The “FinCen files” story reveals: getting caught doesn’t stop banks from taking dirty money. It may even encourage them
On December 11, 2012, U.S. Justice Department officials called a press conference in Brooklyn. The key players were once and future bank lawyer Lanny Breuer (disguised at the time as Barack Obama’s Assistant Attorney General in charge of the DOJ’s Criminal Division), and Loretta Lynch, the U.S. Attorney for the Eastern District of New York, and future Attorney General. The duo revealed that HSBC, the largest bank in Europe, had agreed to a $1.9 billion settlement for years of money-laundering offenses.
An alphabet soup of regulatory agencies was represented that day, from the Justice Department, to Immigration and Customs Enforcement (ICE), the U.S. Treasury, the New York County District Attorney, and the Office of the Comptroller of the Currency, among others.
The regulators outlined a slew of admissions, with HSBC’s headline offense being the laundering of $881 million for Central and South American drug outfits, including the infamous Sinaloa cartel.
The laundering was so brazen, regulators said, the bank’s Mexican subsidiary had developed “specially shaped boxes” for cartels to pack with cash and slide through teller windows. The seemingly massive fine reflected serious offenses, including violations of the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).
The next years would follow up with a flurry of similar settlements extracting sizable-sounding fees from other transnational banks for laundering money on behalf of terrorists, sanctioned businesses, mobsters, drug dealers, and other malefactors. Firms like JP Morgan Chase ($1.7 billion), Standard Chartered ($300 million), and Deutsche Bank ($258 million) were soon announcing settlements either for laundering, sanctions violations, or both.
Even seasoned financial reporters accustomed to seeing soft-touch settlements scratched their heads at some of the deals. In the case of HSBC, the stiffest penalty doled out to any individual for the biggest drug-money-laundering case in history — during which time HSBC had become the “preferred financial institution” of drug traffickers, according to the Justice Department — involved an agreement to “partially defer bonus compensation for its most senior executives.” If bankers can’t get time for washing money for people who put torture videos on the internet, what can they get time for?
When I did a story on the case in early 2013, I found the HSBC settlement was the latest step in a dizzying, decade-plus cycle of offenses and ignored reprimands, involving multiple regulatory bodies. The number of times HSBC had blown off compliance orders seemed too absurd to be real. In one stretch between 2005 and 2006, the bank received (and, apparently, ignored) 30 formal warnings just from the Office of the Comptroller of the Currency.
Prosecutors insisted the deferred prosecution settlements slapped on companies like HSBC, Standard Chartered, and JP Morgan Chase were tougher than jail terms. The deals would place banks in a permanent state of quasi-arrest, with regulators granted enormous supervisory power and serious charges pre-filed and hanging over the firms going forward.
As one federal investigator put it to me back then, “This way, we have them by the short ones.”
Fast-forward eight years. On September 20th, a combination of Buzzfeed and the International Consortium of Investigative Journalists (ICIJ) published the details of a major document leak highlighting a decade of money-laundering incidents, involving hundreds of billions of dollars and a number of the world’s biggest banks. The leak centered on a cache of over two thousand “suspicious activity reports,” or SARs, filed by those banks to the Financial Crimes Enforcement Network, a regulatory arm of the U.S. Treasury.
Today we reveal that tactics by US regulators to force banks to change their ways have not worked. Instead, banks defied crackdowns moving staggering sums of cash. #FinCENFiles Global banks defy U.S. crackdowns by serving oligarchs, criminals and terrorists – ICIJThe FinCEN Files show trillions in tainted dollars flow freely through major banks, swamping a broken enforcement system.bit.ly
Though the ICIJ was also behind the release of the Panama Papers, investigative editor Michael Hudson told me he believes the FinCen leak is “the most important” project they’ve worked on. Instead of being about one group of actors, or one jurisdiction, these revelations span the banking sector as a whole.
“It shows the widest set of problems,” he says.
The story has been covered around the world, but some press accounts particularly here in the States seem to have missed the punchline, i.e. that the banks figuring most prominently in the FinCen leak are exactly the same institutions paraded before the public as subjects of “message-sending” punishments back in 2012-2014.
HSBC, for instance, continued to take in questionable money through 2012 and beyond, including $30 million from Hong Kong accounts related to a Ponzi scheme called World Capital Market. WCM was suspected of bilking “investors” — most of them ordinary people scraping together five or ten thousand dollars and throwing them at false promises of guaranteed returns — of nearly $80 million.
The leaked records show HSBC flagged the account as suspicious as early as 2013, but continued to take the money from this and a wide variety of other dicey accounts. Although regulators saw all of this information, the Department of Justice not only didn’t take action, it announced in 2017 that HSBC had “lived up to all of its commitments” and agreed to file a motion to lift the deferred prosecution deal.
A similar pattern held with JP Morgan Chase, which in 2013 was hit with a cease and desist order over “systemic deficiencies” in its money-laundering controls, yet continued to do business with rogue accounts, including some infamous and obvious ones. To give some sense of the sums involved, JPM made roughly a half-billion dollars just servicing the accounts for con artist Bernie Madoff.
As far back as 2006, JP Morgan Chase knew enough to pull its own money out of investments in hedge funds tied to Madoff, but never told investors, and continued to manage his accounts for years. The bank ultimately settled with the government over the Madoff episode in 2014, after the 2013 “cease and desist” order, while continuing to manage money for other malodorous accounts — including, according to the ICIJ, more than $1 billion for Jho Low, the fugitive financier behind Malaysia’s infamous 1MDB fund.
In a detail that should infuriate the #Resistance crowd, Jamie Dimon’s bank also continued to do business in huge sums for former Trump campaign manager Paul Manafort even after Manafort stepped down in scandal, and even after the bank flagged Manafort’s accounts. From the ICIJ report:
JPMorgan also processed more than $50 million in payments over a decade, the records show, for Paul Manafort, the former campaign manager for President Donald Trump. The bank shuttled at least $6.9 million in Manafort transactions in the 14 months after he resigned from the campaign amid a swirl of money laundering and corruption allegations spawning from his work with a pro-Russian political party in Ukraine.
