Where are the prosecutions of bank officers for defrauding investors or the government?
This isn\’t an academic question or an eruption of pitchfork populism. Personal accountability is vital in board rooms. We know regulation doesn\’t work very well. Regulators get captured. Bank lobbyists dominate the backroom games. Government agencies have too few investigators to police adequately.
What we want is self-enforcement. That can come from a strong sense of personal ethics, something long lost in the go go banking world with its multi-million dollar personal incentives. Or it can come from a strong sense of fear — a sense that if you violate the law, you just might end up in jail.
And that requires prosecutions and jail sentences. Fines don\’t do it. The SEC just fined a Citibank employee $100,000 for helping to defraud investors by not foreclosing a staggering $50 billion in toxic subprime mortgages that were in Citi\’s basement. That same official got a yearly paycheck of over $12 million. The fine was a rounding error on his bonus. That\’s a joke.
And now Johnathan Weil of Bloomberg exposes how ridiculous this has become. A bank employee at UCB embezzeled $235,000 from the bank to cover gambling debts. He was sentenced to jail. The officers of UCB lied about the bad debts on their books to defraud taxpayers out of $300 million from the TARP program. The bank went belly up. The taxpayers lost their money. The bank officials walked. WTF.
Here\’s the article. Send it to your legislator. It is time to rouse the Justice Department from its slumbers.
http://www.bloomberg.com/news/2010-08-05/gambling-bank-s-money-turns-out-to-be-illegal-jonathan-weil.html
Gambling Bank\’s Money Turns Out to Be Illegal: Commentary by Jonathan Weil
By Jonathan Weil – Aug 4, 2010
Bloomberg Opinion
As we approach the second anniversary of the Treasury Department’s oft-maligned Troubled Asset Relief Program, here’s a trivia question to see just how much you have learned about the way justice is meted out in Bailout Nation.
If you were a banker, which of the following activities would be more likely to land you a quick trip to the federal penitentiary? Is it:
(a) Misrepresenting your dying bank’s financial condition in order to secure almost $300 million in TARP bailout cash and then quickly proceeding to lose it all, or
(b) Embezzling about $235,000 from your employer to support your compulsive-gambling addiction and pay off personal debts?
The correct answer, naturally, is “b.” In this country, when it comes to matters of high-finance crime and punishment, little pigs get slaughtered, while hogs get fat — convicted Ponzi schemer Bernard Madoff being this rule’s most notable exception.
The facts here aren’t hypothetical. This actually happened at a San Francisco-based lender with assets of $10.9 billion called United Commercial Bank, which is in the spotlight again following a report last month by the Federal Deposit Insurance Corp.’s inspector general on the causes of its failure.
The mid-level bank officer who stole the money to support his gambling habit, Alex Yan, 50, was sentenced to 27 months in prison in June 2009 and ordered to pay restitution to UCB of $235,695. He pleaded guilty about two months after a grand jury indicted him in November 2008, which happened to be the same month UCB received its $298.7 million under the TARP Capital Purchase Program.
Bye-Bye TARP Money
Treasury lost its entire investment when UCB failed a year later. At the time of UCB’s closure, which cost the FDIC’s insurance fund $1.5 billion, an FDIC press release said the bank’s problem loans might have been identified earlier were it not for “alleged fraud exercised by former senior management, currently under investigation by the relevant authorities.” So far, Yan remains the only former UCB banker charged by the government with breaking the law.
The primary reason for UCB’s failure, according to the inspector general’s report, was inadequate oversight by the bank’s directors and management. The bank, which primarily served San Francisco’s ethnic Chinese community, started expanding rapidly in 2002 by buying other banks, usually at premium prices.
By Hand
However, it lacked the technology and staff to prevent errors in its financial reports, intentional or otherwise. Even after doubling assets in just four years, UCB still relied on manual processes to manage its books. It also relied heavily on short-term, high-cost funding to finance its growth in long- term, commercial real-estate and construction loans. That combination proved lethal when many of the loans soured.
By April 2009, FDIC examiners had begun to identify deterioration in the bank’s asset quality and overall financial condition, prompting UCB to write down large numbers of loans. This was just one month after UCB’s outside accounting firm, KPMG LLP, had given the bank a clean audit opinion on its 2008 financial statements.
The following month, on May 8, the examiners met with KPMG officials to inform the firm, according to the inspector general’s report. Five days later, KPMG notified the audit committee for UCB’s publicly traded holding company, UCBH Holdings Inc., that “illegal acts” may have occurred at the bank. Mainly those related to overvalued loans and understated losses. The audit committee began an investigation and on May 20 warned investors not to rely on the company’s 2008 financial statements or first-quarter 2009 earnings release.
No Restatement
Among other things, the investigation found instances where bank employees lied to KPMG auditors, intentionally delayed loan writedowns and altered documents to hide credit losses. (KPMG concluded that these activities started around October 2008.) UCB’s chief executive officer and chief operating officer resigned. Others were fired. UCB failed before it could issue restated financial reports.
The inspector general’s report largely let the FDIC off the hook for recommending that Treasury approve the bank’s TARP request. It said the FDIC “was not aware of UCB’s serious financial reporting matters” when it evaluated the bank’s application in October 2008, and that these only became apparent later. It wasn’t until June 2009 that the FDIC designated the bank as undercapitalized.
All this might be just another forgettable episode from the banking crisis that almost crippled America’s financial system. Except this time, we have the unusual example of a bank where someone actually got pinched. It just wasn’t somebody you might have expected, or the crime you might have imagined.
No Charges
Yan stole hundreds of thousands of dollars from his bank, the bank turned him in, and he got sent to prison. Meanwhile, the people who ran his bank scammed the American public out of hundreds of millions of dollars and haven’t been charged by the government with anything.
Maybe someday the authorities will find it worth their while to prosecute both types of misbehavior with similar zeal. Until then, the status quo shall remain: The smaller the fraud, the harder they fall. Some lesson that is.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
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