Revenge of the Money Launderers

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.

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 VanuatuPanama, 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.

ICIJ @ICIJorg

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?

the Joe Rogan experience no well it you
00:05
get compared to him a lot and one in one
00:09
way I really saw that comparison was
00:11
your brilliant coverage of the financial
00:13
crisis and what was the the mechanisms
00:16
behind the scene of the financial crisis
00:18
and that I became a really big fan of
00:20
your work reading that because the that
00:23
I I think you covered that as well if
00:25
not better than anybody
00:26
oh well thanks yeah I mean so I I knew
00:31
nothing about any I couldn’t even
00:32
balance my checkbook when they assign me
00:34
to that story and and I had to start
00:38
basically from square one and I was
00:41
calling people and saying things like
00:44
can you tell me something about
00:45
something that I’ll understand you know
00:47
it’s real cold calling investment banks
00:49
and literally saying that and I finally
00:51
got a guy to have lunch with me and he
00:56
said your problem is that you’re trying
00:59
to understand this as an economic story
01:01
once you look at it as a crime story
01:04
you’ll get it and and from that point
01:08
forward I I totally I felt like like I
01:11
started to understand the whole
01:13
mechanism in the subprime mortgage scam
01:16
it really was a scam it’s really it’s
01:18
really just a massive corporatized
01:21
version of like selling oregano as weed
01:26
basically they they took stuff that
01:30
these is incredibly worthless highly
01:33
risky mortgage loans right you know they
01:36
would give out loans to everybody with a
01:38
pulse you know whether you had a job or
01:41
not whether you were a citizen or not
01:43
didn’t matter poor thing was to get the
01:45
loan immediately sell it off chop it up
01:48
turn it into securities and then they
01:50
used this highly advanced sort of
01:54
mathematical trick to turn all that sort
01:58
of mortgage hamburger into triple-a
02:00
rated securities so you’d have like a
02:02
you know a junk rated mortgage like the
02:05
riskiest loan in existence something
02:10
that was so toxic that
02:12
country companies like country or I
02:14
wouldn’t want to hold on to it for more
02:15
than a week because they were afraid it
02:17
would that the stuff would blow up and
02:18
then they would sell it off to like a
02:21
pension fund or you know an insurance
02:24
company in the form of a triple-a rated
02:27
security which you know is as safe as a
02:31
US Treasury bond so it was a scam McGann
02:35
and the the the the metaphor of you know
02:39
baby power taking baby powder and
02:42
selling it as coke or whatever that
02:44
that’s exactly what it was they just
02:45
took worthless shit and sold it as
02:47
something that was that was gold and
02:49
they got they did it for years and years
02:52
and years and years and they they knew
02:54
that this gigantic huge bubble of risk
02:58
and disaster was just accumulating and
03:02
that someday it was going to all explode
03:04
and cascade and and and ruin the economy
03:07
but everybody was trying to time it
03:10
right and and bet on when that would
03:14
happen and make their money before that
03:16
that Judgment Day came and it was it was
03:20
fascinating what’s it once I started to
03:22
learn about it it was just such a an
03:23
amazingly disgusting fascinating story
03:27
that it was just hard not to not to get
03:30
into it a crime story yeah think of it
03:33
as a crime story yeah no absolutely I
03:36
even got one guy gave me a book it was
03:42
called famous famous con artists in
03:45
history right it was like this little
03:47
tome it’s smaller than like the smallest
03:49
paperback and it was the biography of
03:53
this guy Victor Lustig was his name he
03:56
was famous because he sold the Eiffel
03:58
Tower twice alright and he he had this
04:05
this scam that he called I think it was
04:09
called the the the Hungarian box I’ll
04:14
have to go back and look but basically
04:15
what he would do is he would get on a
04:18
boat in New York and he had this sort of
04:24
beautiful mahogany box with
04:25
ranked on it that had two holes in it
04:27
and he would show all the guests that he
04:30
would put a blank piece of paper in one
04:32
and turn a crank and $100 bill would
04:35
come out the other end and he convinced
04:39
them all that it was a machine that made
04:41
money and everybody would offer him an
04:45
increasing amount of money for this
04:47
invention and he wouldn’t sell it until
04:51
the last day when he would sell it for a
04:54
you know forty or fifty thousand dollars
04:55
and then he would disappear and jump off
04:56
the boat and in France and never be seen
04:58
again people would yeah there it is
05:00
what’s it called yeah but but that’s
05:08
exactly what the Mortons picture let me
05:10
see his face
05:13
look at that fucking creep
05:15
[Laughter]
05:16
Wow let me see that box again Wow that
05:22
is crazy
05:23
so there yes so it was obviously fake
05:26
and and and but that’s what the mortgage
05:28
scam was they they they were taking
05:32
basically blank paper these these
05:35
subprime loans that belong to jander’s
05:38
who were gonna foreclose within ten
05:41
minutes all right and they were telling
05:45
people that oh we have this new
05:47
mathematical process that allows that
05:49
actually makes this stuff really safe
05:51
and you can put it in your in your
05:56
College endowment you can put in your
05:58
pension fund and so all these people you
06:01
know whose retirement monies were based
06:04
on securities we’re buying all this shit
06:08
that they thought was was triple-a rated
06:11
and that’s that’s how they woke up and
06:12
you know and in 2008-2009 and they found
06:14
their 401ks or were you know wiped out
06:19
by 40 percent or whatever it was my
06:20
neighbor really did I happen to him my
06:23
neighbor bought this plot of land and
06:24
had this dream to build his dream house
06:27
and he would go buy the plot of land and
06:30
he was always cleaning up and getting
06:31
ready and I was talking to him and then
06:33
boom 2008 happened he lost everything
06:37
and he would still go buy that plot
06:40
and cleanup and he and I would talk
06:42
about it and they just told me lost
06:44
everything
06:45
yeah so it’s never gonna happen huh yeah
06:47
no I think he I think he died he