“If you look at the cases where they tried to punish and deter the big banks, the headline-making efforts just haven’t worked,” says Hudson. “In the aftermath of these supposed crackdowns, the banks continued to move money in staggering amounts, for powerful and dangerous characters.”
“The big takeaway is, the system just doesn’t work,” adds former federal prosecutor Paul Pelletier. “I think these SARs represent about $2 trillion in suspicious transactions, and nearly all of it went through. And this is just a small fraction of the overall amount of money.”
According to Hudson, the FinCen files represent about two-tenths of one percent of the suspicious activity reports filed between 2011 and 2017.
In the aftermath of the HSBC deal in 2012, money laundering cases began to attract a fair amount of press attention. HSBC’s case even became one of the subjects for Oscar-winning documentarian Alex Gibney’s “Dirty Money” series:
At the time, there was an expectation that these stories could be told in the past tense, because firms like HSBC had been busted. The FinCen leaks show the opposite. The settlements may actually have been an accelerant, allowing for the appearance of regulation, while alerting banks to broader weaknesses that encouraged more brazen behavior going forward. We may have to change the way we think about “dirty money,” from being an outside contaminant, to endemic to the system at its core.
Public legend about movement of ill-gotten cash usually centers on crooks sitting under ceiling fans in tropical locales, receiving mysterious wire transfers in places outside the physical reach of American regulators, like Vanuatu, Panama, or the British Virgin Islands. The FinCen leaks make clear the real hub of money laundering is in what Hudson calls the “choke point” of New York, where the world’s largest financial institutions have streamlined the process of moving shady money.
SARs don’t always indicate a crime. They’re the regulatory equivalent of a call to police to check something out that doesn’t add up. Bank monitors who compile them might be spotting something in their account rolls like high numbers of cash transactions, large numbers of wire transfers to a country where the customer doesn’t do business, etc.
The requirement to produce these reports creates a cat-and-mouse game for banks. Every time compliance officers discover derogatory information that leads to an account being closed, it’s a direct hit to a bank’s revenues. On the other hand, to keep regulators off their backs, banks have to be seen to be doing all they can to sniff out illegalities. Therefore there’s an incentive for banks to cycle through creative ways of looking like they’re engaging in compliance, without actually doing so.
A bank might create sizable AML departments, but pad them with inexperienced, entry-level employees incapable of spotting problems (see here for the HSBC example I wrote about years ago). A firm may hire a top-of-the-line department head, but not give him or her real resources. Required hiring boxes may be checked, but the company may non-report or under-report problems. Companies may even generate huge numbers of suspicious activity reports while leaving key data like names or addresses missing.
In a different scenario, reports are filed too late for action to be taken. SARs are supposed to be filed within 30 days, for instance, but the FinCen documents were filed to the government an average of 166 days after the initial detection of a potential problem.
In another stalling method, banks informally agree not to close suspicious accounts until a certain number of SARs have accrued. When the Senate Permanent Subcommittee on Investigations looked at HSBC in 2012, for instance, they found internal emails from bank executives suggesting that HSBC’s Mexico operations had settled on a policy of not closing accounts until four SARs had been filed.
When the company’s chief compliance officer found out about its subsidiary HMEX’s standard, he wrote, in a bemused tone, “4 SARs seems awfully indulgent, even by local standards.” HMEX later cut the standard to two SARs, which seems to be the exception rather than the rule. In the FinCen leaks, companies are seen repeatedly filing reports about the same actor, each time implying they’ve dug just enough to write a report, but never quite enough to actually close the account.
Of course, in banking, size matters. “Maybe the bank looks at a wire transfer and says, ‘This smells.’ Do that in a $12,000 transaction, and they’ll kick you out of the bank,” says Pelletier. “Do it at $12 million, and they’ll let it go.”
What’s unique about this leak it shows bad behavior the banks actually reported. As one former investigator put it this week, “This is the stuff they actually have a suspicious activity report for!” That banks keep taking the money is bad, but the fact that regulators keep receiving the reports and letting shady transactions slide makes the dirty-money problem a bizarre symbiosis of private rapaciousness and (at best) governmental apathy.
While credit card companies are able to detect fraud and banks are able to detect suspicious activity thanks to technological advances, the government lacks the same capability, in part perhaps because the reporting system is not automated. Since it’s a crime to leak a “SAR” — you “literally have to steal one” to make one public, as one former investigator puts it — they’ve rarely been seen by the public. The ICIJ has now put them on display:
The government receives millions of these written reports, which often appear to reflect a fair amount of person-hours of research by the bank. However, the government lacks what one investigator described to me as an “AI-type test” for passive review of this material, and lacks the personnel to go through it all individually.
At best, a federal investigator may go through the SAR database to check an individual or company already targeted in another probe. This particular batch of SARs seems to have been gathered as part of a congressional investigation into Russian interference, for instance. The rest of the reports are fated to be memory-holed by overwhelmed regulators.
What do you get in this seeming worst-case scenario, when banks pretend to monitor, and regulators pretend to collect the monitoring? A short list of some of the messes found in the FinCen docs:
— In one ridiculous case, Deutsche Bank’s New York branch processed $2.6 billion and $700 million, respectively, for a pair of companies called Ergoinvest and Chadborg trade. Both companies declared annual incomes of $35,000, and the statements for both firms bear the signature of the same obscure dentist in Belgium, who claims he doesn’t even own a car. Yet the money kept rolling through! The companies earned British registrations through “formation agencies” located in the Baltics, where investigators have found a rat’s nest of problems in recent years. Deutsche Bank, the originator of 62% of the leaked SARs (perhaps reflecting the focus of the Russia investigation that produced the FinCen docs), moved at least $150 billion just from one small Tallinn-based bank, Danske Estonia, for instance.
— Ukrainian Ihor Kolomoisky was the subject of raids by federal investigators earlier this summer, and has been profiled in colorful news reports that read like movie scripts. In one piece, he allegedly dropped crayfish meat by remote control into a tank to be devoured by sharks in the middle of a meeting, as a Dr. Evil-style intimidation tactic.
