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The next time you see a story, online or in the MSM, about the "great" job that's being done by those managing our economy and/or the "genius" of Treasury Secretary Tim Geithner and Federal Reserve Board Chair Ben Bernanke, perhaps you should consider the following inconvenient realities.

IMHO, here's the latest on the ongoing story that gets the "award" for being the most egregious violation of the public's trust, at least when it comes to illustrating the true state of regulatory enforcement on Wall Street, today (Tim Geithner and Bernanke, among others, have been running the show for a lot longer than President Obama's been in office): "Wachovia Paid Trivial Fine for Nearly $400 Billion of Drug Related Money Laundering."

(Diarist's Note: Naked Capitalism Publisher Yves Smith has provided written authorization to diarist to reproduce her blog's posts in their entirety for the benefit of the DKos community.)

Wachovia Paid Trivial Fine for Nearly $400 Billion of Drug Related Money Laundering
Yves Smith
Naked Capitalism
April 3, 2011

If this news story does not prove that banks are effectively above the law, I don’t know what does. The Guardian, in an account yet to be picked up anywhere in the US media (per Google News as of this posting, hat tip readers May S and Swedish Lex) reports that Wachovia was at the heart of one of the world’s biggest money laundering operations, moving $378.4 billion into dollar-based accounts from Mexican casas de cambio, which are currency exchange firms. While these transfers took place over a period of years, the article notes that it equals 1/3 of Mexican GDP. And the resolution?

Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year’s “deferred prosecution” has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

The operation may have started sooner, but Wachovia admitted in the settlement that as of 2004 it had reason to address the procedures used for these transfers and chose not to. Martin Woods, a London-based employee and former member of the Metropolitan drug squad, had been hired as a senior anti-money laundering officer and started tightening up the activities within his reach. In 2006, he identified a number of obviously problematic transactions coming out of the casas:

Woods discussed the matter with Wachovia’s global head of anti-money laundering for correspondent banking….He then undertook what banks call a “look back” at previous transactions and saw fit to submit a series of SARs, or suspicious activity reports, to the authorities in the UK and his superiors in Charlotte, urging the blocking of named parties and large series of sequentially numbered traveller’s cheques from Mexico. He issued a number of SARs in 2006, of which 50 related to the casas de cambio in Mexico. To his amazement, the response from Wachovia’s Miami office, the centre for Latin American business, was anything but supportive – he felt it was quite the reverse.

As it turned out, however, Woods was on the right track. Wachovia’s business in Mexico was coming under closer and closer scrutiny by US federal law enforcement. Wachovia was issued with a number of subpoenas for information on its Mexican operation. Woods has subsequently been informed that Wachovia had six or seven thousand subpoenas. He says this was “An absurd number. So at what point does someone at the highest level not get the feeling that something is very, very wrong?”

In April and May 2007, Wachovia – as a result of increasing interest and pressure from the US attorney’s office – began to close its relationship with some of the casas de cambio. But rather than launch an internal investigation into Woods’s alerts over Mexico, Woods claims Wachovia hung its own money-laundering expert out to dry….

Later in 2007, after the investigation of Wachovia was reported in the US financial media, the bank decided to end its remaining relationships with the Mexican casas de cambio globally. By this time, Woods says, he found his personal situation within the bank untenable…

On 16 June Woods was told by Wachovia’s head of compliance that his latest SAR need not have been filed, that he had no legal requirement to investigate an overseas case and no right of access to documents held overseas from Britain, even if they were held by Wachovia…

Late in 2007, Woods attended a function at Scotland Yard where colleagues from the US were being entertained. There, he sought out a representative of the Drug Enforcement Administration and told him about the casas de cambio, the SARs and his employer’s reaction. The Federal Reserve and officials of the office of comptroller of currency in Washington DC then “spent a lot of time examining the SARs” that had been sent by Woods to Charlotte from London.

The article recounts how the DEA, the criminal division of the Internal Revenue Service and the US attorney’s office in southern Florida were taking a hard look at wire transfers out of Mexico and found that they wound up at the correspondent bank account of the casas at Wachovia which were supervised by its Miami branch. From the Guardian:

“On numerous occasions,” say the court papers, “monies were deposited into a CDC by a drug-trafficking organisation. Using false identities, the CDC then wired that money through its Wachovia correspondent bank accounts for the purchase of airplanes for drug-trafficking organisations.” The court settlement of 2010 would detail that “nearly $13m went through correspondent bank accounts at Wachovia for the purchase of aircraft to be used in the illegal narcotics trade. From these aircraft, more than 20,000kg of cocaine were seized.”

