Federal Regulators Trying to Leash and Collar Standard Chartered’s Nemesis, Benjamin Lawsky

The plot thickens! Today, the Wall Street Journal reported that, “Regulators Seek Unity in U.K. Bank Talks.”

If you read the article, a more accurate headline would be “Federal regulators desperate to get in front of Lawsky mob and call it a parade.” All the article says is the mucho unhappy and very much outflanked Federal regulators have gotten a meeting with Lawsky. Just look at the disconnect between the PR in the first paragraph and the actual state of play in the second:

U.S. authorities are forming a group with New York’s top financial regulator to negotiate a settlement with Standard Chartered over allegations it illegally hid financial dealings with Iran.

The U.S. Treasury Department, Federal Reserve, U.S. Department of Justice and Manhattan district attorney’s office are scrambling to reach an understanding with the New York State Department of Financial Services over the ground rules for negotiations with the U.K.’s fifth-largest bank by assets, according to people familiar with the talks.

This is hysterical. “Ground rules for negotiations”? Lawsky does not need the permission of Geithner et. al. to negotiate with Standard Chartered. As long as Lawsky has Cuomo’s backing, he has all the leverage here. And three independent sources told me as of today that Cuomo was fully behind Lawsky. That means he is likely to remain free to operate as he sees fit. It’s a given that if the White House had any real sway over Cuomo and saw fit to intervene, they would have done so by now. There is no downside to Lawsky in going through the motions of seeing if there is a way for him to proceed and have the Feds save a bit of face.

Let me stress again: Lawsky has all the cards, and he must know that. SCB has done an effective job in muddying the waters and making it sound as if Lawksy’s action hinges on his reading of the Federal statues setting forth Iran sanctions (and by implication, who is he to do that when the corrupt and bank friendly Treasury in supposed to be teh lead actor in this arena?) But as we stressed, Lawsky mentions that law as the basis for only one of the seven violations of law he cites (and even then, his reliance on it seems narrow and defensible; the violation is that the bank worked to keep the New York operation in the dark about the transfers so that it could not vet whether they were in compliance with the law). The other six are New York laws. That means the SBC press campaign, to claim that Lawsky is all wet, that only $14 million, and not $250 billion of transactions were out of compliance, is irrelevant even if true.

A Bloomberg story today describes why Lawsky is within his rights to consider revoking the license of the SCB New York branch:

New York’s financial-services regulator has grounds to shut Standard Chartered Plc (STAN) in the state even if he accepts the firm’s argument that it illegally laundered only a fraction of the $250 billion he claims.

As the state’s top banking regulator, Benjamin Lawsky has power to act in his discretion against any financial institution he deems untrustworthy, according to the charter of his year-old department.
Penalties he could impose include fines and the revocation of the bank’s license to operate in the state…

Even if Standard Chartered’s position is legally sound, the order’s disclosure of internal e-mails suggesting a conspiracy to hide the identity of Iranian clients from regulators has given Lawsky grounds to act when the two sides face off at an administrative hearing Aug. 15, according to experts on both sides of the Atlantic.

“I don’t care whether it is a half of one percent that weren’t right,” said Arthur Levitt, former chairman of the Securities and Exchange Commission,…

“There are going to be more that weren’t right…The e-mails are really outrageous. I think Lawsky has uncovered something that probably has a much deeper depth.”…

Neil Barofsky, who oversaw the U.S. Troubled Asset Relief Program and criticized the U.S. Treasury Department in his book, Bailout, objected to the criticism heaped on Lawsky.

“This is not Lawsky getting ahead of other regulators,” said Barofsky. “This is Lawsky doing his job.”…

“Willful non-compliance is very serious,” said Tariq Mirza, a former Federal Deposit Insurance Corp. official now with Grant Thornton. “If those allegations can be substantiated, regulators throw the book at institutions.”

The Bloomberg story also mentions that Treasury is coordinating with other regulators on this case, but that the coordination “may go nowhere” and Lawsky may still act alone.

The problem facing Treasury is it has conflicting objectives. It really needs to look like Lawsky has relented and is working with them, even if the reality is that Lawsky is driving the operation and the other regulators are just attaching their names and some legal boilerplate to the settlement and getting a cut. But they are also offended that Lawsky is engaging in such (by their captured standards) aggressive tactics. Lawsky wants a $700 million settlement. Since any experienced negotiator knows that a good negotiation means everyone does not get what they want, he might accept $500 million if SCB starts acting serious about settling pronto (as least privately).