Learn about the 22 properties Kolomoisky and his associates purchased between 2006 and 2015 – with this interactive map made by @pirhoo. #FinCENFiles
Michael Sallah @MikeSallah7
The Oligarch Who Ate Cleveland: Untold story of how Deutsche Bank helped Igor Kolomoisky acquire an empire in real estate in America’s heartland — the money siphoned from Ukraine’s largest bank. @TanyaKozyreva and me and team from @ICIJorg https://t.co/2aWlZGtPQt via @ICIJorg
The crux of accusations by prosecutors is that Kolomoisky employed gangland tactics at home (including using “armed goons” to take over an oil company), then funneled the money to places like the States, to be invested in legit vehicles like real estate. This is exactly the kind of person the SAR process is designed to identify and disqualify quickly. Nonetheless, the FinCen files show Deutsche Bank, which had entered into a settlement deal in 2015 for moving over $11 billion in suspicious transactions, moved at least $240 million for a Kolomoisky-connected account at exactly that time, between 2015 and 2016.
— Even as Russian aluminum baron Oleg Deripaska garnered enormous media attention in recent years, including during the Russiagate furor, he continued to move money freely through the American banking system. The FinCen files contain a total of 58 SARs related to Deripaska, issued between 1997 and 2017, covering an amazing $12.41 billion in transactions. The Bank of New York Mellon flagged 16 transactions involving a Deripaska subsidiary company called Mallow Capital, but apparently kept doing business. To quote the ICIJ, “Mellon said Mallow Capital appeared to be a shell company operating in a high-risk area with no known legitimate business purpose. In 2012 and 2013, Mallow sent itself nearly $420 million using different British Virgin Islands addresses and different banks…”
The FinCen leaks highlight two major weaknesses of the regulatory system. One is the longstanding absence of a requirement that anyone opening a U.S. account name a “beneficial owner,” i.e. who is really controlling the account. The other is correspondent banking. Banks in the U.S. are required to “know your customer” in addition to monitoring and reporting domestic accounts. Still, any foreign bank with a license may open “correspondent” accounts in those same regulated Western banks. A lot of the worst instances catalogued in the FinCen leaks involve these correspondent accounts, opened in Asia, Eastern Europe, the Middle East, etc.
In the long run, the regulatory system ends up serving as a de facto partner for banks that all but admit they’re taking in money from Ponzi schemers, mobsters, drug lords, and rogue states.
This is a “feature, not a bug” problem. Going back to the years after the crash, regulators spoke often about the need to carefully construct settlements, so that even repeat offenders might remain viable.
In late 2012, for instance, at a press conference announcing a market manipulation settlement for the Swiss Bank UBS, Breuer told reporters, “Our goal here is not to destroy a major financial institution.”
“This is a bank that has broken the law before,” a reporter said that day. “So why not be tougher?”
“I don’t know what tougher means,” Breuer answered.
Some time later, then-Attorney General Eric Holder gave a video message on the theme, “There is no such thing as Too Big to Jail.” While insisting “no one is above the law,” Holder pointed out that some criminal charges carried automatic regulatory penalties that “may even trigger the loss of that institution’s charter.” This, he implied, is not always a good thing.
This issue had come up at the HSBC press conference the previous year, when Breuer said, “had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking license in the US.”
For that reason, Holder insisted, regulators often “must go the extra mile to coordinate closely with the regulators who oversee these institutions’ day-to-day operations.”
Translated, this meant the Justice Department was crafting punishments to make sure banks landed on their feet and remained functional as American businesses, even in the face of public reprimand.
A typical settlement involved a fine that sounded large but was really equal to months or weeks of profit, with penalties in some cases also being deductible, so taxpayers could share in the joys of paying a bank’s debt to society. In other words, settlements were designed not to hurt too much, but just the right amount.
Even a “record” harsh settlement doled out to the French bank BNP-Paribas in 2014 for sanctions violations, which included a rare plea to a real criminal charge in addition to a $9 billion penalty, only incurred a one-year exile from U.S. dollar transactions. Even when throwing the proverbial book at firms, regulators made sure to pave clear roads to redemption.
This was not necessarily a bad thing. There’s no reason why anyone should want systemically-important institutions (who are often major employers) to be wiped off the face of the earth, willy-nilly. The problem is that if you completely remove the threat of a lost charter, it signals to everyone that regulators will tolerate even open repeat violations. In this light, even a “tough” public punishment becomes a license to steal.
Hudson, for instance, notes that announcements of many of the biggest money laundering settlements involving the firms in the FinCen files were accompanied by jumps in the company’s share prices. HSBC’s shares rose in London and Hong Kong after the 2012 settlement, and even BNP’s criminal plea deal prompted a 3.6% jump in share price. Markets see the settlements as seals of approval going forward, and “send the signal that the regulators are looking to do a deal,” Hudson says.
The irony of all this is that the Trump era has seen much gnashing of teeth over America’s withdrawal from global bureaucracies like the Paris Agreement, the “Open Skies” arms control treaty, the Iran deal, and other conventions. Meanwhile, in the one place we want an isolationist-style wall, around the Federal Reserve-connected American banking system, barriers are wearing away. Only in crime, it seems, is America becoming more global in outlook.
Matt Taibi on Subprime: Where is Money (Houses) and how do we Get It?