06:51
eventually got really sick and they took
06:53
him out of his house and brought him
06:55
somewhere but I think he’s dead now but
06:57
yeah his his story was awful awful to
07:01
hear this guy who was in his 60s who had
07:04
got this piece of land with a nice view
07:06
and it’s like this is where I’m gonna
07:07
build my dream house and he had all this
07:10
money prepared for it all this money
07:11
saved away and he was ready to rock and
07:14
roll and then boom mmm it all went out
07:17
they just drained out somebody put a
07:19
hole in the bottom of the boat and
07:20
everything everything went to the bottom
07:23
of the ocean yeah and then he’d probably
07:25
got ripped off twice because his tax
07:26
dollars went to go bail out the guys who
07:28
you know you know who because some of
07:31
the some of the banks got stuck holding
07:32
some of this shit and rather than eat
07:35
the losses like your your friend did
07:37
they got the Federal Reserve to buy it
07:40
from them ya know and and you know or or
07:44
the Treasury how the fuck did they get
07:47
away with giving the CEOs bonuses during
07:51
that time yeah a giant bonuses during
07:53
the time where they they had to be
07:55
bailed out by the taxpayers yeah that
07:57
was another scam like so they were if
08:01
you looked at the fine print of all the
08:02
bailouts it’s basically said that you
08:05
had to repay the money by us by X time
08:08
before you could start paying people
08:10
exorbitant amounts of money again but a
08:14
lot of those a lot of those conditions
08:16
were never really followed and you know
08:19
the the conditions of repayment were
08:22
kind of glossed over and the the the
08:27
companies that they were supposed to be
08:28
able to pass these things called stress
08:30
tests which demonstrated that they were
08:33
back on solid footing again before they
08:35
paid people bonuses but the stress tests
08:39
were all fledged and you know I mean the
08:41
there were there was crime and
08:44
corruption a legality basically in every
08:46
direction during that whole period and
08:48
and
08:49
not just in the government but in in all
08:52
these companies as well geez yeah but
08:55
fascinating to follow yeah what was it
08:58
like covering that I mean how long did
09:00
you spend working on that seven years
09:03
probably yeah yeah well because one of
09:06
the things that I thought no that was
09:07
really interesting was I did my first
09:13
story about this and I got this
09:16
incredible reaction because it turns out
09:19
that the financial press there is nobody
09:21
in the financial press who writes for
09:23
ordinary people like it’s basically what
09:26
I was doing was a translation job I was
09:27
trying to basically take what had
09:30
happened and explain it in a way that a
09:33
person who knew nothing about finance
09:35
would be able to understand and it turns
09:38
out that nobody is doing that so all
09:42
these people who had questions about it
09:44
who who wanted to know what had happened
09:46
to their money or why don’t why didn’t
09:49
my house get foreclosed on or what it
09:50
you know what’s what’s a subprime
09:52
mortgage or anything you know there was
09:57
nobody else doing that work so I had
09:59
lots of it to do and it was really
10:01
interesting and I just kept doing it
10:04
that had to be depressing yeah oh yeah
10:07
of course
10:07
of course I mean most most investigative
10:10
reporting is depressing particularly
10:14
that because you mean a lot of it was
10:16
old people that oh my god old people
10:19
minorities I mean I did one story about
10:22
a bank in Maryland well it’s a National
10:29
Bank it’s it’s a bank that you know I
10:31
wouldn’t be surprised that a lot of
10:34
people listening how have their accounts
10:35
at this Bank they had to pay settlement
10:39
to the government because they were
10:42
intentionally targeting elderly black
10:45
people to sell subprime mortgages to and
10:50
they called the mud people
10:51
and there were all these these like
10:53
toxic emails going back and forth about
10:55
how stupid they were and how they’ll buy
10:57
anything etc etc the emails they call
11:00
them mud pee
11:01
yeah yeah and so they had to pay a
11:03
settlement to the government and but you
11:06
know the racial component of the of that
11:08
crash was something that I didn’t really
11:10
clue into until late but that was a big
11:12
part of it too
11:13
it was you know a lot of it involved
11:18
these mortgage lenders going into
11:22
particularly like lower middle-class
11:24
black neighborhoods and knocking on
11:27
doors where there’d be like an elderly
11:29
person at home and saying hey would you
11:31
like to refi your mortgage and you’ll
11:34
have a little bit of extra spending
11:35
money this month right and the person
11:40
won’t know anything about finance and
11:42
they’ll still sign this refinance deal
11:44
that allows them to save a little bit of
11:46
money each month not knowing that they
11:49
had just converted their fixed mortgage
11:51
into a floating mortgage and that is
11:53
seeing the interest rates changed you
11:56
know you’d have people who went from
11:58
paying $900 a month to paying $7,000 a
12:02
month right and suddenly they’re out in
12:04
the street and and you know the the
12:08
company that sold them the loan is long
12:10
gone by then they they’re not holding it
12:12
they as soon as they got her name on the
12:15
dotted line they sold it off to a bank
12:17
in New York who in turn again chopped it
12:20
up into hamburger and sold it probably
12:21
to you our pension fund or who or
12:23
whatever so there’s nobody she’d give a
12:25
complain to and you know yeah that stuff
12:27
was really depressing what was a feeling
12:29
like of having very little understanding
12:31
about finance and then immersing
12:33
yourself in it and now is vac sizing
12:36
that this is the underlying structure
12:38
that our society is Rhon that our money
12:41
is established through like this is this
12:43
is how we we sell houses and loans and
12:47
this is what we’re doing yes yeah no it
12:50
was it was fascinating I because before
12:52
that I was mostly covering like
12:56
elections right and again if you cover
12:58
elections it’s incredibly boring and you
13:01
never hear anything of substance and
13:03
it’s not terribly complicated and you
13:05
know one one the the Democrat says that
13:08
you know we want to help the middle
13:10
class and the Republican says we want to
13:11
