated?
Is HSBC a rogue bad actor? Hardly!
The new revelations of HSBC misconduct stem from a whistle blower, Herve Falciani, who downloaded incriminating files from HSBC computers in 2008. A detailed evaluation of Falciani’s material by ICIJ, the International Consortium of Investigative Journalists, was released last week, showing a pervasive pattern of deliberate professional collusion in financial crimes.
The bank has responded to the scandal with a statement claiming that “the compliance culture and standards of due diligence” [before 2008] at its Swiss private bank “were significantly lower than today.”
Well, maybe. Other units of HSBC have been in the news recently too. HSBC Holdings PLC, the corporate parent, and HSBC Bank USA paid $1.9 billion in fines under a deferred-prosecution agreement with a US court in 2012. The fines allowed HSBC to avoid criminal prosecution for helping Latin American drug cartels launder at least $881 million in dirty money, among other crimes.
Don’t lose sleep worrying about the impact of that fine on HSBC’s dividend flow to the bank’s wealthy shareholders: the $1.9 billion represent less than two months’ profit for HSBC. The bank has an estimated 57 million clients world-wide, and assets of at least $2.7 trillion. The shareholders will be fine.
Now let us watch again to Margin Call, the very accurate J.C. Chandor’s film, a sort of follow up to Inside Job, which depicts a great insight into the fall of Wall Street through the key people at an investment bank, over a 24-hour period, during the early stages of the financial crisis.
And I am thinking now about the sleepless nights spent by our next door, “little” and efficient banker to fulfil his role honestly and grant us credit lines to keep running … honestly.