The story provides a great deal more detail about the money laundering operations and the investigation. It is an excellent job of reporting and I urge you to read it in full. It is very clear the US put a lot of resources into the investigation. So why did Wachovia get off so easy?

At the height of the 2008 banking crisis, Antonio Maria Costa, then head of the United Nations office on drugs and crime, said he had evidence to suggest the proceeds from drugs and crime were “the only liquid investment capital” available to banks on the brink of collapse. “Inter-bank loans were funded by money that originated from the drugs trade,” he said. “There were signs that some banks were rescued that way.”…

[Paul] Mazur [lead infiltrator of the Medellin drug operation] said that “a lot of the law enforcement people were disappointed to see a settlement” between the adlture ration and Wachovia. “But I know there were external circumstances that worked to Wachovia’s benefit, not least that the US banking system was on the edge of collapse.”

I suspect you never imagined “too big to fail” and “too big to jail” were this intimately connected.

So, given this culture of Wall Street being above the law, and of our government looking the other way, it should come as no surprise that there are people in the MSM and in some parts of the blogosphere, including right here on Daily Kos, that continue to tell us via their rec'd diaries: "There's nothing to see here. Move along," when it comes to the latest public disclosure of corporate kleptocracy. Specifically, I'm referencing the Federal Reserve's public disclosure of its actions at its discount window during "the height" of nation's financial crisis in late 2008.

Quelle Surprise! Fed Lent Over $110 Billion Against Junk Collateral During Crisis
Yves Smith
Naked Capitalism
April 1, 2011

Former central banker Willem Buiter once remarked that the Federal Reserve’s “unusual and exigent circumstances” clause, which enables it to lend to “any individual, partnership or corporation” if it can’t get the dough from other banks, allows the Fed to lend against a dead dog if it so chooses.
It looks like the US central bank did precisely that.
Readers no doubt know that Bloomberg entered into a hard-fought battle over its Freedom of Information Act request to compel the Fed to release the details of its various lending programs during the crisis to the public. The banking regulator used the patently bogus excuse that revealing that information could damage the competitive positions of firms that had received the loans. That was patently bogus since all the major recipients are in the market on an ongoing basis and rejiggering their exposures based on market opportunities.
The only party at risk at this juncture was the Fed, since it would have its decisions scrutinized. And in a democracy, it is of vital public interest that an organization as influential as the Fed, which committed large amounts of funding outside Constitutionally-mandated budget processes, be held accountable for its actions.
The information was released yesterday and Bloomberg has provided a first cut on a small but juicy portion of it, the Primary Dealer Credit Facility. From a risk standpoint, the loans mace under this program violated the central bank guideline known as the Bagehot rule: “Lend freely, against good collateral, at penalty rates”. That is the prescription if the borrower is facing a bank run, meaning a liquidity crisis. The fact that 72% of the Fed’s loans on September 29 from the Primary Dealer Credit Facility were junk or equivalent (defaulted and unrated securities or equity) is further proof that many financial firms were facing a solvency, not a liquidity, crisis. The breakdown:

Equities comprised $71.7 billion, or 43.6 percent of the total. High-yield debt, including the defaulted issues, accounted for $18.4 billion, or 11.2 percent. Collateral of unknown rating was $28 billion, or 17 percent…..The U.S. central bank allowed borrowers to use $929 million in market-valued debt that had gone into default, rated D, as collateral on that day, 2008, more than the $905.5 million in Treasuries that were pledged…

And the haircuts were so low that the ideas that these were collateralized loans is a joke. The “collateralization” was a necessary legal fiction for throwing cash at anyone who thought they needed it:

The Fed loans on Sept. 29, 2008, represented a 5.49 percent “collateral cushion,” the amount by which the pledged assets exceeded the loan value….

To put things in perspective, the market haircut on most debt securities during the period of the crisis starting in September 2008 was above 40 percent,” [Craig] Pirrong [a finance professor at the University of Houston} said....The cushion “was far too small for the risk of the underlying collateral,” Pirrong said. “Collateral that’s junk or defaulted debt and equities at a time when market volatility was huge is pretty eye opening.”

It wasn't just "most debt securities" that had tanked in value. Consider the fate of AAA rated ABS CDOs, which were one of the most serious black holes at virtually all of the dealer banks. We reproduced this chart on repo haircuts in ECONNED:

(Diarist's Note: CHART: International Monetary Fund illustration from Yves Smith's, "Econned," where the Fed was providing Wall Street "Primary Dealers" with loans at almost face value on assets where the banks should have taken: "...a 95% haircut on AAA rated ABS CDOs," post-Lehman.)