protect America Family Values and that’s
13:13
pretty much the extent of the end
13:15
a challenge in terms of covering that
13:17
stuff and I always thought to myself you
13:20
know politics in America must be a lot
13:22
more complicated than this right there
13:23
must be some other hidden thing where
13:28
it’s incredibly complex and diabolical
13:30
and and you know the the real match
13:33
additions of power must be visible
13:35
somewhere and I think that you find that
13:40
when you when you start looking into how
Wall Street works how money works how
central banking works how you know how
the concentration of wealth works
I mean basically the subprime scheme was
an effort to pull the remaining savings
out of the population right it just
wasn’t you know in the old days
investment banks made their money by
lending money to companies who would
build factories and they would make
stuff and sell it around the world and
everybody would make money and never you
know even even the population would
would would benefit from it but that
manufacturing economy it’s all gone it’s
so four C’s so you have this
financialized the economy and they have
no normal beneficial way to make money
and all that all they can really do is
look to see where is their money and how
can we get it and most people had money
in their houses right like the the
14:42
accumulated savings of most people
14:43
whatever was left after the internet
14:46
crash in the 90s was in real estate and
14:50
that this was the scam by which they
14:54
took the wealth that was left in the
14:58
pockets of ordinary people and
14:59
transferred it to you know nine people
15:03
in Manhattan basically I mean that’s why
15:05
you have you know we told them when we
15:07
talk about wealth inequality now right
15:10
being a huge factor that you know the
15:13
top 95 I’m sorry the top 1% of the
15:19
population owns ninety percent of the
15:21
wealth in the country whatever it is
15:23
that’s a consequence of schemes like
15:25
this where they’re just there
15:28
they’re finding out where people have a
15:30
little bit of money and they’re
15:32
systematically coming up with scams to
15:34
move it from there to here with no
15:37
consequence no with no consequence and
15:39
that was the other part of the story
15:40
that I ended up having to cover later
15:42
which was you know the last time they
15:45
tried something like this like during
15:47
the SNL crisis which was also sort of a
15:51
giant fraud scheme also that involved
15:53
real estate lending and you know but
15:56
that the government after that actually
15:58
you know indicted 1800 people they put
16:01
800 people in jail they put a lot of you
16:04
know serious influential people on the
16:06
dock after that nobody nobody went to
16:11
jail after the stuff and there was and
16:13
people think that well they didn’t do
16:16
anything that was technically illegal no
16:17
bullshit there there was lots of stuff
16:19
that was that was brazenly criminally
16:23
illegal I mean they they committed fraud
16:25
on a broad scale but some of these
16:27
companies were into the things that were
even worse than that I mean you take
HSBC HSBC admitted to laundering 850
million dollars for a pair of Central
and South American drug cartels
including the Sinaloa cartel right which
is suspected in thousands of murders
like and you know they they admitted to
this activity they agreed to a deferred
prosecution agreement with the
government where nobody did a day in
jail no individual had to pull out a
dime out of their own pockets to pay the
shareholders pointed up 1.9 million
dollars but some of that was tax
deductible which means we paid some of
that fine and and the only real
punishment with any teeth is that some
of the executives had to partially defer
their bonuses for five years so
laundering 850 million dollars for narco
terrorists gets you a total walk you
know that tells you basically everything
you need to know about do we prosecute
white-collar crime in this country
basically no you know I mean that’s the
answer
ultimately that you find out and there
was paperwork that showed they knew it
was from the cartels oh yeah they if you
if you look at the the agreement and you
can watch the thirst there’s there’s a
video of of Loretta Lynch and lanny
18:00
breuer because this is before laura
18:02
Loretta Lynch was Attorney General but
18:03
she was she was basically the head of
18:07
this deal they talked about the fact
18:10
that the HSBC branches because most of
18:13
this was done in Mexico hmx which was
18:17
the subsidiary company they had special
18:20
teller windows built to fit cash boxes
18:24
that the drug cartels were bringing into
18:26
the bank so basically you’ve seen the
18:29
scene the scene in Scarface where the
18:31
guys come in with duffel bags of cash to
18:33
the bank right and you know that’s like
18:35
a montage you know there’s that that
18:37
song I forget what song it is in the
18:38
background same thing these guys would
18:40
come into the the bank they would slide
18:44
in these boxes of cash one after the
18:46
other and that’s admitted activity the
18:49
banks signed off on this they’d you know
18:50
it’s not like they’re contesting it
18:52
they’re not saying we neither admitted
18:53
nor denied it’s it’s part of the deal so
18:57
and in they agreed to the amount
18:59
everything so yeah it was a one point
19:04
nine billion dollar settlement but you
19:06
know it’s not like it came out of the
19:07
pockets of the people who did it and
19:09
it’s not like any of the people who did
19:11
it are in jail it’s just you know a
19:13
thing that happened and you know that’s
19:16
five weeks of profit for the bank so
19:18
what what the fuck they don’t care right
19:21
did you see the documentary an inside
19:24
job yeah yep we’ve covered a lot of the
19:27
same territory yeah yeah that was a
19:29
sobering documentary where they’re
19:31
talking to the very people that caused
19:33
the financial crisis mm-hm and and
19:35
realizing that these people were
19:37
economics professors that eventually got
19:39
these jobs really lucrative jobs with
19:42
banks and how they finagled this system
19:45
and made it so it looked like these
19:47
things were appropriate ya know I talked
19:50
to the
19:50
some of the some of the things that they
19:53
invented that made this the crash
19:54
possible sounded like good ideas like
19:58
they they came up with this thing called
20:00
the credit default swap all right and I
20:02
won’t bore you with what that is exactly
20:05
