By Pam Martens and Russ Martens: April 24, 2018
The U.S. Department of Justice has had an ongoing investigation into the potential rigging of the U.S. Treasury market by big banks on Wall Street for the past three years according to a series of past media reports. And yet, no formal charges have been brought. Lots of Wall Street watchers are wondering why – especially since private law firms have brought very specific charges in the matter into Federal court.
There are only so many times the Justice Department can charge the largest Wall Street banks with felony counts for rigging markets before the public catches on that it’s a feature not a bug of their business model. Continuous rigging charges could lead to growing public demands and newspaper editorials to break up these serially-charged behemoths at a time when members of Congress – who depend on the largess of Wall Street to run their political campaigns – don’t want to anger their major donors by endorsing legislation to break up the banks.
Two of the five largest U.S. banks by assets, JPMorgan Chase and Citigroup, already have four criminal felony counts between them. Two of JPMorgan Chase’s felony counts stem from how it handled Ponzi-king Bernie Madoff’s main business bank account for decades and failed to report highly suspicious activity as it is required to do under Federal law. Those two counts came in January 2014. The very next year, both JPMorgan Chase and a Citigroup unit, Citicorp, were slapped with one felony count each for their involvement in the rigging of foreign currency markets. The banks have admitted to all of the felony charges. Two foreign banks that are also active on Wall Street, Barclays PLC and the Royal Bank of Scotland (RBS), also pleaded guilty and received one felony count each in the foreign currency matter that was announced on May 20, 2015. On the same date, UBS, another mega Wall Street bank, pleaded guilty to rigging the interest rate benchmark known as Libor.
Unknown to most of the general public is the fact that these same mega banks on Wall Street that are repeatedly charged with abusing their customers and the public interest also play a critical role in helping the U.S. government finance its debt and help the Federal Reserve in carrying out its monetary policy. The banks are known as “Primary Dealers” and this is how the New York Fed describes their role:
“Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed’s trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”
In other words, serial lawbreakers constitute the infrastructure of the U.S. financial system. One might be inclined to think of it as prison guards overseeing a work party of inmates on a big road infrastructure project. The difference being, of course, that the titans of these Wall Street banks have never seen the inside of a jail cell – even after they caused the greatest financial collapse in 2008 since the Great Depression.
Adding to the problem is the fact that these mega banks have been allowed to gobble up their peer banks over the years, leading to a drastic decline in the number of Primary Dealers that can bid at U.S. Treasury auctions. In 1988 there were 46 primary dealers. By 1999, there were only 30. As of November 2017, according to the New York Fed, there were only 23.
As the amount of new Treasury debt issuance has grown as a result of spiraling deficits, the number of big Primary Dealers has shrunk. This makes the Justice Department and the Treasury Department extremely fearful of indicting a major Primary Dealer because convicted felons cannot engage in Treasury auction contracts. Instead, the Justice Department simply hands out deferred prosecution agreements, putting the banks on three-year probation with a DOJ incentive not to bring further felony counts and deferred prosecution agreements until the three-year probation has lapsed. This has set new milestones in moral hazard.
On May 3 of last year, Kevin Dugan of the New York Post reported that “The Justice Department’s investigation into Wall Street’s rigging of the $14 trillion Treasury market is zeroing in on Goldman Sachs….” Dugan noted that “Goldman Sachs won almost all auctions for US Treasury bonds from 2007 to about 2011, a remarkable winning streak that came despite safeguards established by the Treasury to keep bidding competitive, sources familiar with the investigation said.”
Dugan also indicated that the government had “chats and emails believed to show Goldman traders sharing sensitive price information with traders at other banks — a sign of possible price fixing and collusion….” Goldman Sachs is a Primary Dealer.
Also in May of last year, Tom Schoenberg of Bloomberg News reported that four other banks had received subpoenas the prior month seeking information in the Treasury market probe. Schoenberg named UBS Group, BNP Paribas, Royal Bank of Scotland Group and Morgan Stanley as recipients of the subpoenas. All four are parent corporations of Primary Dealer units.