Transcript00:00the Joe Rogan experience no well it you00:05get compared to him a lot and one in one00:09way I really saw that comparison was00:11your brilliant coverage of the financial00:13crisis and what was the the mechanisms00:16behind the scene of the financial crisis00:18and that I became a really big fan of00:20your work reading that because the that00:23I I think you covered that as well if00:25not better than anybody00:26oh well thanks yeah I mean so I I knew00:31nothing about any I couldn’t even00:32balance my checkbook when they assign me00:34to that story and and I had to start00:38basically from square one and I was00:41calling people and saying things like00:44can you tell me something about00:45something that I’ll understand you know00:47it’s real cold calling investment banks00:49and literally saying that and I finally00:51got a guy to have lunch with me and he00:56said your problem is that you’re trying00:59to understand this as an economic story01:01once you look at it as a crime story01:04you’ll get it and and from that point01:08forward I I totally I felt like like I01:11started to understand the whole01:13mechanism in the subprime mortgage scam01:16it really was a scam it’s really it’s01:18really just a massive corporatized01:21version of like selling oregano as weed01:26basically they they took stuff that01:30these is incredibly worthless highly01:33risky mortgage loans right you know they01:36would give out loans to everybody with a01:38pulse you know whether you had a job or01:41not whether you were a citizen or not01:43didn’t matter poor thing was to get the01:45loan immediately sell it off chop it up01:48turn it into securities and then they01:50used this highly advanced sort of01:54mathematical trick to turn all that sort01:58of mortgage hamburger into triple-a02:00rated securities so you’d have like a02:02you know a junk rated mortgage like the02:05riskiest loan in existence something02:10that was so toxic that02:12country companies like country or I02:14wouldn’t want to hold on to it for more02:15than a week because they were afraid it02:17would that the stuff would blow up and02:18then they would sell it off to like a02:21pension fund or you know an insurance02:24company in the form of a triple-a rated02:27security which you know is as safe as a02:31US Treasury bond so it was a scam McGann02:35and the the the the metaphor of you know02:39baby power taking baby powder and02:42selling it as coke or whatever that02:44that’s exactly what it was they just02:45took worthless shit and sold it as02:47something that was that was gold and02:49they got they did it for years and years02:52and years and years and they they knew02:54that this gigantic huge bubble of risk02:58and disaster was just accumulating and03:02that someday it was going to all explode03:04and cascade and and and ruin the economy03:07but everybody was trying to time it03:10right and and bet on when that would03:14happen and make their money before that03:16that Judgment Day came and it was it was03:20fascinating what’s it once I started to03:22learn about it it was just such a an03:23amazingly disgusting fascinating story03:27that it was just hard not to not to get03:30into it a crime story yeah think of it03:33as a crime story yeah no absolutely I03:36even got one guy gave me a book it was03:42called famous famous con artists in03:45history right it was like this little03:47tome it’s smaller than like the smallest03:49paperback and it was the biography of03:53this guy Victor Lustig was his name he03:56was famous because he sold the Eiffel03:58Tower twice alright and he he had this04:05this scam that he called I think it was04:09called the the the Hungarian box I’ll04:14have to go back and look but basically04:15what he would do is he would get on a04:18boat in New York and he had this sort of04:24beautiful mahogany box with04:25ranked on it that had two holes in it04:27and he would show all the guests that he04:30would put a blank piece of paper in one04:32and turn a crank and $100 bill would04:35come out the other end and he convinced04:39them all that it was a machine that made04:41money and everybody would offer him an04:45increasing amount of money for this04:47invention and he wouldn’t sell it until04:51the last day when he would sell it for a04:54you know forty or fifty thousand dollars04:55and then he would disappear and jump off04:56the boat and in France and never be seen04:58again people would yeah there it is05:00what’s it called yeah but but that’s05:08exactly what the Mortons picture let me05:10see his face05:13look at that fucking creep05:15[Laughter]05:16Wow let me see that box again Wow that05:22is crazy05:23so there yes so it was obviously fake05:26and and and but that’s what the mortgage05:28scam was they they they were taking05:32basically blank paper these these05:35subprime loans that belong to jander’s05:38who were gonna foreclose within ten05:41minutes all right and they were telling05:45people that oh we have this new05:47mathematical process that allows that05:49actually makes this stuff really safe05:51and you can put it in your in your05:56College endowment you can put in your05:58pension fund and so all these people you06:01know whose retirement monies were based06:04on securities we’re buying all this shit06:08that they thought was was triple-a rated06:11and that’s that’s how they woke up and06:12you know and in 2008-2009 and they found06:14their 401ks or were you know wiped out06:19by 40 percent or whatever it was my06:20neighbor really did I happen to him my06:23neighbor bought this plot of land and06:24had this dream to build his dream house06:27and he would go buy the plot of land and06:30he was always cleaning up and getting06:31ready and I was talking to him and then06:33boom 2008 happened he lost everything06:37and he would still go buy that plot06:40and cleanup and he and I would talk06:42about it and they just told me lost06:44everything06:45yeah so it’s never gonna happen huh yeah06:47no I think he I think he died he06:51eventually got really sick and they took06:53him out of his house and brought him06:55somewhere but I think he’s dead now but06:57yeah his his story was awful awful to07:01hear this guy who was in his 60s who had07:04got this piece of land with a nice view07:06and it’s like this is where I’m gonna07:07build my dream house and he had all this07:10money prepared for it all this money07:11saved away and he was ready to rock and07:14roll and then boom mmm it all went out07:17they just drained out somebody put a07:19hole in the bottom of the boat and07:20everything everything went to the bottom07:23of the ocean yeah and then he’d probably07:25got ripped off twice because his tax07:26dollars went to go bail out the guys who07:28you know you know who because some of07:31the some of the banks got stuck holding07:32some of this shit and rather than eat07:35the losses like your your friend did07:37they got the Federal Reserve to buy it07:40from them ya know and and you know or or07:44the Treasury how the fuck did they get07:47away with giving the CEOs bonuses during07:51that time yeah a giant bonuses during07:53the time where they they had to be07:55bailed out by the taxpayers yeah that07:57was another scam like so they were if08:01you looked at the fine print of all the08:02bailouts it’s basically said that you08:05had to repay the money by us by X time08:08before you could start paying people08:10exorbitant amounts of money again but a08:14lot