Audit Notes: Libor Rain Man, fraud without fraudsters, George Will on TBTF

The Journal spotlights an RBS banker at the center of the scandal

The Wall Street Journal’s David Enrich has some great reporting on Tom Hayes, the RBS banker at the center of the massive Libor scandal:

Then, regulators say, Mr. Hayes took Libor manipulation a step further, into an effort involving other banks. Around January 2007, he started contacting not just other UBS employees to try to skew the Libor rate but a handful of friends and former colleagues at other banks…

Each morning at a meeting of UBS’s interest-rate-derivatives desk in Tokyo, Mr. Hayes told colleagues which way he planned to push Libor that day, according to the Justice Department. Mr. Hayes was so open about his strategy that he would change his status on his Facebook page to reflect his daily desires for Libor to move up or down, said a person familiar with the matter.

Though generating tens of millions of dollars a year in revenue, he worried his bosses weren’t satisfied. “Have had ok year but management still pushing me for more,” he wrote to a trader at another bank in November 2007, according to the CFTC.

You might want to pass the popcorn. Hayes was charged by the Justice Department with fraud right before Christmas, and he sent Enrich a text that said, “This goes much much higher than me.”

— Michael Hiltzik of the Los Angeles Times writes about the Justice Department finally going after the credit-ratings firms. It’s an aggressive action against S&P, with the administration seeking $5 billion for the fraud that enabled the crisis.

But as Hiltzik notes, there’s still something missing here: Individual accountability:

But the key question sidestepped by the new lawsuits is why no individuals are being brought to book for what were, in every way, the plots and designs of individual people, acting to slake their own greed and ambition. This is another example of what UC Irvine criminologist Henry Pontell calls “the trivialization of criminal fraud.”

“This is essentially a criminal fraud case,” Pontell told me. “The only difference between civil and criminal cases is that they [the prosecutors] can spend a lot less on civil cases because the burden of proof is lower.”

That speaks to the impoverishment of our white collar prosecutorial corps since 9/11, when the best and brightest were diverted to anti-terrorism cases and not replaced. By normalizing major corporate fraud cases as merely matters for civil fines, however, this trend has destroyed the deterrent effect of the justice system.

It’s the same old fraud-without-fraudsters thinking we’ve seen the last five years.

— It’s kind of a big deal when a conservative like George Will makes the case for aggressive government action to cut Wall Street down to size:

In a sense, TBTF began under Ronald Reagan with the 1984 rescue of Continental Illinois, then the seventh-largest bank. In 2011, the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) had 40 percent of all federally insured deposits. Today, the 5,500 community banks have 12 percent of the banking industry’s assets. The 12 banks with $250 billion to $2.3 trillion in assets total 69 percent. The 20 largest banks’ assets total 84.5 percent of the nation’s gross domestic product…

By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail. Aux barricades!

Will talks favorably about both Senator Sherrod Brown plan to limit bank assets to 2 to 4 percent of GDP and Dallas Fed President Richard Fisher’s to limit them to $100 billion. That would truly be radical change. JPMorgan Chase is about four times bigger than Brown’s limit and 23 times larger than Fisher’s.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,