but basically it’s a kind of insurance
20:08
where it’s it’s basically a bet it’s
20:12
hard to explain but it’s a way of quasi
20:19
insuring a product without having to
20:22
pony up a lot of money and the it’s it’s
20:27
called the derivative right and these
20:31
instruments are completely unregulated
20:35
can I put the secret default swap is
20:37
like you and I betting on whether or not
20:43
a third person’s house is going to burn
20:48
in a fire right like the old-school
20:50
insurance said that it had to be your
20:53
house in order for you to get insurance
20:55
on it this new form of quasi insurance
21:00
said that two totally disinterested
21:01
parties could have an interest in a
21:03
third thing that happens so it’s
21:06
basically gambling and on the one hand
21:11
it allowed people to create a whole lot
21:15
of capital which allowed them to lend
21:16
more money which theoretically allowed
21:18
people to buy more houses but in reality
21:21
it just created the system where all
21:23
these people had bets that were back and
21:25
forth on on all these properties that’s
21:27
one of the reasons why the when the
21:30
crash happened when when all those
21:31
mortgages started to fail it wasn’t just
21:34
the failures of those properties it was
21:36
all these people who were betting on
21:37
whether or not these people could could
21:39
pay their mortgages they started to lose
21:42
money and then there were people who had
21:43
bets on that who started to lose money
21:45
and it’s like this cascading whirlpool
21:47
of shit that happened and again it just
21:51
it started out as an idea to just create
21:53
more money to lend to lend and it turned
21:56
into this nightmare mechanical scenario
22:00
that just that created losses
22:03
you know in this almost apocalyptic
22:05
fashion and a lot of them had no idea
22:08
but that that was going to be the
22:10
eventualities
22:14
yeah it’s great it’s definitely crazy
22:17
stuff as a person who didn’t really
22:19
follow finance before how much does that
22:21
affected your life now like the way you
22:24
look at things I definitely pay a lot
22:26
more attention to the fine print when I
22:30
enter into any financial contract I
22:34
think about where I do my banking but
22:38
the reality is you just don’t have a
22:40
whole lot of choice in this country
22:41
anyway I mean it’s like everything else
22:43
there’s only a few companies left so
22:47
almost every bank that’s out there where
22:51
you can have a bank account in a
22:52
mortgage is is a bank that I’ve written
22:55
about some massive scandal before so
22:58
that that’s that’s a problem but yeah I
23:03
worry about it all the time I mean I
23:04
have friends in finance who call me and
23:07
they they tell me that you know that the
23:11
things that are incredibly unsafe and
23:13
that this that and the other could could
23:14
could happen and so I have an anxiety
23:17
level about things that I never had
23:18
before but apart from that yeah I mean
23:22
that’s a natural consequence of having
23:26
to spend 7 years looking at all these
23:29
horror stories that’s great it’s crazy
23:31
you spent their lunch time on it do you
23:34
see any other bubbles coming up
23:36
yeah people talk about that all the time
23:40
there’s a lot of a lot of negative press
23:45
about subprime auto loans for instance
23:48
which is it’s not exactly the same but
23:52
it’s it’s a similar thing I mean the
23:53
same basic scam of taking loans chopping
24:00
them up and then repackaging them as
24:02
something that’s more valuable than the
24:04
original loan you can do that with
24:06
anything any kind of credit you can do
24:08
it with credit cards you can do it with
24:09
aircraft loans you can do it with with
24:11
car loans you can do it with with home
24:13
mortgages
24:15
and so the the mechanism of taking
24:18
things that are are toxic and risky and
24:22
making them look like triple-a is still
24:25
is still part of the economy and it’s
24:30
everywhere the plus side of that is that
24:33
there’s more credit available you know
24:36
almost anybody can get a credit card or
24:38
even if you’ve had screwed up credit you
24:39
can get a car you know I mean there’s
24:42
this put us on this like endless cycle
24:44
of build-up bubble collapse build-up
24:46
bubble collapse rebounding collapse
24:49
again absolutely I mean I think that’s
24:51
that’s that’s why I can’t you have to be
24:55
nervous about the you know the
24:57
skyrocketing stock exchange because we
25:01
verified yeah I mean you should be right
25:03
do you are you heavily invested in and
25:05
I’ve got some in there I just did when
25:07
when the whole you know when Trump was
25:09
saying the economy has never been better
25:10
look at the stock market stock market’s
25:12
killing it always do and then it’ll have
25:14
a bad day and okay well I thought we’re
25:16
doing great like what’s going on with
25:18
this bad day can you not control these
25:19
bad days right like what’s happening
25:21
here right if you’re if you’re in
25:23
control the good days you’re also in
25:24
control the bad days right yeah of
25:26
course of course it just it seems it
25:29
seems super suspicious yeah and and in
25:32
the old days you’d have a lot of
25:34
confidence that well the stock market
25:37
always eventually goes up so yeah
25:40
there’s gonna be bad days but it’ll go
25:42
back but the problem is the underlying
25:43
economy in America it just isn’t all
25:46
that hot you know like we’re like what
25:48
do we really make in this country what
25:50
what we’re where’s the floor right like
25:53
we have we have some industries that
25:55
sort of perform well but if you know
25:58
periodically we go through these bubbles
26:00
that are based on nothing more than
26:01
enthusiasm you know in the 90s it was
26:04
the the tech bubble right where people
26:08
like Alan Greenspan would say things
26:10
like well we have a new paradigm in
26:11
economics right so it doesn’t matter
26:15
whether a company hasn’t shown any
26:17
ability to make money or
26:21
you know has no reasonable profit and
26:25
loss statements it’s just if it’s a good
26:27
idea that the stock is sound and
26:30
everybody should invest in it and the
26:32
stock market is going to continually go
26:34
go up so don’t worry about it of course
26:37
that doesn’t happen everybody but it
26:39
blows up everybody loses their shirt but
26:41
what what do they do the Fed lowers
26:44
interest rates basically allows Wall
26:46
Street to recapitalize drink itself
26:49