Note these prices were as of August; things were clearly even worse post Lehman. A 95% haircut on AAA rated ABS CDOs means the paper was effectively worthless.
This first cut by Bloomberg also shows that Morgan Stanley was the biggest user of the facility, receiving $61.3 billion of funds for securities "worth" $66.5 billion, 71.6% of which was junk or unrated. As eye-popping as those numbers are, the funds received are less than half the fall in Morgan Stanley's liquidity pool in the two weeks after the Lehman failure, per Economics of Contempt. Merrill Lynch was second, getting $36.3 billion in funding for $39.1 billion of collateral, 83.4% of which was junk or unrated.

A separate Bloomberg story on the discount window operations found that 70% of the credit extended, including four of the five biggest users during the peak usage week, in October 2008, were foreign. More high (or more accurately, low) points:

U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia SA, based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion...

“What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?” said [Ron] Paul, who has advocated abolishing the Fed. “We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes.”

Expect some fun Congressional hearings in the not-too-distant future.

A further remark: the fact that Bloomberg can say anything intelligent at this juncture is a testament to the cleverness of its reporters. The central bank quite deliberately responded to the request by providing the information in the most disaggregated, difficult to work with form imaginable. The central bank did a version of the same trick with its data on Maiden Lane II. The holdings of that asset management vehicle were various real estate exposures, some of which were hedged. The hedges were reported separately from the bonds and loans. Clearly, Blackrock, the asset manager, had far more useful and understandable reports that they used internally and provided to the New York Fed, but those were withheld. This data will presumably be as enticing as the Wikileaks cables, so enough eyeballs on it will eventually overcome the Fed’s efforts to hinder analysis.

Given the voluminous amount of information provided, future FOIA requests may need to explicitly include that the relevant government body provide information in the form in which it is used internally, including any higher level aggregations, to prevent future “fuck yous” in the form of technically permissible but nevertheless obstructionist compliance.

While Federal Reserve documents just provided to the public last Thursday are voluminous, above and beyond what Yves covers above, we've already learned, via Gretchen Morgenson in today's NY Times, that the Fed also made an autonomous decision to backstop to the world (or, at least just about everywhere else other than Main Street):

The Bank Run We Knew So Little About
Gretchen Morgenson
New York Times
April 3, 2011

...“The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system,” said Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland. Such a thing would never have occurred 20 years ago, he added.

As Morgenson also notes, everything lent via the Fed's discount-window during the crisis was repaid.

..But the precedent was set: The Fed was the financial backstop to the world.
Since 2000 or so, the mind-set at the Fed in New York and Washington has been that the central bank must step in when there is a global crisis, Mr. Todd said, even if it appears to exceed its mandate.
Ben S. Bernanke, the Fed chairman, seemed to foreshadow this view early in the crisis. Addressing the Fed’s annual symposium at Jackson Hole, Wyo., on Aug. 17, 2007, Mr. Bernanke said: “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”

Note Morgenson's closing paragraph. (I really get a kick out of how Morgenson often "buries the [real] lead.")

Protecting global lenders and investors from the effects of their financial decisions was exactly what the Fed decided it had to do. Bankers and investors on the receiving end of this largess have long known the extent to which the Fed rescued them in their time of need. Now, thanks to these Fed documents, the rest of us can see it, too.

Bold type is diarist's emphasis.

Yes, it truly is amazing what a great job our government (most notably, the Treasury Department) and the Federal Reserve does when it comes to protecting "...lenders and investors from the effects of THEIR financial decisions." But, as we've learned of late, and as we're constantly reminded, once again tonight on 60 Minutes, when it comes to Main Street, not so much: "Foreclosure Fraud Featured This Sunday On 60 Minutes."

For more on the shameful, ongoing pillaging of Main Street by Wall Street--aided, abetted and obfuscated by their minions in our government with the support of even a few folks in this community and via their respective independent blogs--here are some additional links loaded with the details (and, I'm talking about just the past 72 hours):

"Matt Stoller: Comptroller of the Currency Orders National Banks to Cover Up Foreclosure Scandal"

"Gauging the Pain of the Middle Class"

"Banksters' Counteroffer Makes A Further Mockery of Fraudclosure Settlement Negotiations"

"David Apgar: Is That a Horse's Head Under the Sheets or Are You Just Happy to Fleece Me?"

