Tuesday, August 7, 2012

Most troubling aspect of Standard Chartered's Iran scandal is Peter Sands advised UK government to bailout banks

The Telegraph reported on the possibility of Standard Chartered having its $190 billion dollar clearing operation in New York closed as a result of what the New York State Department of Financial Services  said was its intentional violation of US money laundering laws.

Naturally, Standard Chartered is saying it didn't do what it is accused of doing and if it did the number of transactions involved was a fraction of what the NY authorities claimed.  Which is not much of an excuse given that zero transactions could have been easily achieved.

To me, the most troubling aspect of this scandal is not that it occurred.

Since the beginning of the financial crisis, we have discovered that every large global financial institution has had a culture that permitted, some might say, encouraged bad behavior.  This is just another unsavory example.

As former Barclays CEO Bob Diamond said, culture is how you behave when no one is watching.  The fact that banks are wrapped in opacity means no one is watching and bankers had and have the opportunity to behave badly.

To me, the most troubling aspect of this scandal is that the UK government turned to the head of Standard Chartered, Peter Sands, for advice and as a result implemented a bailout of the banks.

Regular readers know that in a modern banking system, banks do not have to be bailed out.  Deposit guarantees and access to central bank funding allow banks to operate with negative book capital levels. As a result of the deposit guarantees, taxpayers are banks' silent equity partner when the bank has negative book capital levels.

Banks are designed to absorb the losses on the excesses in the financial system and protect the real economy.

With Standard Chartered's Iran scandal have we finally run out of bankers the UK government will take advice from that recommend bailouts over requiring the banks to recognize their losses and provide ultra transparency to confirm the fact?
Standard Chartered could be expelled from Wall Street amid explosive allegations that for 10 years the bank “schemed” to bypass American anti-money laundering sanctions and process $250bn (£160bn) of transactions on behalf of Iranian clients. 
New York’s top financial regulator has claimed that “flagrantly deceptive actions” by the British bank left the US “vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”. 
In a devastating 27-page order Benjamin Lawsky, superintendent of the New York State Department of Financial Services, claims that Standard Chartered Bank (SCB) “operated as a rogue institution” – and that the bank’s group directors in London were complicit. 
In October 2006, the head of the bank’s American operations “sent a panicked message to the group executive director in London” saying that the bank’s handling of Iranian clients could cause “catastrophic reputational damage”. The unnamed director allegedly replied: “You f****** Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.” 
The order ... claims: “Motivated by greed, SCB acted for at least 10 years without any regard for the legal, reputational, and national security consequences of its flagrantly deceptive actions. 
Lord Davies, the former Labour minister, was chief executive of Standard Chartered between 2001 and 2006. The current chief executive, Peter Sands, was promoted to the top job from finance director in November 2006. Mr Sands, one of Britain’s most respected bankers, was credited with masterminding the “Balti bail-out” that shored up the financial system at the apex of the crisis in 2008.
The Wall Street Journal focused on the hit to both Standard Chartered's and Peter Sands' reputation and the simple fact that shutting down the dollar clearing operation would have very negative consequences for the bank.

In the U.K., Mr. Sands has long been heralded as a voice of reason in the country's turbulent banking sector. The former consultant, who was named Standard Chartered CEO in 2006, regularly espoused the importance of sound governance and sensible investment. 
While several of its British peers were being bailed out by taxpayers, Mr. Sands was guiding the Asia-focused bank to record profits boosted by growing trade between emerging nations. The executive stressed the fact that Standard Chartered doesn't have an investment bank and didn't need European Central Bank cheap loans to keep its business ticking over. 
As a result, Mr. Sands is one of the few top British bankers to see his stock rise in the past decade.... 
At this stage, few analysts expect the allegations to have any bearing on Mr. Sands's job. 
However, some wonder why Standard Chartered was taken so flat-footed by the report. "It's not going to be helpful that the management team was basking in the glory saying that they weren't hit by compliance scandals," said Gary Greenwood at Shore Capital. "It doesn't look good as they probably ought to have known this was going on." 
When asked by reporters about the U.S. investigation last week, Mr. Sands played down its importance. 
The New York State Department of Financial Services on Monday threatened to revoke the license of Standard Chartered Bank, a U.S. unit of the U.K. bank located in midtown Manhattan. 
Standard Chartered's U.S. dollar clearing business is the seventh largest in the world, according to Deutsche Bank. Standard Chartered has positioned itself as a facilitator of trade between Western and emerging nations, so being able to offer this service is critical, analysts say. 
However, the bank can easily afford the fine, said Mr. Greenwood.  The real cost, he said, is to the management's reputation.

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