Last Week in Deferred and Non-Prosecution Agreements: Arming China and Stealing Trillions from Municipalities

I’m so old I remember the time, four years ago, when Democrats hated Deferred Prosecution Agreements.

Back in the days when Chris Christie, former US Attorney, was challenging Jon Corzine, once and future bankster, to be governor of New Jersey, Democrats made hay of the significant numbers of DPAs Christie signed, mostly with a series of medical device companies busted for kickbacks. After it was revealed Christie had picked his former boss, John Ashcroft, to make $52 million monitoring one of those medical device companies, it became a convenient way to show the corporatist corruption of Christie.

There was even a bit of discussion, in early 2009, about whether DPAs made banks more likely to engage in fraud because they assumed they’d get a DPA rather than a prosecution. Those discussions largely centered on the two DPAs AIG got in the mid-00s for fraudulently hiding its risk, which nevertheless didn’t prevent AIG from taking on so much risk it blew up the entire financial system. One of the monitors of those DPAs–who arguably should have but didn’t see AIG’s ongoing fraud–was a guy by the name of James Cole. He’s now the Deputy Attorney General.

And as recently as 2010, NJ Congressman Bill Pascrell had this to say, in response to the publication of a GAO report showing some improvement but greater need for oversight over DPAs.

One cannot ignore the spike of 38 deferred prosecution agreements in 2007, up from a mere four agreements in 2003. That proves that what was supposed to be an option to be used in rare circumstances had become the norm at the Department of Justice.


It is imperative that the Congress reign in the unmitigated power that federal prosecutors hold to serve as judge, jury and sentencer in the deferred prosecution process.

And yet I have heard very little about the two DPAs signed last week–perhaps because big corporate impunity has become such a common occurrence in the post-crash era.

First, there’s the deal Pratt & Whitney and two subsidiaries signed for evading export restrictions to help China build an attack helicopter. Effectively Pratt & Whitney laundered their production of some development helicopters–plus the military grade engine control module software to go with them–through a Canadian subsidiary. And when they finally admitted they had deliberately avoided US export restrictions on military equipment, they lied to DOJ about doing so. While they have to pay a $75 million fine, some of the charges are being deferred. And no individual has been charged with helping China get a helicopter designed to attack tanks.

So DOJ’s punishment for a defense contractor to put Chinese civil contracts ahead of US national security is a big fine, deferred prosecution, but no jail time.

Even more troubling is the Non-Prosecution Agreement signed with Barclays over its manipulation of the LIBOR rate. Effectively, during the heady bubble days, Barclays colluded to lie about the interbank lending rate to maximize its own trades; as finance was crashing and Barclays itself had to pay higher rates for credit, it lied about that to imply the bank was healthier than it was. And while between DOJ, Commodity Futures Trading Commission, and Britain’s Financial Services Authority, Barclays will have to pay around $475 million in fines, and while CFTC imposed the kind of mandated fixes that DOJ normally would under a DPA, Barclays is basically scot-free for colluding to lie about a rate that affects people throughout the financial system.

Matt Taibbi explains why this is so important: because when the banks said the LIBOR rate was lower than it really was, a lot of investors got a smaller return on their LIBOR-tracked investments than they otherwise would have.

A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

And the CFTC describes the scope of the trades pegged to LIBOR.

LIBOR impacts enormous volumes of swaps and futures contracts, commercial and personal consumer loans, home mortgages and other transactions. For example, U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange (CME), which had a traded volume in 2011 with a notional value exceeding $564 trillion. In addition, according to the BBA, swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion, according to the Bank for International Settlements. LIBOR and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are derived from candid and reliable submissions made by each of the banks on the panels.

Now, it is expected that banks that beat Barclays to settlement may be treated more harshly. And DOJ implied that it might prosecute individuals at Barclays.

The non-prosecution agreement applies only to Barclays and not to any employees or officers of Barclays or any other individuals.