of those a lot of those conditions08:16were never really followed and you know08:19the the conditions of repayment were08:22kind of glossed over and the the the08:27companies that they were supposed to be08:28able to pass these things called stress08:30tests which demonstrated that they were08:33back on solid footing again before they08:35paid people bonuses but the stress tests08:39were all fledged and you know I mean the08:41there were there was crime and08:44corruption a legality basically in every08:46direction during that whole period and08:48and08:49not just in the government but in in all08:52these companies as well geez yeah but08:55fascinating to follow yeah what was it08:58like covering that I mean how long did09:00you spend working on that seven years09:03probably yeah yeah well because one of09:06the things that I thought no that was09:07really interesting was I did my first09:13story about this and I got this09:16incredible reaction because it turns out09:19that the financial press there is nobody09:21in the financial press who writes for09:23ordinary people like it’s basically what09:26I was doing was a translation job I was09:27trying to basically take what had09:30happened and explain it in a way that a09:33person who knew nothing about finance09:35would be able to understand and it turns09:38out that nobody is doing that so all09:42these people who had questions about it09:44who who wanted to know what had happened09:46to their money or why don’t why didn’t09:49my house get foreclosed on or what it09:50you know what’s what’s a subprime09:52mortgage or anything you know there was09:57nobody else doing that work so I had09:59lots of it to do and it was really10:01interesting and I just kept doing it10:04that had to be depressing yeah oh yeah10:07of course10:07of course I mean most most investigative10:10reporting is depressing particularly10:14that because you mean a lot of it was10:16old people that oh my god old people10:19minorities I mean I did one story about10:22a bank in Maryland well it’s a National10:29Bank it’s it’s a bank that you know I10:31wouldn’t be surprised that a lot of10:34people listening how have their accounts10:35at this Bank they had to pay settlement10:39to the government because they were10:42intentionally targeting elderly black10:45people to sell subprime mortgages to and10:50they called the mud people10:51and there were all these these like10:53toxic emails going back and forth about10:55how stupid they were and how they’ll buy10:57anything etc etc the emails they call11:00them mud pee11:01yeah yeah and so they had to pay a11:03settlement to the government and but you11:06know the racial component of the of that11:08crash was something that I didn’t really11:10clue into until late but that was a big11:12part of it too11:13it was you know a lot of it involved11:18these mortgage lenders going into11:22particularly like lower middle-class11:24black neighborhoods and knocking on11:27doors where there’d be like an elderly11:29person at home and saying hey would you11:31like to refi your mortgage and you’ll11:34have a little bit of extra spending11:35money this month right and the person11:40won’t know anything about finance and11:42they’ll still sign this refinance deal11:44that allows them to save a little bit of11:46money each month not knowing that they11:49had just converted their fixed mortgage11:51into a floating mortgage and that is11:53seeing the interest rates changed you11:56know you’d have people who went from11:58paying $900 a month to paying $7,000 a12:02month right and suddenly they’re out in12:04the street and and you know the the12:08company that sold them the loan is long12:10gone by then they they’re not holding it12:12they as soon as they got her name on the12:15dotted line they sold it off to a bank12:17in New York who in turn again chopped it12:20up into hamburger and sold it probably12:21to you our pension fund or who or12:23whatever so there’s nobody she’d give a12:25complain to and you know yeah that stuff12:27was really depressing what was a feeling12:29like of having very little understanding12:31about finance and then immersing12:33yourself in it and now is vac sizing12:36that this is the underlying structure12:38that our society is Rhon that our money12:41is established through like this is this12:43is how we we sell houses and loans and12:47this is what we’re doing yes yeah no it12:50was it was fascinating I because before12:52that I was mostly covering like12:56elections right and again if you cover12:58elections it’s incredibly boring and you13:01never hear anything of substance and13:03it’s not terribly complicated and you13:05know one one the the Democrat says that13:08you know we want to help the middle13:10class and the Republican says we want to13:11protect America Family Values and that’s13:13pretty much the extent of the end13:15a challenge in terms of covering that13:17stuff and I always thought to myself you13:20know politics in America must be a lot13:22more complicated than this right there13:23must be some other hidden thing where13:28it’s incredibly complex and diabolical13:30and and you know the the real match13:33additions of power must be visible13:35somewhere and I think that you find that13:40when you when you start looking into howWall Street works how money works howcentral banking works how you know howthe concentration of wealth worksI mean basically the subprime scheme wasan effort to pull the remaining savingsout of the population right it justwasn’t you know in the old daysinvestment banks made their money bylending money to companies who wouldbuild factories and they would makestuff and sell it around the world andeverybody would make money and never youknow even even the population wouldwould would benefit from it but thatmanufacturing economy it’s all gone it’sso four C’s so you have thisfinancialized the economy and they haveno normal beneficial way to make moneyand all that all they can really do islook to see where is their money and howcan we get it and most people had moneyin their houses right like the the14:42accumulated savings of most people14:43whatever was left after the internet14:46crash in the 90s was in real estate and14:50that this was the scam by which they14:54took the wealth that was left in the14:58pockets of ordinary people and14:59transferred it to you know nine people15:03in Manhattan basically I mean that’s why15:05you have you know we told them when we15:07talk about wealth inequality now right15:10being a huge factor that you know the15:13top 95 I’m sorry the top 1% of the15:19population owns ninety percent of the15:21wealth in the country whatever it is15:23that’s a consequence of schemes like15:25this where they’re just there15:28they’re finding out where people have a15:30little bit of money and they’re15:32systematically coming up with scams to15:34move it from there to here with no15:37consequence no with no consequence and15:39that was the other part of the story15:40that I ended up having to cover later15:42which was you know the last time they15:45tried something like this like during15:47the SNL crisis which was also sort of a15:51giant fraud scheme also that involved15:53real estate lending and you know but15:56that the government after that actually15:58you know indicted 1800 people they put16:01800 people in jail they put a lot of you16:04know serious influential people on the16:06dock after that nobody nobody went to16:11jail after the