So, while on Friday we were told that the March employment report added 216,000 jobs to the economy, the truth behind the numbers is far different than the spin. You see, as Dean Baker reminds us about the absurdity of the spin we're witnessing in the MSM and even in the blogosphere, on a daily basis...

...[Over the past year] The drop in the unemployment rate over this period was entirely due to people leaving the labor force. Now is that good news or what?

Then again, as noted above and as it will be self-evident on 60 Minutes tonight, there are fleeting moments in the MSM, these days, where we are now starting to hear about these inconvenient truths.

Who knows? Maybe even the folks inside the Beltway will get a clue; but, I doubt it.

#            #            #

"ADDED DIARY BONUS" (heh...if you've made it this far): Speaking of inconvenient truths, if you haven't seen this year's Oscar-winning documentary, "Inside Job," it's now available online, FOR FREE!

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Comment Preferences

    •  thanks for the diary bobs. I just watched (6+ / 0-)

      Inside Job again and one of the things I noted was just how many people 'declined' to be interviewed for the film.  

      All the major players that made billions of dollars and got away with it, and our course our so called 'pubic servants,' Hank Paulson, Larry Summers, Tim Geithner and Ben Bernanke.

      Gee I wonder why they didn't want to be interviewed?

      I'm looking forward to finding out how Senator Bernie Sanders is going to take action on the matter of why so much money was doled out to Foreign Bankers including Libya by the FED.  

      Ms. B.

      “I hope the two wings of the Democratic Party may flap together.” William Jennings Bryan

      by Badabing on Sun Apr 03, 2011 at 12:51:24 PM PDT

      [ Parent ]

      •  I'm curious to see how the 60 Minutes pc... (3+ / 0-)
        Recommended by:
        Mr Robert, Badabing, alizard

        ...plays out in the MSM and throughout the blogosphere.

        It's one of the few MSM vehicles that generates same-day and next-day bloviating response from inside the Beltway. (This is due to audience size. But, it should be interesting, nonetheless.)

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Sun Apr 03, 2011 at 12:54:57 PM PDT

        [ Parent ]

  •  Foreclosure fraud coverage on 60 Minutes (6+ / 0-)

    would have been great about 3 years ago.

  •  the (7+ / 0-)

    war on drugs ... everyone's a criminal except the bankers involved in it.

    "Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild, 1790

    by FreeTradeIsYourEpitaph on Sun Apr 03, 2011 at 12:05:23 PM PDT

  •  Another reason why drugs should be (6+ / 0-)

    decriminalized. Prevent the temptation of bankers. Apparently, they can't help themselves. Thanks for the diary.

    "Such is the irresistible nature of truth that all it asks, and all it wants, is the liberty of appearing." - Thomas Paine

    by blueoregon on Sun Apr 03, 2011 at 12:14:14 PM PDT

  •  Many of our corporations are criminals involved in (5+ / 0-)

    criminal behavior?

    Well, yes they are.

    More's the pity that there are so few ways to counter their malfeasances.

    Those who deny freedom to others deserve it not for themselves. - Abraham Lincoln

    by 4Freedom on Sun Apr 03, 2011 at 12:18:33 PM PDT

  •  How do you jail a corporation? (1+ / 0-)
    Recommended by:

    Fines are just a business expense.

    Thanks for the news and analysis.  Hope it isn't getting to you.  I would be needing a hazmat suit to do what you do.

    Nice guys finish last. Nice guys shouldn't race.

    by A Voice on Sun Apr 03, 2011 at 12:36:25 PM PDT

    •  Use MATH. The Top 25 compensations in pay (0+ / 0-)

      options, hookers, meth ... caviar, lear jets


      EVERYONE over 100k? 250k?

      BTW - they need at least 8 years in the joint - ALL their relationships and associations and everything will be stone cold long gone

      and then they can start over again - at 7-11 ??


      Yond Cassius has a lean and hungry look; He thinks too much: such men are dangerous

      by seabos84 on Sun Apr 03, 2011 at 02:10:51 PM PDT

      [ Parent ]

    •  Very simple (1+ / 0-)
      Recommended by:

      ...take away the privilege of limited liability and jail the individuals who are hiding behind the corporate veil.  Prosecutors used to know how to do this.

      50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

      by TarheelDem on Sun Apr 03, 2011 at 04:00:20 PM PDT

      [ Parent ]

  •  Just like the Titanic (4+ / 0-)

    the Investor class must be saved!

