Time to ban UBS from doing business in the U.S.

December 21, 2012

Times have changed since 1989. That year, bond king Mike Milken was indicted on 98 counts of racketeering and securities fraud. He served two years in prison after he pled guilty to six securities violations. Milken paid $1.1 billion in fines and disgorgement to investors. His firm, Drexel Burnham Lambert, settled civil and criminal charges, but it went bankrupt the following year.

Now, because of the fragility of the financial system, UBS, the latest firm to be involved in systemic financial crimes after it was found to be manipulating Libor, will only face a criminal charge against its Japanese subsidiary. It is the equivalent of a legal slap on the wrist. The bank should instead be banned from conducting business in the U.S. The WSJ reports:

Regulators described the alleged illegality as ‘epic in scale,’ with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates to make money on trades. The six-year effort ‘seriously compromised’ the integrity of financial markets, said the U.S. Commodity Futures Trading Commission[…]

[…]UBS isn’t facing criminal charges. Justice Department officials said they decided not to charge the Zurich-based company, fearing such a move could endanger its stability.

But this wasn’t the first bid-rigging conviction for UBS this year. UBS employees were also convicted of multiple bid-rigging, writes Reuters:

Three former UBS AG executives were convicted on Friday of conspiring to deceive U.S. cities and towns by operating a scheme to rig bids to invest municipal bond proceeds.

Is this the only incidence of bid-rigging for UBS? Well, no:

“For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects,” Scott Hammond of the U.S. Department of Justice Antitrust Division said in a statement after the verdict.

James Stewart, writing in the New York Times, reminds us of a few more massive illegal schemes that UBS participated in:

UBS obtained a deferred prosecution agreement in 2009 for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud. UBS bankers trolled for wealthy clients susceptible to tax evasion schemes at professional tennis matches, polo tournaments and celebrity events. One UBS banker smuggled diamonds in a toothpaste tube to accommodate a client. In return for the deferred prosecution agreement, UBS agreed to pay $780 million in fines and penalties and disclose the identities of many of its United States clients.

Is that all? No Stewart mentions another one that I had forgotten about:

In what the S.E.C. called at the time the largest settlement in its history, in 2008 UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities, which were sold by UBS as ultrasafe cash equivalents even though top UBS executives knew the market for the securities was collapsing. Seven of UBS’s top executives were said to have dumped their own holdings, totaling $21 million, even as they told the bank’s brokers to “mobilize the troops” and unload the securities on unsuspecting clients.

Can someone please tell me why this Swiss bank is still operating in United States? It has been preying on investors, municipalities, the U.S. tax system and the global system for setting interest rates. Excuse me for my cynicism, but these are just the illegal dealings that have come to light. It is hard to imagine now that the rest of UBS’s business is squeaky clean. UBS should be banned from conducting business in the U.S.

Lanny Breuer of the U.S. Justice Department said:

“Our goal here is not to destroy a major financial institution,” […] Prosecutors have to at least “evaluate whether or not innocent people might lose jobs” and other types of potential collateral damage.

The U.S. Justice Department has “concerns” about the fragility of the financial system and jobs? I would feel a lot more confident in our justice system if it had concerns about protecting American citizens from predatory financial institutions.

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