stuff and there was and16:13people think that well they didn’t do16:16anything that was technically illegal no16:17bullshit there there was lots of stuff16:19that was that was brazenly criminally16:23illegal I mean they they committed fraud16:25on a broad scale but some of these16:27companies were into the things that wereeven worse than that I mean you takeHSBC HSBC admitted to laundering 850million dollars for a pair of Centraland South American drug cartelsincluding the Sinaloa cartel right whichis suspected in thousands of murderslike and you know they they admitted tothis activity they agreed to a deferredprosecution agreement with thegovernment where nobody did a day injail no individual had to pull out adime out of their own pockets to pay theshareholders pointed up 1.9 milliondollars but some of that was taxdeductible which means we paid some ofthat fine and and the only realpunishment with any teeth is that someof the executives had to partially defertheir bonuses for five years solaundering 850 million dollars for narcoterrorists gets you a total walk youknow that tells you basically everythingyou need to know about do we prosecutewhite-collar crime in this countrybasically no you know I mean that’s theanswerultimately that you find out and therewas paperwork that showed they knew itwas from the cartels oh yeah they if youif you look at the the agreement and youcan watch the thirst there’s there’s avideo of of Loretta Lynch and lanny18:00breuer because this is before laura18:02Loretta Lynch was Attorney General but18:03she was she was basically the head of18:07this deal they talked about the fact18:10that the HSBC branches because most of18:13this was done in Mexico hmx which was18:17the subsidiary company they had special18:20teller windows built to fit cash boxes18:24that the drug cartels were bringing into18:26the bank so basically you’ve seen the18:29scene the scene in Scarface where the18:31guys come in with duffel bags of cash to18:33the bank right and you know that’s like18:35a montage you know there’s that that18:37song I forget what song it is in the18:38background same thing these guys would18:40come into the the bank they would slide18:44in these boxes of cash one after the18:46other and that’s admitted activity the18:49banks signed off on this they’d you know18:50it’s not like they’re contesting it18:52they’re not saying we neither admitted18:53nor denied it’s it’s part of the deal so18:57and in they agreed to the amount18:59everything so yeah it was a one point19:04nine billion dollar settlement but you19:06know it’s not like it came out of the19:07pockets of the people who did it and19:09it’s not like any of the people who did19:11it are in jail it’s just you know a19:13thing that happened and you know that’s19:16five weeks of profit for the bank so19:18what what the fuck they don’t care right19:21did you see the documentary an inside19:24job yeah yep we’ve covered a lot of the19:27same territory yeah yeah that was a19:29sobering documentary where they’re19:31talking to the very people that caused19:33the financial crisis mm-hm and and19:35realizing that these people were19:37economics professors that eventually got19:39these jobs really lucrative jobs with19:42banks and how they finagled this system19:45and made it so it looked like these19:47things were appropriate ya know I talked19:50to the19:50some of the some of the things that they19:53invented that made this the crash19:54possible sounded like good ideas like19:58they they came up with this thing called20:00the credit default swap all right and I20:02won’t bore you with what that is exactly20:05but basically it’s a kind of insurance20:08where it’s it’s basically a bet it’s20:12hard to explain but it’s a way of quasi20:19insuring a product without having to20:22pony up a lot of money and the it’s it’s20:27called the derivative right and these20:31instruments are completely unregulated20:35can I put the secret default swap is20:37like you and I betting on whether or not20:43a third person’s house is going to burn20:48in a fire right like the old-school20:50insurance said that it had to be your20:53house in order for you to get insurance20:55on it this new form of quasi insurance21:00said that two totally disinterested21:01parties could have an interest in a21:03third thing that happens so it’s21:06basically gambling and on the one hand21:11it allowed people to create a whole lot21:15of capital which allowed them to lend21:16more money which theoretically allowed21:18people to buy more houses but in reality21:21it just created the system where all21:23these people had bets that were back and21:25forth on on all these properties that’s21:27one of the reasons why the when the21:30crash happened when when all those21:31mortgages started to fail it wasn’t just21:34the failures of those properties it was21:36all these people who were betting on21:37whether or not these people could could21:39pay their mortgages they started to lose21:42money and then there were people who had21:43bets on that who started to lose money21:45and it’s like this cascading whirlpool21:47of shit that happened and again it just21:51it started out as an idea to just create21:53more money to lend to lend and it turned21:56into this nightmare mechanical scenario22:00that just that created losses22:03you know in this almost apocalyptic22:05fashion and a lot of them had no idea22:08but that that was going to be the22:10eventualities22:14yeah it’s great it’s definitely crazy22:17stuff as a person who didn’t really22:19follow finance before how much does that22:21affected your life now like the way you22:24look at things I definitely pay a lot22:26more attention to the fine print when I22:30enter into any financial contract I22:34think about where I do my banking but22:38the reality is you just don’t have a22:40whole lot of choice in this country22:41anyway I mean it’s like everything else22:43there’s only a few companies left so22:47almost every bank that’s out there where22:51you can have a bank account in a22:52mortgage is is a bank that I’ve written22:55about some massive scandal before so22:58that that’s that’s a problem but yeah I23:03worry about it all the time I mean I23:04have friends in finance who call me and23:07they they tell me that you know that the23:11things that are incredibly unsafe and23:13that this that and the other could could23:14could happen and so I have an anxiety23:17level about things that I never had23:18before but apart from that yeah I mean23:22that’s a natural consequence of having23:26to spend 7 years looking at all these23:29horror stories that’s great it’s crazy23:31you spent their lunch time on it do you23:34see any other bubbles coming up23:36yeah people talk about that all the time23:40there’s a lot of a lot of negative press23:45about subprime auto loans for instance23:48which is it’s not exactly the same but23:52it’s it’s a similar thing I mean the23:53same basic scam of taking loans chopping24:00them up and then repackaging them as24:02something that’s more valuable than the24:04original loan you can do that with24:06anything any kind of credit you can do24:08it with credit cards you can do it with24:09aircraft loans you can do it with with24:11car loans you can do it with with home24:13mortgages24:15and so the the mechanism of taking24:18things that are are toxic and risky and24:22making them look like triple-a is still24:25is still part of the economy and it’s24:30everywhere the plus side of