By Pam Martens and Russ Martens: May 28, 2019 ~
Wall Street is the only industry in America that is allowed, in broad daylight, to operate its own private justice system while making its employees and customers sign binding contracts to take their complaints to that venue to seek justice. That’s like sticking your arm into the mouth of an alligator that just grabbed your purse and expecting to come out whole.
Endless reports by journalists on how rigged this private justice system is have done nothing to reopen the nation’s courthouse doors to claims against Wall Street.
Not only do the general counsels of Wall Street’s biggest global banks get to fashion their own system to hear claims against the banks but they get to meet in secret for two decades to strategize on other topics impacting their common interest.
In 2016, Bloomberg reporters Greg Farrell and Keri Geiger broke the exclusive report that Wall Street’s top in-house lawyers for the mega banks had been meeting in secret for two decades with their counterparts from foreign global banks. The 2016 meeting took place at a ritzy hotel in Versailles. Past tony venues included Switzerland’s Lake Lucerne and the bucolic panoramas of Connecticut’s historic Litchfield County, according to the report. (Plotting how to rip off Main Street and remain out of jail is so much more relaxing while sipping brandy from the veranda of a 19th century inn.)
At the secret 2016 meeting, the following lawyers attended: Goldman Sachs General Counsel, Gregory Palm; Stephen Cutler of JPMorgan Chase (a former Director of Enforcement at the Securities and Exchange Commission (SEC)); Gary Lynch of Bank of America (also a former Director of Enforcement at the SEC); Morgan Stanley’s Eric Grossman; Citigroup’s Rohan Weerasinghe; Markus Diethelm of UBS Group AG; Richard Walker of Deutsche Bank (again, a former Director of Enforcement at the SEC); Robert Hoyt of Barclays; Romeo Cerutti of Credit Suisse Group AG; David Fein of Standard Chartered; Stuart Levey of HSBC Holdings; and Georges Dirani of BNP Paribas SA.
Surely former Directors of Enforcement at the SEC know that it’s an anti-trust issue to be meeting in secret once a year with your counterparts from global banks – with no public announcement, no published minutes, and no press in attendance.
Apparently, an industry that can get away with creating and operating its own private justice system with no pushback from the U.S. Department of Justice doesn’t need to worry about pesky details like secret meetings among competitors.
Another area that has escaped anti-trust reforms on Wall Street for decades is what appears to be a set agreement on the underwriting fees that will be charged by the mega banks on Initial Public Offerings (IPOs).
In 1998, IPO researcher Jay Ritter found that Wall Street underwriters had charged a 7 percent underwriting fee on 90 percent of IPOs that raised $20 million to $80 million. In 2012, Reuters reported that the “typical IPO that raises less than $500 million incurs a 7 percent fee — what’s known as ‘the 7 percent solution.’ But as IPOs grow in size, the fee percentage shrinks….”
Let all of this sink in for a moment. In at least two decades, the U.S. Department of Justice has not stopped the practice of Wall Street’s General Counsels meeting in secret nor has it stopped the seemingly “fixed” 7 percent underwriting fee for IPO deals under $500 million.
Even after May 20, 2015 when the Justice Department brought felony charges against four banks for rigging the Foreign Exchange market, including the two U.S. banks JPMorgan Chase and Citigroup, it wasn’t sufficiently curious about what else the cartel might be rigging – say, for example, its private justice system. All four banks pleaded guilty to the charges and to using a chat room to conspire that was insightfully called “The Cartel.”
Then there is the derivatives cartel. According to the most recent report from the Office of the Comptroller of the Currency (OCC), just five Wall Street bank holding companies control 86 percent of the $232.7 trillion in notional derivatives at the more than 5,000 banks in the U.S. Those bank holding companies are: JPMorgan Chase, Citigroup, Goldman Sachs Group, Morgan Stanley and Bank of America – five of the same banks whose General Counsels are meeting in secret each year at a posh getaway.
Derivatives played a major role in the severity of the 2008 financial collapse on Wall Street and were supposed to be reformed under the Dodd-Frank financial reform legislation of 2010. That has not happened. The concentration of this massive amount of derivatives among these handful of firms and the counterparties to these trades puts the U.S. and global economy at serious risk today.
Another potential cartel is the Dark Pools owned by these same mega banks. The U.S. Department of Justice and SEC are looking the other way while these admitted co-conspirators in foreign-exchange trading are trading the stock of their own bank and their bank competitors in a secret venue. (See Wall Street Banks Are Trading in Their Own Company’s Stock: How Is This Legal?)
With the perpetually revolving door between Wall Street’s law firms, the U.S. Department of Justice and the Securities and Exchange Commission, it may be impossible to eradicate corruption on Wall Street. But it would take only the restoration of the Glass-Steagall Act to prevent the Wall Street Casino from holding the Federally-insured deposits hostage the next time it collapses from its own corruption. Each of the major Wall Street trading firms owns one or more Federally-insured commercial bank.
The Glass-Steagall Act, officially called the Banking Act of 1933, profiled itself as “An Act to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations.” The simplicity of the 37-page law was why it kept the U.S. banking system safe for the next 66 years. Just 9 years after its repeal in 1999, Wall Street collapsed in a manner remarkably similar to the crash of 1929, when there were also no walls between the Wall Street casino and deposits.
A significant part of its 37 pages dealt with the establishment of insurance on bank deposits, what we know today as the Federal Deposit Insurance Corporation or FDIC. The insurance guarantee was desperately needed in 1933 because banks were failing all over the country and the public had lost confidence in holding deposits in banks.
The provisions banning deposit-taking banks from being engaged in the securities business are contained in Sections 16, 20 and 21and took effect one year after the enactment of the legislation in 1933.
Section 16 mandated that “The business of dealing in investment securities by the [banking] association shall be limited to purchasing and selling such securities without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities.”
Section 20 required that “After one year from the date of the enactment of this Act, no member bank shall be affiliated in any manner described in section 2 (b) hereof with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities.”
Section 21 reaffirmed the provisions of Sections 16 and 20, ordering that: “(a) After the expiration of one year after the date of enactment of this Act it shall be unlawful— (1 ) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor.”
Most importantly, Section 21 added jail time for those who violated the law, ordering that anyone violating the provisions of that section would, upon conviction, “be fined not more than $5,000 or imprisoned not more than five years, or both.” Obviously, both the amount of the fine and the jail time need to be increased to have an impact on today’s Wall Street billionaires.
Congress has been wringing its hands and dithering on taking meaningful action to rein in the ongoing serial abuses on Wall Street since the epic financial collapse in 2008. The American people need to keep the heat on Congress to force it to fulfill its obligations to the national interests instead of Wall Street interests.