Bankers too big to jail, so jail the small players?

Matt Levine writes: Richard Choo-Beng Lee, who cooperated with prosecutors in their long-running investigation of insider trading at and around SAC Capital Advisors, was sentenced to 21 days in jail, which is not a particularly long sentence as insider-trading sentences go, but which was still rather a shock to him since other insider-trading cooperators have normally avoided prison. I guess now that the Newman decision has more or less killed thehedge-fund-insider-trading crackdown, there is less reason to make cooperation appealing.

In related news, “The Securities and Exchange Commission’s case against hedge fund billionaire Steven Cohen is moving forward again, after prosecutors Monday withdrew their request for a two-year freeze imposed while they pursued criminal insider trading charges against his employees.” That case is a civil failure-to-supervise case connected with insider trading, and one fact that may be relevant to SAC’s supervisory culture is that Richard Choo-Beng Lee is one of two SAC Capital traders named Richard Lee who pled guilty to insider trading and cooperated with the government.

Meanwhile in England, poor Tom Hayes is appealing his barbaric 14-year prison sentence for Libor manipulation. “Hayes ‘Didn’t Invent’ Libor Rigging, Lawyer Says in Appeal Fight,” is the Bloomberg headline, and while I am sympathetic, no one appeals a murder sentence on the grounds that he didn’t invent murder.

In Switzerland, Hervé Falciani, a former HSBC private bank employee who leaked secret documents led to revelations “that HSBC’s Swiss banking arm turned a blind eye to illegal activities of arms dealers and helped wealthy people evade taxes,” was sentenced to five years in prison for his troubles. “He is currently living in France, where he sought refuge from Swiss justice, and did not attend the trial.”

And in Brazil, is Andre Esteves too big to jail? I mean, he’s in jail, but that is creating nervousness at his investment bank, BTG Pactual, and in the Brazilian financial system more generally.

Equity requirements upped for banks and questions about the size of banks subject to US Fed regulation.

The largest U.S. banks would face a $120 billion total shortfall of long-term debt under a Federal Reserve proposal aimed at ensuring their failure wouldn’t hurt the broader financial system.

Banks such as Wells Fargo & Co. and JPMorgan Chase & Co. will be required to hold enough debt that could be converted into equity if they were to falter, according to a Fed rule that was approved by a unanimous vote on Friday. The Fed’s proposal, which applies to eight of the biggest U.S. banks, requires debt and a capital cushion equal to at least 16 percent of risk-weighted assets by 2019 and 18 percent by 2022.

Ian Katz writes: The broad strokes of the proposal, including the lengthy phase-in period and the 18 percent target instead of what some bankers thought could be as high as 20 percent, are easier than many in the industry expected.

The rule on total loss-absorbing capacity, or TLAC, is a key part of regulators’ efforts to avoid another financial crisis. If U.S. banks were to fail, investors in their stock would lose everything, but the debt would be converted into equity in a new, reconstituted bank under the plan. It’s an element of the so-called living wills banks must submit to the Fed and Federal Deposit Insurance Corp. each year to map out their hypothetical demise.

The reason for the provision: When a bank fails, regulators want it to have a war chest to fund a new, healthy version of the company — hopefully without a dime from taxpayers.

Wells Fargo had been perceived as facing the toughest road under the rule because of its reliance on deposits rather than debt.

The Financial Stability Board, a group of global regulators that makes recommendations to the Group of 20 nations, plans to phase in a TLAC rule requiring long-term debt of at least 16 percent of risk-weighted assets starting in 2019 and 18 percent by 2022.

The Fed also approved mandatory levels of minimum long-term debt, which vary depending on how large and complex the banks are.

Since the financial crisis, the Fed has consistently written rules that have been more stringent than global regulatory accords on capital and liquidity.

Banks are now subject to regulation if they have $50 billion in assets.  Banks have asked to up this to $500 billion.  The Fed set new requirements to help protect against bank failures;  “The final rule establishes a number of enhanced prudential standards for large U.S. bank holding companies and foreign banking organizations to help increase the resiliency of their operations. These standards include liquidity, risk management, and capital. It also requires a foreign banking organization with a significant U.S. presence to establish an intermediate holding company over its U.S. subsidiaries, which will facilitate consistent supervision and regulation of the U.S. operations of the foreign bank. The final rule was required by section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.”  from the US Fed.

The Rocky Road to Globalization

French companies are complaining that they pay huge fines to the US government when they do not comply with American law, but that France is not benefitting by reciprocal fines.  In the US, the policy has been to exact fines, big by the ordinary citizen’s standards, but the cost of doing business for most corporations.  There are no crimes charged.

Only when Credit Suisse was forced to plea one criminal charge as citizens and some lawmakers joined the hue and cry against big banks’ seeming immunity.  Promises made by the SEC and the Department of Justice helped the Swiss bank accept the charge.  They must have been told that the bank would not loose its 2 billion dollar pension business in the US if they pleased guilty.

US Representative Maxine Waters and Senator Elizabeth Warren demanded that the US Labor Department justify its exemption for Credit Suisse, enabling the bank to continue its pension business in the US despite its criminal status.

Hearings were held last January 15th.  Testimony about Credit Suisse’s corrupt culture was given by important people in finance around the globe.

The outcomeL  Instead of granting the ten-year exemption Credit Suisse had applied for, they were given a five-year exemption.  The criminal plea counted for almost nothing.

Do we want laws on the books that are not enforced?  Why exact a criminal plea if it is not enforced?   ANd where do these monies the government collects go?

Are whistleblowers protected in the US?

U.S. Sen. Elizabeth Warren, D-Mass., and Republican Chuck Grassley, of Iowa, urged the Securities and Exchange Commission this week for an update on the performance of so-called “whistleblower” protections created under the Dodd-Frank Act.

Warren and Grassley, in a letter to SEC Chair Mary Jo White, requested information on the agency’s Office of the Whistleblower, as well as asked about implementation of 2013 SEC Office of Inspector General recommendations, among other things.

According to Warren’s office, a 2013 OIG report regarding the implementation of protections created under the law, recommended that the Office of the Whistleblower establish standardized performance criteria for whistleblower complaints.

“The whistleblower program is an important tool in the SEC’s efforts to combat securities fraud and almost three years have passed since the SEC OIG evaluation of this program,” the senators stated in their letter. “We are writing to seek an update on the program’s performance and on OWB’s progress in implementing the OIG recommendations.”

Warren and Grassley urged the SEC chair to provide answers to several questions by Nov. 26, including: a description of progress in implementing the 2013 recommendations; the number of whistleblower tips, complaints and referrals received from July 2013 to June 2015; and the average time it took the office to review them upon receipt.

The senators also requested information regarding the average amount of time between posting a Notice of Covered Action and contacting the relevant whistleblower and the percentage of tips, complaints and referrals under investigation, among other data.

Under Dodd-Frank Congress expanded protections afforded to whistleblowers and provided incentives for reporting potential SEC violations, Warren’s office said. Two key provisions included in the law to expand whistleblower participation provided the SEC the authority to award cash payments to those who provide actionable tips and instructed the agency to create a new division to oversee the whistleblower program.

Warren’s letter came a week after the Democratic senator called on the SEC and Commodity Futures Trading Commission to implement rules that protect taxpayers and the financial system following Dodd-Frank changes.