sober and they plunge into the next the
26:52
next madness which is mortgages and once
26:55
again you have Alan Greenspan saying hey
26:58
you know real estate is a great bet it’s
27:01
you know it’s going to continually
27:02
ascend people should use their homes as
27:05
ATM machines you know you should you
27:08
should consider refinancing your house
27:10
so that you can get a little bit of
27:11
extra cash and and this is this was
27:14
actually the message they sent to
27:15
America and again it creates as
27:17
artificial mania
27:19
where the economy is stoked artificially
27:23
to gigantic dimensions but it’s not
27:27
based on anything and so when when it
27:30
crashes when you finally get like any
27:33
Ponzi scheme it you know it depends it
27:36
depends on more new investors coming in
27:38
than old investors leaving right so
27:40
there’s always going to be that moment
27:42
when suddenly we don’t have as many new
27:45
ones as old ones and the instant that
27:47
happens it all goes kaboom right and
27:50
that’s what happened with with the
27:53
subprime market there was a moment in
27:55
time where they they just couldn’t keep
27:58
it going anymore they couldn’t find any
28:00
more new suckers though to get to sell
28:03
mortgages to and the mania ended and all
28:06
went splat and then it was amplified by
28:08
the fact that we have this system now of
28:11
people betting on credit that is legal
28:16
which creates more losses out of thin
28:19
air so yeah I’m terrified every time I
28:22
see this the stock market go up what’s
28:25
it based on is it based on our economy
28:27
actually doing well I don’t know I don’t
28:29
think so
28:30
you know I’m sorry I’m look like I’m
28:33
scaring you a little bit you’re
28:34
definitely scaring but I think that’s
28:36
good I think I need to be scared I tend
28:39
to take these things and just you know I
28:41
have financial advisors I let them
28:43
handle money right when I hear things
28:45
like this I just got Jesus well I I get
28:48
terrified when I hear about really smart
28:49
people getting scammed like yesterday we
28:52
were talking about theranos do you know
28:54
that a blood testing company that turned
28:57
out to be total horseshit no I didn’t
28:59
hear about this oh it’s great story it’s
29:01
it’s a story of one of those things
29:03
where you you find someone who you hope
29:06
exists and you build them up there was
29:08
this woman she looked like Steve Jobs
29:11
she wore a black turtleneck in every
29:13
photo and she was the richest ever
29:18
self-made woman she was worth four
29:21
billion dollars she had built this
29:23
company called theranos right out of
29:25
college she was like 19 when she started
29:28
the company it was a blood-testing
29:30
company that just required a small prick
29:32
of your blood to do complicated blood
29:34
analysis for diseases and things along
29:36
those lines
29:36
turns out it didn’t work at all mmm and
29:38
they faked a bunch of shit I’d spread
29:42
fraud a lot of people got their blood
29:44
tested it turned out to be you know they
29:46
were at risk for all these diseases and
29:48
warren buffett invested a hundred
29:51
million dollars I think 125 Betsy DeVos
29:54
more than 100 million dollars like all
29:56
these super wealthy people got scammed
29:59
Wow yeah when you find out that really
30:01
wealthy people write that do this for a
30:04
living
30:05
yeah Buffett does that for a living
30:07
right that he can get scammed out of a
30:09
hundred and twenty five million dollars
30:12
right right yeah and and Warren Buffett
30:15
his his mantra is supposed to be picking
30:20
the the absolute long term investment
30:25
right so it’s not he’s not like a stevie
30:28
colon type who just looks at the tape
30:30
and tries to time it just right so you
30:32
know you can you can make an investment
30:35
for ten seconds and come out with it
30:37
with a you know
30:38
if he if he’s investing in a company and
30:40
a and even he can be fooled that’s
30:43
that’s pretty terrible but look at Enron
30:45
I mean Enron was was another example of
30:47
the world’s best financial analysts
30:49
we’re looking at this company for a
30:51
decade and the the results were
30:56
completely ridiculous like it should
30:58
have been obvious to any layperson that
31:00
that these profit numbers couldn’t
31:03
possibly be real and it wasn’t until one
31:08
of those guys I think it was Jim Chanos
31:11
it was sort of a famous short seller I
31:13
mean I sort of said hey wait a minute
31:15
that there’s something up here but
31:19
people continually invested in these
31:21
companies and there’s just not a whole
31:22
lot of oversight that goes on with with
31:27
Wall Street and I think that’s that’s a
31:29
major lesson of you know the last 20
31:33
years is that is that there’s just not a
31:36
lot of eyes on on crime and in this area
31:39
another example is I’m sorry the the
31:43
who’s the guy scammed all the rich
31:44
people really made up Bernie Madoff yeah
31:46
I was gonna bring him up yes the most
31:47
egregious example right yeah yeah I mean
31:49
there are other there are other people
31:51
who did similar things but this guy
31:54
didn’t even make investments right you
31:56
know what I mean
31:57
like he he was literally just sort of
31:59
taking money and you know when someone
32:01
cashed out he would you know it was like
32:04
who’s that little girl throwing he had a
32:09
big you know pile of cash and you know
32:11
he would who take some man and throw
32:13
some out but if the SEC it had at any
32:16
time just looked at his books and said
32:19
what are you invested in it all would
32:23
have you know that whole house of cards
32:25
would have fallen and invest in anything
32:27
no and he wasn’t he wasn’t making trades
32:29
he wasn’t doing anything you know and
32:32
and there are a bunch of stories like
32:35
this there’s a great book called the
32:38
octopus which is about as somebody who
32:39
did a Madoff like scam another hedge
32:42
fund where same thing they weren’t
32:45
really making trades they were just sort
32:46
of creating phony profit and loss
32:48
statements and
32:50
and and creating records that look like
32:53
trades they could they could tell their
32:55
investors about but they weren’t
32:56
actually doing anything so if anybody
32:58
any expert at any time had just poke
33:03
their nose in into this person’s books
33:06
they would have seen it in ten seconds
33:07
that’s the mean that’s the amazing thing
33:09
about this you know not not to get back
