S.E.C.’s Kara Stein Takes Aim at Deutsche Bank

The recent spate of settlements by big Wall Street banks has underscored their astonishing ability to persuade powerful government officials to let them escape without any real penalty for wrongdoing.

Knowingly assemble shaky mortgages into securities and then market them as safe investments? No problem. Rig the price of foreign currencies? Of course. Manipulate the price of gold, silver, copper and oil? Go ahead. Conspire to set the price of the London interbank borrowing rate, or Libor, to the detriment of tens of millions of corporate and individual borrowers the world over? Sure, especially when the only penalty before getting back to business as usual is a fine paid with shareholders’ money.

There has been no accountability for the individuals who perpetrated these crimes, and it is doubtful there ever will be, even as one Barclays trader proclaimed in a 2010 email cited as part of the foreign-exchange scandal settlement, “If you ain’t cheating, you ain’t trying.” The Justice Department, the Federal Reserve, the Securities and Exchange Commission, the Commodities Futures Trading Commission and other regulators have essentially given Wall Street a pass.

But for one S.E.C. commissioner, the line has finally been crossed. In a scathing dissent this month to a decision to allow Deutsche Bank to avoid being labeled an “ineligible issuer” as a result of the criminal conviction of a subsidiary for manipulating Libor, the commissioner, Kara M. Stein, declared war on special treatment for the big banks. The S.E.C.’s waiver allows Deutsche Bank to keep all the advantages of being a “well-known seasoned issuer” — including instant access to investors in the capital markets and a streamlined securities registration process — that would normally have been revoked once the bank admitted to a criminal role in the manipulation of Libor. Instead, thanks to the waiver, the bank can continue to operate as if it had done nothing wrong.

That struck Ms. Stein as a mistake, and she has summoned up the courage to say so. She did not mince words. “Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating and stealing,” she wrote in a statement published on the S.E.C.’s website. “This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating Libor. The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.”

Ms. Stein went on to decry the recent trend of the S.E.C. to grant waivers to financial institutions that commit crimes instead of barring them from certain lucrative business lines as punishment for their criminal behavior. The Deutsche Bank waiver is the S.E.C.’s third in less than two years — all of which have been granted during the tenure of the agency’s chairwoman,Mary Jo White, who pledged to clean up bad behavior on Wall Street. But like several of her predecessors, she has so far failed to deliver on that promise.

“This criminal scheme involving Libor manipulation was designed to inflate profits, and it was effective,” Ms. Stein continued. “It created the impression that Deutsche Bank was more creditworthy and profitable than it actually was. Accordingly, the conduct affected its financial results and disclosures. Because Libor plays such an important role in the worldwide economy, manipulation of it goes to the heart of many aspects of Deutsche Bank’s disclosures. Interest rates represented to clients and the public also were clearly false.” She has her doubts, with good reason, that Deutsche Bank’s “culture of compliance is dependable” or that “its future disclosures will be accurate and reliable.”

Read on.

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