that is that24:33there’s more credit available you know24:36almost anybody can get a credit card or24:38even if you’ve had screwed up credit you24:39can get a car you know I mean there’s24:42this put us on this like endless cycle24:44of build-up bubble collapse build-up24:46bubble collapse rebounding collapse24:49again absolutely I mean I think that’s24:51that’s that’s why I can’t you have to be24:55nervous about the you know the24:57skyrocketing stock exchange because we25:01verified yeah I mean you should be right25:03do you are you heavily invested in and25:05I’ve got some in there I just did when25:07when the whole you know when Trump was25:09saying the economy has never been better25:10look at the stock market stock market’s25:12killing it always do and then it’ll have25:14a bad day and okay well I thought we’re25:16doing great like what’s going on with25:18this bad day can you not control these25:19bad days right like what’s happening25:21here right if you’re if you’re in25:23control the good days you’re also in25:24control the bad days right yeah of25:26course of course it just it seems it25:29seems super suspicious yeah and and in25:32the old days you’d have a lot of25:34confidence that well the stock market25:37always eventually goes up so yeah25:40there’s gonna be bad days but it’ll go25:42back but the problem is the underlying25:43economy in America it just isn’t all25:46that hot you know like we’re like what25:48do we really make in this country what25:50what we’re where’s the floor right like25:53we have we have some industries that25:55sort of perform well but if you know25:58periodically we go through these bubbles26:00that are based on nothing more than26:01enthusiasm you know in the 90s it was26:04the the tech bubble right where people26:08like Alan Greenspan would say things26:10like well we have a new paradigm in26:11economics right so it doesn’t matter26:15whether a company hasn’t shown any26:17ability to make money or26:21you know has no reasonable profit and26:25loss statements it’s just if it’s a good26:27idea that the stock is sound and26:30everybody should invest in it and the26:32stock market is going to continually go26:34go up so don’t worry about it of course26:37that doesn’t happen everybody but it26:39blows up everybody loses their shirt but26:41what what do they do the Fed lowers26:44interest rates basically allows Wall26:46Street to recapitalize drink itself26:49sober and they plunge into the next the26:52next madness which is mortgages and once26:55again you have Alan Greenspan saying hey26:58you know real estate is a great bet it’s27:01you know it’s going to continually27:02ascend people should use their homes as27:05ATM machines you know you should you27:08should consider refinancing your house27:10so that you can get a little bit of27:11extra cash and and this is this was27:14actually the message they sent to27:15America and again it creates as27:17artificial mania27:19where the economy is stoked artificially27:23to gigantic dimensions but it’s not27:27based on anything and so when when it27:30crashes when you finally get like any27:33Ponzi scheme it you know it depends it27:36depends on more new investors coming in27:38than old investors leaving right so27:40there’s always going to be that moment27:42when suddenly we don’t have as many new27:45ones as old ones and the instant that27:47happens it all goes kaboom right and27:50that’s what happened with with the27:53subprime market there was a moment in27:55time where they they just couldn’t keep27:58it going anymore they couldn’t find any28:00more new suckers though to get to sell28:03mortgages to and the mania ended and all28:06went splat and then it was amplified by28:08the fact that we have this system now of28:11people betting on credit that is legal28:16which creates more losses out of thin28:19air so yeah I’m terrified every time I28:22see this the stock market go up what’s28:25it based on is it based on our economy28:27actually doing well I don’t know I don’t28:29think so28:30you know I’m sorry I’m look like I’m28:33scaring you a little bit you’re28:34definitely scaring but I think that’s28:36good I think I need to be scared I tend28:39to take these things and just you know I28:41have financial advisors I let them28:43handle money right when I hear things28:45like this I just got Jesus well I I get28:48terrified when I hear about really smart28:49people getting scammed like yesterday we28:52were talking about theranos do you know28:54that a blood testing company that turned28:57out to be total horseshit no I didn’t28:59hear about this oh it’s great story it’s29:01it’s a story of one of those things29:03where you you find someone who you hope29:06exists and you build them up there was29:08this woman she looked like Steve Jobs29:11she wore a black turtleneck in every29:13photo and she was the richest ever29:18self-made woman she was worth four29:21billion dollars she had built this29:23company called theranos right out of29:25college she was like 19 when she started29:28the company it was a blood-testing29:30company that just required a small prick29:32of your blood to do complicated blood29:34analysis for diseases and things along29:36those lines29:36turns out it didn’t work at all mmm and29:38they faked a bunch of shit I’d spread29:42fraud a lot of people got their blood29:44tested it turned out to be you know they29:46were at risk for all these diseases and29:48warren buffett invested a hundred29:51million dollars I think 125 Betsy DeVos29:54more than 100 million dollars like all29:56these super wealthy people got scammed29:59Wow yeah when you find out that really30:01wealthy people write that do this for a30:04living30:05yeah Buffett does that for a living30:07right that he can get scammed out of a30:09hundred and twenty five million dollars30:12right right yeah and and Warren Buffett30:15his his mantra is supposed to be picking30:20the the absolute long term investment30:25right so it’s not he’s not like a stevie30:28colon type who just looks at the tape30:30and tries to time it just right so you30:32know you can you can make an investment30:35for ten seconds and come out with it30:37with a you know30:38if he if he’s investing in a company and30:40a and even he can be fooled that’s30:43that’s pretty terrible but look at Enron30:45I mean Enron was was another example of30:47the world’s best financial analysts30:49we’re looking at this company for a30:51decade and the the results were30:56completely ridiculous like it should30:58have been obvious to any layperson that31:00that these profit numbers couldn’t31:03possibly be real and it wasn’t until one31:08of those guys I think it was Jim Chanos31:11it was sort of a famous short seller I31:13mean I sort of said hey wait a minute31:15that there’s something up here but31:19people continually invested in these31:21companies and there’s just not a whole31:22lot of oversight that goes on with with31:27Wall Street and I think that’s that’s a31:29major lesson of you know the last 2031:33years is that is that there’s just not a31:36lot of eyes on on crime and in this area31:39another example is I’m sorry the the31:43who’s the guy scammed all the rich31:44people really made up Bernie Madoff yeah31:46I was gonna bring him up yes the most31:47egregious example right yeah yeah I mean31:49there are other there are other people31:51who did similar things but this guy31:54didn’t even make investments right you31:56know what I mean31:57like he he was