Lawsky has no reason to cut New York’s piece of the pie smaller to make the lapdog Treasury and Fed look good. So if Lawsky’s bottom number is, say, $500 million, how much do the Treasury and Fed want on top of that to look credible? I doubt Federal regulators would be prepared to have the Federal piece of the settlement be less than New York state’s. But it strikes me as unlikely that Geithner would stomach pushing SCB for a settlement of north of $1 billion (note I have no specific information; this is strictly gut. I think Geithner values preserving decent relations with UK regulators, and they have to be smarting over the way he managed to dump all blame for Libor on them, when price fixing is also a US anti trust violation and US banks were also gaming Libor). Mind you, as Levitt and Mirza stress, the violations look egregious and willful. If Lawsky has other documents along the lines of the ones he cited in his order, I think a number like that is fully justified. I just can’t see a bank stooge like Geithner going there unless he felt there was no way out.

To give another benchmark, International Business Times had a bit of fun determining what SBC’s sentence would be if it were an individual found guilty of these crimes:

If Standard Chartered Bank were indeed a person instead of an international financier, what kind jail time would it be facing?

The International Business Times asked a criminal defense attorney in New York just that question. The verdict: If corporations were truly people, they would be looking at two decades or more in the slammer.

The charges against Standard Chartered, per the regulator’s filing, mainly relate to “falsifying business records with the intent to defraud examiners” and facilitating “unauthorized Iranian transactions.” If the company were an individual, “a quick glance at the alleged conduct indicates two main crimes that would likely be charged: money-laundering and enterprise corruption,” the lawyer said Tuesday.

Under New York state statutes against those two crimes, a defendant found guilty could be sentenced to a penalty of between eight-and-one-third and 25 years. The attorney noted that “it seems likely that a maximum sentence would be given because of the extent of criminality alleged in this case.” And if the judge really wanted to throw the book at them, the attorney explained, they could consider every instance where Standard Chartered Bank engaged in alleged illegal conduct, no doubt hundreds of them, as a “discrete act of criminality” rather than “one criminal transaction.”

Federal involvement would make the possible prison term even stiffer, with the appropriate federal money-laundering statute carrying a penalty of “roughly 15 to 19 years,” and a racketeering conviction “punishable by up to 20 years” in Club Fed.

There is also an article at the New York Times on Lawsky which comes close to being a hatchet job. It does not look as if the Times made any effort to get to anyone in Lawsky’s camp (by contrast, I know of at least one reporter working on a profile who says everyone who Lawsky has worked with him is extremely complimentary). It also has sources that are spinning (one might say misrepresenting) the genesis. It acknowledges that Lawsky discussed his findings and theories, so it undermines the “blindsided claim. We were told three months ago, with the Fed; the article says April, so this is pretty close to the same time frame and sounds like the same meeting. This is the claim in the Times:

Mr. Lawsky said he would act even without the other regulators at a meeting in April after an examination by his office of the bank revealed failures in its compliance with bank secrecy and money laundering laws, according to people with knowledge of the review.

“With knowledge” sounds at least one step removed. By contrast, we are told that Lawsky said he would like to go ahead and the Fed gave its blessing. But this apparent misrepresentation of the Fed giving a go-ahead serves to represent Lawsky as a lone wolf (note he also gave a courtesy call to the New York DA’s office, before releasing the order; that too is used against him in the article).

And let’s be real: do you think this would have gone anywhere if Lawsky had acceded to the Fed and Treasury’s guidance, since both are firmly convinced that there is no such thing as bank fraud? Lawsky clearly took much more rope than the Federal regulators ever imagined he would, but there seems to be reason to think that he did get authorization.

Given that the disinformation is flying hot and heavy on this story, one final point. Don’t expect a hearing next week. Lawsky filed this action fully expecting there would be no hearing. So do not be fooled by the media treating the postponement of a hearing for settlement talks as some sort of victory for SCB or Treasury & Co.. That was the plan from the get-go.

Trust me, I have no doubt Lawksy would be delighted to have a hearing, which is precisely SCB will do whatever it takes to make sure that does not happen (an article at the Times tonight suggests there might be a private hearing rather than a public one, but if SCB is not willing to negotiate, I’m not clear as why it would make sense for Lawsky to agree). Put it another way: if there is a hearing, it means that SCB has come to believe its own PR, which is a very dangerous position to get yourself into when in the middle of a high profile scandal. It will be walking into a buzz saw.

Update: If you are in New York and support what Lawksy is doing, it would be nice to send him a note, particularly since the New York Times has started sniping at him. You can use this form.