So it may be that this NPA will help DOJ bring the hammer on the individuals and other banks that gamed the financial system to make sure it benefited them most of all.

But for the moment, Barclay’s penalty still amounts to a wrist-slap given the magnitude of the crime.

Maybe it’s time to return to the question of whether DOJ serves as an adequate judge, jury, and sentencer for these big corporations?

12 replies
  1. allan says:

    I would hope that the staggering amounts of loans, futures, derivatives, etc., tied to LIBOR would make civil suits against the guilty banks a form of corporate capital punishment. But when you look at how hard it’s been for MBS lawsuits to make a dent, it’s difficult to be optimistic.

  2. emptywheel says:

    @allan: It’ll be more likely here than with MBS, I think. Problem is, how likely is it that municipalities will sue? It seems like it’ll just be the other banksters that get their money back.

  3. earlofhuntingdon says:

    A $75 million fine, even if it is paid up front in cash, is a rounding error in the world of major systems defense contracting, let alone one involving the prohibited export of military technology and materials to a foreign power, let alone one with the potential to use those resources China possesses. Just the money involved in transferring the know how to make and support such a weapons system would be two or three orders of magnitude greater.

    Assigning $75 million as the appropriate consequence for the intentional, criminal violation of US laws and the intentional, criminal obstruction of justice in hiding those crimes amounts to a “Don’t get caught again” agreement with P&W, not a “Don’t do it again” penalty.

    I hope that outcome is an expression of now routine corruption in the DoJ and the White House rather than a consequence of the US-as-debtor not wanting to piss off a significant creditor.

  4. earlofhuntingdon says:

    As you say, untold thousands of transactions are pegged to LIBOR. They include a plethora of financial, investment and pension contracts; those engaged in by Barclays or Royal Bank of Scotland would have been a tiny number of them. They also include such things as penalty clauses in routine commercial contracts for product sales, technology licensing and direct foreign investments.

    The total cost to the world economy of rigging the LIBOR rate would be astronomical. In a way, it is an on-steroids version of now routine banking crimes, such as the collusion regarding ATM fees. That is, “seeming inconsequential” amounts are stolen, but from many, many individual contracts. In fact, the amounts per contract are really quite high in percentage terms. They are astronomical when aggregated across a global economy.

    Too big to fail also means too big to manage. For those beltway denizens that never tire of pleasuring the FIRE industries, it also means too big to swallow. The US economy, and its individual people and families, sorely need a resuscitated antitrust division that takes its job seriously. Predictably, Mr. Obama and his patrons on the Hill will ensure that the DoJ’s antitrust division remains among the most moribund in Washington.

  5. earlofhuntingdon says:

    Dday and Yves Smith supplement EW’s comments. (Can’t seem to find the usual tools, so these are in “long hand”.)

    The number of commercial loans alone is estimated at $10 trillion. As cited by Yves, linking to the WSJ, the total value of contracts affected may be $800 trillion. Not bad for a few “rogue desk officers” coming off the risk conscious reservation. Senior managers and their boards, in imitation of Feldwebel Schulz, knew nussink. Undoubtedly more banks than Barclays and RBS are involved.

    The idea of the US DoJ issuing non-prosecution agreements for such conduct is nauseous. That is, unless in exchange – and wholly unlike Team Obama’s relentless and immunizing, “What’s past is forgotten, not prologue” policies – the DoJ obtained full cooperation and full disclosure agreements, together with fines and penalties in amounts reflecting the systemic damage done here, and changes to board memberships, managers and management processes.

    The Brits might force a reluctant Tory government into versions of such things, a parliamentary investigation has already been announced. But Mr. Obama would probably find such intrusive regulatory and prosecutorial responses to be unnecessarily rude.