33:12
to you know my my drug-dealing book but
33:15
this is one of the things that he says
33:16
which is that you know you can be in a
33:20
you know in a poor black neighborhood
33:22
and a couple of kids will be on a cell
33:25
phone and talking about selling ten
33:27
dollars worth of weed and they’ll be
33:29
picked up by cops you know within 20
33:33
minutes or something like that
33:34
meanwhile you know somebody like you
33:37
know Bernie Madoff can commit 100
33:41
million dollar frauds year after year
33:43
after year and not even do any to take
33:46
any effort to try to cover it up all
33:48
that well and get away with it well
33:50
Bernie’s big crime was that he ripped
33:52
off rich people yeah absolutely
33:54
if he had done the exact same thing to
33:56
poor people but he did was just it was
33:58
just too easy to call what he did a
34:00
crime versus what you were talking about
34:02
with these financial institutions right
34:05
yeah yeah if he if he had long if he
34:07
laundered it through a slightly more
34:09
legitimate process he he would have
34:11
gotten out flattened but the one of the
34:13
things that a lot of these guys these
34:15
scam artists get into it thinking that
34:18
they’re actually gonna be real hedge
34:20
funds and that they they have some stock
34:23
picking system that’s actually going to
34:25
make all their clients money and one of
34:27
the things they find out is that a they
34:29
suck they they they’re not outperforming
34:31
the market and they’re not that smart
34:33
but be that their clients can’t tell if
34:36
they just make up the numbers so there
34:39
there are a number of cases of people
34:41
who start out trying to be legitimate
34:43
and trying to be really real investment
34:46
advisors but they just end up turning it
34:49
to Bernie Madoff types because it’s just
34:52
easy there’s no there aren’t that many
34:54
people watching for it and
34:56
you know that that’s kind of scary too
34:58
well it seems like there’s so many
35:01
people doing it how could there be
35:04
enough people watching it right about
35:06
how many investment firms there are and
35:08
how many different people that are
35:09
involved in trading how could anybody be
35:12
watching all of it right yeah no there
35:15
but even even so even if you take that
35:20
into consideration then the number of
35:22
eyes that are that are on this world is
35:24
is ridiculously low electic take AIG all
35:28
right AIG was one of the world’s largest
35:31
companies at before before it crashed it
35:35
had like a hundred eighty thousand
35:36
employees it was it took advantage of
35:41
this weird loophole that allows
35:42
financial companies to essentially
35:45
choose their own regulator so because
35:48
because AIG had a thrift or Savings and
35:53
Loan that’s basically the same thing
35:54
they chose to be regulated by the OTS
35:59
which is the office of Thrift
36:01
Supervision
36:02
which is this tiny tiny little you know
36:07
office in Washington that oversees
36:10
basically Savings and Loan operations
36:12
and in in the OTS this is this is
36:16
actually true the they had exactly one
36:19
insurance expert on staff so essentially
36:22
with the world’s largest insurance
36:23
company was being regulated by a
36:27
government office that only had one
36:29
person who really understood insurance
36:31
and and even and even that person
36:33
wouldn’t have understood the the part of
36:37
the company that blew up which was
36:39
essentially an investment bank within
36:42
the insurance company that was creating
36:44
these sort of highly advanced sort of
36:46
derivative operations that know that
36:50
they just would not have been able to
36:51
understand that stuff so there the
36:55
government just does not place a lot of
36:58
resources into you know keeping an eye
37:01
on even the most basic things and when
37:04
you compare that to law enforcement in
37:06
other areas you know
37:08
is how many how many people do we have
37:11
you know worrying about back bank
37:13
robberies in this country or drugs right
37:16
or you know how many people are being
37:19
watched because their marijuana dealers
37:21
in other states I mean it dwarfs the
37:24
number of people who are watching for
37:25
economic crimes yeah one person yeah I
37:30
just love the the name of it office of
37:33
Thrift Supervision yeah sure it exists
37:36
anymore I think it was it was merged
37:39
into some other because there used to be
37:42
the OCC the officer of the Comptroller
37:44
of the currency and I think they created
37:47
a new regulator at out of all that after
37:49
the crash but but yeah and I chose its
37:53
regulator and its regulator you know was
37:56
totally overmatched didn’t couldn’t
37:58
understand shit and that’s one of the
38:00
reasons why the company blew up the
38:02
company also blew up because it was run
38:04
by insurance people who didn’t
38:07
understand the idea was basically Wall
38:11
Street’s bookie all these people were
38:12
betting all these investment banks were
38:14
betting on whether or not mortgages were
38:16
gonna fail or not and AIG was selling
38:19
the product that they could use to make
38:23
those bets essentially or they were
38:24
taking on insurance on packets of
38:27
mortgages so if they exploded you would
38:30
get a payout right it was it’s like it’s
38:33
like buying an insurance policy on your
38:35
neighbor’s house if it goes up in flames
38:37
you get paid on it you got paid AIG was
38:39
selling a product that allowed banks
38:41
essentially to buy insurance on on
38:44
houses on mortgages and if the if people
38:48
foreclosed if the mortgage has failed or
38:52
pools of mortgages failed if you if you
38:56
bought that kind of insurance you got
38:57
these huge payouts so people were
38:59
betting against mortgages basically and
39:02
AIG was taking all this book and but the
39:06
the heads of the company were oldschool
39:08
insurance executives who just didn’t
39:10
understand this sort of newfangled
39:15
complicated form of insurance and so
39:18
they would look at the numbers they were
39:20
being given and even they didn’t get it
39:21
didn’t they didn’t understand how how
39:24
exposed they were and so and all the
39:27
bets started going the wrong way
39:28
suddenly they’re being asked to pay out
39:30
billions of dollars and they’re like
39:33
wait where is this coming from so even
39:36
the companies were kind of clueless
39:38
about the shit that was going on it
39:40
turns out
39:46
[Applause]