    Speaks volumes about who really matters in policies/minds of our leading economic advisors running the show and calling the shots... yeah, ...and I'll wait for it...the argument coming will be...if we hadn't saved them (no matter that maybe a haircut or two  or three would have sufficed instead of bonuses and keeping their jobs)wait for it .... it would have been worse much worse if they hadn't saved the investor class for their poor decisions!  Yes, maybe the poor billionaire investor class would have had to take a loss for their poor investment decisions and might not have had high double digit gains in their wealth last decade while everyone else was stagnant or loss ground...dear me...can't have that....can't have any sharing of the sacrifice from those individuals....can't have any narrowing of the wealth gap among the classes....and personal responsibility is for working class stiffs...just like laws.

    Home run bob...that drug cartel/money angle was certainly interesting especially the part where there is evidence in 2008 that drug money was covering the Inter-bank loan what a tangled and illegal web we weave when first we practice to do clearly irresponsible illegal shit.  Slap on the wrist for those involved in that drug angle, but a mere commoner holding 3 ounces of medical marijuana and sharing it with his friends will get 5 years in prison.

    Unbelievable...keep it up bob.

    "When will the American teachers follow the lead of Wall Street and start making some sacrifices for the children"..Jon Stewart

    by emal on Sun Apr 03, 2011 at 12:40:22 PM PDT

  •  those with the gold, make the rules. (1+ / 0-)
    Recommended by:

    Whatever action a great man performs, common men follow. And whatever standards he sets by exemplary acts, all the world pursues. The Gita 3.21

    by rasbobbo on Sun Apr 03, 2011 at 01:18:11 PM PDT

  •  Who could of ever predicted (3+ / 0-)
    Recommended by:
    seabos84, lostinamerica, MrJayTee

    that one month after these geniuses made these comments.

    For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be “at or near the bottom.” Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: “Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost.”

    ..."That foreign banks would be thronging the Fed discount window" (from the Morgensen article.

    Yeah pure genius Mr. "No-haircuts for AIG"  Geithner...I'd would have died from sheer embarrassment  ...but apparently this is all good enough to get one appointed to the Treasury....only in Amurka.

    "When will the American teachers follow the lead of Wall Street and start making some sacrifices for the children"..Jon Stewart

    by emal on Sun Apr 03, 2011 at 01:29:13 PM PDT

  •  I'm not holding my breath for 60 minutes..... (0+ / 0-)
    in an account yet to be picked up anywhere in the US media

    Accoding to Newsweek................

    How Dumb Are We?
    NEWSWEEK gave 1,000 Americans the U.S. Citizenship Test--38 percent failed. The country's future is imperiled by our ignorance.

    Not much more to say is there........................n/t

  •  Bob, great diary (0+ / 0-)

    Do you have any thoughts on the new Risk Retention proposals the SEC and bank regulators came out with last week?

    I can't tell whether these are good because they will force the banks to retain more risk when they securitize or they're bad because they might make it harder for borrowers to get a mortgage.


  •  Very interesting (2+ / 0-)
    Recommended by:
    bobswern, alizard
    The striking thing was the large amount of borrowing that the New York Fed accepted during the crisis from European banks that had only a minimal presence in the U.S. and arguably posed no threat to the U.S. payment system,

    What exactly is "the U.S. payment system"?  Is it the clearing of US transactions that banks do every day? That is, the meat and potatoes of the Federal Reserve System.

    Here is a big question raised by the disclosures about Wachovia (which indicates that the global financial system outside the informal economy was indeed frozen up gridlocked by their accounting conventions).  To what extent was the Fed buying off foreign counterparties from pursuing fraud claims against US-headquartered megabanks?

    Very soon we need to move from jaw-dropping shock at what has been going on in the financial sector to concrete proposals for reform, starting with some major trust busting.  Of course, implementing those reforms needs legislation and funding and that needs members of Congress who (1) know ounce 1 about the financial system and (2) give a shit about the constituents who elected them.

    We are back where progressives were 100 years ago, putting together popular arguments for reform and common sense ideas about what reform looks like.  And this time the reform movement must look both at the US banking system but also the global financial system of which it is a part.  Anti-trust laws and other safeguards don't mean much if offshore regulations make it easy to suck paper capital out of the one country into some other "financial center" and play games with the numbers there.  Remember the credit default swaps unit of AIG was in London.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Sun Apr 03, 2011 at 03:58:16 PM PDT

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