  6. earlofhuntingdon says:

    A few juicy quotes from Yves:

    Governor of the Bank of England, equivalent to the head of the Federal Reserve, making as Yves remarks decidedly unBen Bernanke-like noises (quoting in the Guardian,

    “It is time to do something about the banking system…Many people in the banking industry are hardworking and feel badly let down by some of their colleagues and leaders. It goes to the culture and the structure of banks: the excessive compensation, the shoddy treatment of customers, the deceitful manipulation of a key interest rate, and today, news of yet another mis-selling scandal.”

    And these shrill, unBeltway-like comments from Will Hutton (also from a Guardian article,

    “Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of “light touch” regulation earlier and if the Serious Fraud Office’s budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism.”

    “British capitalism” is likely to be an hors d’oeuvre for this beast.

  7. earlofhuntingdon says:

    @earlofhuntingdon: My analogy wasn’t quite right, in that this global scandal involved underpricing LIBOR so as to lower bank borrowing costs, hiding the financial distress of highly leveraged financial institutions.

    That would have artificially deprived of revenue those on the other side of these transactions. Not to mention, it made unsound publicly traded institutions appear financially sound. Among its other effects, as EW points out in her headline, by lowering rates of return on financial investments, it placed in further jeopardy already plundered pension funds, businesses and holders dependent on annuities and so on.

    And Mr. Obama’s DoJ says, “Move along, nothing to see here folks, nothing like a criminal violation of the Sherman antitrust act to prosecute.” I wonder if the Chinese are planning to have a sale on pitchforks?

  8. jo6pac says:

    Yes Earl nothing to see, everything is on schedule please move along.

    EW, I have complete confidence that no one goes to jail just a lot of noise for the election. I would like to be wrong but doj holder and his boss are too busy with dirty hippie mary jane user and the whistle blowers that this country needs to keep in check the criminals that run the place called Amerika.

  9. MadDog says:

    @orionATL: Very interesting! I bet there are literally thousands of unseen video (by the public) that would cause national uproars.

    This is probably one of the reasons for the US military’s “embed” policy for journalists where all of their material is subject to pre-publication censorship.

    And while the journalistic profession should have raised a stink to high heaven about this censorship, the truth is that they have folded like a cheap suit.

  10. chetnolian says:

    And now breaking news we have got rid of our American top bankster, Bob Diamond. Revenge for Neil Hayward! Though so far none of the frankly xenophobic stuff that surrounded Hayward’s demise, though it would be as justified as Diamond was one of the main people who helped bring US style bank trading greed to the UK. Before he resigned had a deal where his tax was paid by Barclays, and then the tax on the tax-avoidance scheme! Diamond is still scheduled for an appearance before the Commons Finance Committee tomorrow, though I’m sure his treatment by our MPs will be much less rude than was Hayward’s in the USA.

  11. thatvisionthing says:

    Wny do my eyes still bug out?

    Barclays admitted to submitting false information at the behest of its traders to benefit pricing for derivatives, and later providing incorrect interest rates to counter media speculation about the bank’s stability. The Justice Department did not require the bank to plead guilty to any crimes by allowing it to enter into a nonprosecution agreement, no doubt to avoid the potential consequences a criminal conviction would have.

    It’s only like poisoning everyone in the world with money:

    Manipulating Libor is like poisoning the water supply for the world’s financial system. Changing the rates by even a few basis points can have an enormous effect on a number of sectors, so there is a vast pool of potential victims who can seek compensation.

    Boom goes the dynamite! They go there:

    Two powerful tools in United States law for pursuing cases are the Sherman Antitrust Act and RICO – the Racketeer Influenced and Corrupt Organizations Act. Both allow for the award of triple damages for a violation, and in addition RICO allows the recovery of legal fees, which is music to the ears of the plaintiffs’ class action bar.

    Circling lawyers!

    In February, Charles Schwab & Company filed an antitrust and RICO lawsuit against the banks contributing to Libor, claiming that they set the benchmark interest rate at an artificially low level. More lawsuits like this can be expected in the next few months as lawyers start circling the banks involved with setting Libor, cases that will receive a significant boost from the Justice Department if more settlements are announced.

    Go sharks! :-)

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