How U.S. Banks Took Over the World

A decade ago, they almost brought down the global financial system. Now they rule it.

When two of Europe’s corporate titans sat down to negotiate a merger this year, they called American banks.

Fiat Chrysler Automobiles hired Goldman Sachs Group Inc. as its lead adviser. France’s Renault SA hired a boutique bank stacked with Goldman alumni. In a deal that would reshape Europe’s auto industry, the continental banks that had sustained Fiat and Renault for more than a century were muscled aside by a pair of Wall Street deal makers.

A decade after fueling a crisis that nearly brought down the global financial system, America’s banks are ruling it. They earned 62% of global investment-banking fees last year, up from 53% in 2011, according to Coalition, an industry data provider. Last year, U.S. banks took home $7 of every $10 in merger fees, $6 of every $10 in stock commissions, and $6 of every $10 paid to hold and move corporate cash.

urope’s banks are smaller, less profitable and beating a hasty retreat from Wall Street.

From their central perch in London and with close ties to developing countries, Europe’s banks were primed to benefit as financial services went global. They charged onto Wall Street in the 1990s and pressed their advantage as U.S. banks limped out of the 2008 crisis.

Then, “they handed the whole system on a platter to the Americans,” said Colm Kelleher, the Irish-born former Morgan Stanley executive.

Coming out of the crisis, U.S. banks quickly raised capital and shed risk, unpleasant tasks that Europeans put off. American businesses recovered quickly, and its consumers are eager to borrow and spend. A tax cut in 2018 boosted profits. Interest rates have risen.

Meanwhile in Europe, regional economies are sputtering and borrowing has slowed.

Central bankers have cut interest rates below zero, which leaves banks struggling to eke out a profit on loans. Banking policy in Europe remains fractured, with national and continental regulators pursuing often conflicting agendas.

“It is not our remit to promote national, or even European, champions,” said Andrea Enria, the European Central Bank’s top banking regulator.

Twenty-five years ago, European banks charged into the U.S. They bought storied firms like Donaldson, Lufkin & Jenrette and Wasserstein Perella and dangled big paydays for rainmakers. When Deutsche Bank announced a $10 billion takeover of Bankers Trust in 1998, it promised at least $400 million in bonuses to retain top bankers.

The challenges of merging a conservative European commercial lender and a U.S. derivatives shop gave competitors pause. Goldman’s CEO, Hank Paulson, shared his doubts with a hotel ballroom of his bankers: Deutsche Bank “just signed up for 10 years of pain,” attendees remember him saying.

Henry Paulson is sworn in as Treasury secretary by Supreme Court Chief Justice John Roberts in 2006. Before he headed the Treasury, he ran Goldman Sachs. PHOTO: JIM YOUNG/REUTERS

But in an era of cheap debt and light regulation, the land grab seemed to pay off. Deutsche Bank had a $3 trillion balance sheet in 2007 and that year earned twice as much as Bank of America Corp. in securities-trading. Royal Bank of Scotland was briefly the largest bank in the world, wielding a balance sheet bigger than Britain’s entire economy.