literally just sort of31:59taking money and you know when someone32:01cashed out he would you know it was like32:04who’s that little girl throwing he had a32:09big you know pile of cash and you know32:11he would who take some man and throw32:13some out but if the SEC it had at any32:16time just looked at his books and said32:19what are you invested in it all would32:23have you know that whole house of cards32:25would have fallen and invest in anything32:27no and he wasn’t he wasn’t making trades32:29he wasn’t doing anything you know and32:32and there are a bunch of stories like32:35this there’s a great book called the32:38octopus which is about as somebody who32:39did a Madoff like scam another hedge32:42fund where same thing they weren’t32:45really making trades they were just sort32:46of creating phony profit and loss32:48statements and32:50and and creating records that look like32:53trades they could they could tell their32:55investors about but they weren’t32:56actually doing anything so if anybody32:58any expert at any time had just poke33:03their nose in into this person’s books33:06they would have seen it in ten seconds33:07that’s the mean that’s the amazing thing33:09about this you know not not to get back33:12to you know my my drug-dealing book but33:15this is one of the things that he says33:16which is that you know you can be in a33:20you know in a poor black neighborhood33:22and a couple of kids will be on a cell33:25phone and talking about selling ten33:27dollars worth of weed and they’ll be33:29picked up by cops you know within 2033:33minutes or something like that33:34meanwhile you know somebody like you33:37know Bernie Madoff can commit 10033:41million dollar frauds year after year33:43after year and not even do any to take33:46any effort to try to cover it up all33:48that well and get away with it well33:50Bernie’s big crime was that he ripped33:52off rich people yeah absolutely33:54if he had done the exact same thing to33:56poor people but he did was just it was33:58just too easy to call what he did a34:00crime versus what you were talking about34:02with these financial institutions right34:05yeah yeah if he if he had long if he34:07laundered it through a slightly more34:09legitimate process he he would have34:11gotten out flattened but the one of the34:13things that a lot of these guys these34:15scam artists get into it thinking that34:18they’re actually gonna be real hedge34:20funds and that they they have some stock34:23picking system that’s actually going to34:25make all their clients money and one of34:27the things they find out is that a they34:29suck they they they’re not outperforming34:31the market and they’re not that smart34:33but be that their clients can’t tell if34:36they just make up the numbers so there34:39there are a number of cases of people34:41who start out trying to be legitimate34:43and trying to be really real investment34:46advisors but they just end up turning it34:49to Bernie Madoff types because it’s just34:52easy there’s no there aren’t that many34:54people watching for it and34:56you know that that’s kind of scary too34:58well it seems like there’s so many35:01people doing it how could there be35:04enough people watching it right about35:06how many investment firms there are and35:08how many different people that are35:09involved in trading how could anybody be35:12watching all of it right yeah no there35:15but even even so even if you take that35:20into consideration then the number of35:22eyes that are that are on this world is35:24is ridiculously low electic take AIG all35:28right AIG was one of the world’s largest35:31companies at before before it crashed it35:35had like a hundred eighty thousand35:36employees it was it took advantage of35:41this weird loophole that allows35:42financial companies to essentially35:45choose their own regulator so because35:48because AIG had a thrift or Savings and35:53Loan that’s basically the same thing35:54they chose to be regulated by the OTS35:59which is the office of Thrift36:01Supervision36:02which is this tiny tiny little you know36:07office in Washington that oversees36:10basically Savings and Loan operations36:12and in in the OTS this is this is36:16actually true the they had exactly one36:19insurance expert on staff so essentially36:22with the world’s largest insurance36:23company was being regulated by a36:27government office that only had one36:29person who really understood insurance36:31and and even and even that person36:33wouldn’t have understood the the part of36:37the company that blew up which was36:39essentially an investment bank within36:42the insurance company that was creating36:44these sort of highly advanced sort of36:46derivative operations that know that36:50they just would not have been able to36:51understand that stuff so there the36:55government just does not place a lot of36:58resources into you know keeping an eye37:01on even the most basic things and when37:04you compare that to law enforcement in37:06other areas you know37:08is how many how many people do we have37:11you know worrying about back bank37:13robberies in this country or drugs right37:16or you know how many people are being37:19watched because their marijuana dealers37:21in other states I mean it dwarfs the37:24number of people who are watching for37:25economic crimes yeah one person yeah I37:30just love the the name of it office of37:33Thrift Supervision yeah sure it exists37:36anymore I think it was it was merged37:39into some other because there used to be37:42the OCC the officer of the Comptroller37:44of the currency and I think they created37:47a new regulator at out of all that after37:49the crash but but yeah and I chose its37:53regulator and its regulator you know was37:56totally overmatched didn’t couldn’t37:58understand shit and that’s one of the38:00reasons why the company blew up the38:02company also blew up because it was run38:04by insurance people who didn’t38:07understand the idea was basically Wall38:11Street’s bookie all these people were38:12betting all these investment banks were38:14betting on whether or not mortgages were38:16gonna fail or not and AIG was selling38:19the product that they could use to make38:23those bets essentially or they were38:24taking on insurance on packets of38:27mortgages so if they exploded you would38:30get a payout right it was it’s like it’s38:33like buying an insurance policy on your38:35neighbor’s house if it goes up in flames38:37you get paid on it you got paid AIG was38:39selling a product that allowed banks38:41essentially to buy insurance on on38:44houses on mortgages and if the if people38:48foreclosed if the mortgage has failed or38:52pools of mortgages failed if you if you38:56bought that kind of insurance you got38:57these huge payouts so people were38:59betting against mortgages basically and39:02AIG was taking all this book and but the39:06the heads of the company were oldschool39:08insurance executives who just didn’t39:10understand this sort of newfangled39:15complicated form of insurance and so39:18they would look at the numbers they were39:20being given and even they didn’t get it39:21didn’t they didn’t understand how how39:24exposed they were and so and all the39:27bets started going the wrong way39:28suddenly they’re being asked to pay out39:30billions of dollars and they’re like39:33wait where is this coming from so even39:36the companies were kind of clueless39:38about the shit that was going on it39:40turns out39:46[Applause]