Benjamin Lawsky: The Man Who Picked a Fight With Wall Street

Meet the state’s top banking regulator

"In the strange political climate of the U.S., anyone who stands up to Iran is a hero," wrote economist Kishore Mahbubani.

London Mayor Boris Johnson chimed in, writing in the Telegraph that Lawsky had been "motivated by jealousy" and "a simple desire to knock a rival centre"—yet another example of the U.S. being "high-handed in her treatment of other nations."

Underneath the faux outrage, the real shock was that a bank—any bank at all—might be subjected to a serious punishment.

Willie Davis
Willie Davis

Though Congress passed Dodd-Frank, landmark legislation designed to rein in big banks and loosen their chokehold on the U.S. economy, more than three years ago, most of the bill has never been implemented.

So bankers have been partying as usual, laundering funds for terrorists, drug traffickers, and repressive regimes (HSBC, Standard Chartered); price-gouging on necessities like electricity and aluminum (JPMorgan, Goldman Sachs); investing other people's pension money in doomed-to-fail ventures (Bank of America, several times); and charging illegal overdraft fees (nearly every large bank in the country).

And the U.S. continued to handle institutional financial crimes the way it always had: by politely ignoring them, or, at worst, by charging the offender a penalty that typically amounted to just a few days' worth of revenue (what the feds always describe as "historic" fines).

Take JPMorgan Chase, which has been fined or sued at least 10 times between 2011 and 2013. It paid $5.29 billion for its share of the subprime mortgage crisis; almost $300 million for misleading investors about shaky mortgage-backed securities; $150 million to pension funds whose money it invested in a risky "structured investment vehicle." And that's just a snapshot of a 10-month period last year. Financial analyst Joshua Rosner estimates that since 2009, JPMorgan's "litigation expenses" have amounted to about $16 billion. (The figure inched up in July, when the bank was fined $410 million for manipulating electricity prices in California and the Midwest.)

Or take HSBC, which for years did a brisk business laundering money for Mexico's Sinaloa drug cartel. Despite the nation's reputation as a cartel kind of place, HSBC deemed Mexico a "standard" risk for money-laundering, meaning that all wire transfers to and from the country, no matter how large or frequent, were allowed to proceed without any internal review.

The Treasury Department found that hundreds of millions of dollars in drug money flowed through HSBC branches in the United States and Mexico. Drug traffickers deposited hundreds of thousands of dollars a day in cash at single branches, using boxes designed to fit precisely through HSBC's bank windows.

Bart Naylor, a financial policy advocate for Public Citizen, a consumer group that for years has begged the feds to take a harder line on bank crimes, says financial crime doesn't just hurt the economy; it deeply affects the lives of ordinary people.

"That teenage girl you knew in high school that became an addict to crack cocaine? That was made possible by HSBC and Standard Chartered taking money-laundering as unseriously as they did," says Naylor. "Shut off money-laundering, you can go a long way toward solving the drug problem and the subsequent gun violence."

The feds, Naylor asserts, have responded with "candy-ass deferred prosecution agreements," in which bankers accept no responsibility and no one goes to jail.

"I call it the immaculate-conception theory of a crime," Naylor says. "A crime was committed, but by no person and no corporation."

In a March appearance before the Senate Judiciary Committee, Attorney General Holder admitted as much, saying that some banks have become "so large that it does become difficult to prosecute them," especially because a criminal charge would have "a negative impact on the national economy."

Standard knew that in Benjamin Lawsky it faced a different adversary. A day before a scheduled hearing on whether its New York license would be revoked, the bank settled, paying a $340 million fine to DFS.

The feds followed with their own sanctions months later, fining Standard $100 million and forcing it to forfeit $227 million more, punishment for "illegally moving millions of dollars through the U.S. financial system on behalf of sanctioned Iranian, Sudanese, Libyan, and Burmese entities." According to the New York Times, the Justice Department, having concluded that the bank had broken no laws, had been on the verge of letting Standard completely off the hook before Lawsky intervened.

True, Lawsky had only managed a fine. But the settlement also forced Standard to install a monitor for two years to watch out for money-laundering violations, and hire permanent monitors to audit "internal procedures."

Lawsky's critics lapsed into a sulky silence. "The industry is not happy with how Ben went after Standard Chartered," says Neil Barofsky, a former federal regulator who oversaw the controversial bank-bailout program. He and Lawsky worked together as prosecutors in the Southern District of New York.

"He didn't follow the playbook: a lengthy internal investigation where you accept all the bank's arguments, then settle for pennies on the dollar," Barofsky says. "Ben said, 'This is egregious conduct, I'm going to take your license.'"

But the costs of that threat—not to mention stealing the feds' thunder—were clear. "When you do something like that, you're going to piss off everyone," Barofsky adds. "You're going to upset the bankers, because the advantageous status quo is being disrupted. You'll upset the regulators because they're being exposed as not doing their jobs, taking the easy road out, or a road that's acceptable to the banks, or helpful when officials want to take a spin through the revolving door." (That is, when federal regulators leave their government jobs for cushy bank jobs, a phenomenon several investigations have concluded is especially common at the Securities and Exchange Commission.)

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