Even the financial crisis looked at first like an opportunity. When Barclays PLC bought Lehman Brothers in a fire sale, it got 10,000 of the firm’s U.S. bankers and few of its bad debts. On Lehman’s Times Square trading floor, the loudspeakers played “God Save The Queen.” Deutsche Bank pounced on Wall Street’s clients.

The high-water mark was in 2011, when global investment-banking fees were roughly split between European and U.S. firms.

The good times didn’t last. A 2012 sovereign-debt crisis across the continent put new pressure on the region’s biggest banks. Economic growth slowed across the continent. Central bankers turned interest rates negative in 2014. German media calls them “Strafzinsen,” translating roughly to “penalty rates.”

UBS slashed 10,000 jobs and cut big parts of its trading operation. Royal Bank of Scotland fired thousands of investment bankers and sold its U.S. retail arm to focus on the U.K. Three-quarters of the Lehman bankers Barclays picked up in 2008 were gone within five years, according to Financial Industry Regulatory Authority records.

Meanwhile, U.S. banks were quietly encroaching on European rivals’ territory. In 2009, JPMorgan completed an acquisition of Cazenove, the U.K. investment bank. Every year since 2014, JPMorgan has generated more investment-banking revenue across Europe than anyone else, according to Dealogic. (The London-listed owner of Peppa Pig, a British cartoon character, hired JPMorgan Cazenove to advise on its sale in August to U.S. toy giant Hasbro Inc. )

As U.S. banks got stronger and their European rivals weakened, client loyalties began to change.

Today’s companies are increasingly global. They make more of their money in the U.S. and have swapped a shareholder register stacked with old-line European families and trusts for the likes of BlackRock Inc. and other U.S. investment giants, where Wall Street banks are better connected. The percentage of U.K. companies’ stock owned by foreigners rose from 16% in 1994 to 53% in 2016, according to government statistics.

Fiat, the Italian car maker that pursued a tie-up with France’s Renault this year, makes two-thirds of its money in the U.S.,  where it owns Chrysler. Its shots are called by John Elkann, the New York-born scion of the family that founded Fiat in 1899.

One of Mr. Elkann’s closest advisers is a Goldman Sachs banker who for the past 15 years has organized a yearly gathering of European billionaire business owners, according to people who have attended. They swap stories, share advice and, more often than not, hire Goldman for deals.

Globalization has cost the Europeans not just on headline-grabbing mergers, but in the everyday business of managing money for clients. Deliveroo, a food-delivery startup based in the U.K., sought to ramp up in Europe and the Middle East. Instead of hiring local banks in each market, it consolidated its money flows with Citigroup , which has local licenses in 98 countries and a global digital platform.

JPMorgan has made a big push to expand transaction banking for European clients. In 2010 it established a new unit of global bankers to pitch day-to-day transaction services to big companies, and later took over dozens of European transaction relationships from RBS.

UBS’s Stamford, Conn., trading floor in 2005. It was able to accommodate 1,400 traders and staff. PHOTO: RICK FRIEDMAN/CORBIS/GETTY IMAGES

Most recently JPMorgan said it is extending its commercial banking business globally, targeting hundreds of midsize businesses across Europe. It has sought to take on a more local flavoring, doing things like sponsoring math-and-science programs for students in France, Germany and Italy.

Last year, Citigroup and JPMorgan were two of the three biggest providers of day-to-day transaction banking globally, along with Britain’s HSBC Holdings PLC, according to Coalition. U.S. banks accounted for 57% of the global transaction-banking revenue pool among the biggest banks in that business, versus 22% for Europeans, Coalition said.

How Corporations and the Wealthy Avoid Taxes (and How to Stop Them)

The United States loses, according to my estimates, close to $70 billion a year in tax revenue due to the shifting of corporate profits to tax havens. That’s close to 20 percent of the corporate tax revenue that is collected each year. This is legal.

Meanwhile, an estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P., is held offshore by ultrawealthy households in a handful of tax shelters, and most of it isn’t being reported to the relevant tax authorities. This is… not so legal.

 ..  In 2015, $15.5 billion in profits made their way to Google Ireland Holdings in Bermuda even though Google employs only a handful of people there.
.. 63 percent of all the profits made outside of the United States by American multinationals are now reported in six low- or zero-tax countries:
  • the Netherlands,
  • Bermuda,
  • Luxembourg,
  • Ireland,
  • Singapore and
  • Switzerland.
.. After learning Irish authorities were going to close loopholes it had used, Apple asked a Bermuda-based law firm, Appleby, to design a similar tax shelter on the English Channel island of Jersey
Appleby duly obliged, and Jersey became the new home of the (previously Irish) companies Apple Sales International and Apple Operations International.
.. In 2015, the Swiss Leaks revealed the owners of bank accounts at HSBC Switzerland, and in 2016 the Panama Papers revealed those of the shell companies created by the Panamanian law firm Mossack Fonseca. These showed that 50 percent of the wealth held in tax havens belongs to households with more than $50 million in net wealth
.. In the Paradise Papers, we see that these are not only Russian oligarchs or Belgian dentists who use tax havens, but rich Americans too.
.. For a long time, the bulk of it was held in Switzerland, but a fast-growing fraction is now in Hong Kong, Singapore and other emerging havens.
The most compelling way to do this would be to create comprehensive registries recording the true individual owners of real estate and financial securities, including equities, bonds and mutual fund shares.
.. One common objection to financial registries is that they would impinge on privacy. Yet countries have maintained property records for land and real estate for decades.
.. comprehensive registries would make it possible to not only reduce tax evasion, but also curb money laundering, monitor international capital flows, fight the financing of terrorism and better measure inequality.