good afternoon welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for monday december seventeenth two thousand and twelve u.b.s. is set to pay as much as one point six billion dollars to settle charges of libel rigging with the u.s. u.k. and swiss authorities this is according to bloomberg the big win me here though is unlike the scores of bank settlements we've seen where the bank neither admits nor denies the allegations this time u.b.s. will reportedly fess up to criminal wrongdoing but is there a hitch well we'll talk to former prosecutor and special and inspector general for

tarp neil barofsky i got to ask him and one less talked about issue related to live where manipulation is that of the lawsuits are likely to arise from those holding the nancy products tied to the rate one major example stems from some municipalities use of interest rate swaps tied to live war they use it to hedge risk when they issued bond bonds for example what is an interest rate swap though we'll break it down and word of the day plus main opposition leader shinzo was elected prime minister of japan yesterday as expected he has got big plans for the bank of japan and let me tell you he wants it to double its inflation target to two percent and he wants unlimited easing to ensue so what may be the results of the nomics we'll talk about it loose change let's get to days capital account.

the u.b.s. live or settlement is expected to be announced wednesday according to the financial times others reporting it could come as early as tomorrow hear some more of the details we know from the f.t.'s coverage so the settlement is over alleged rigging of the yen live or interest rate over several years involving deaths from tokyo to london the bank will pay close to one point five billion dollars according to f t others such as bloomberg are saying that number could be slightly higher as much as one point six billion and an aspect of these settlement we don't typically see u.b.s. is japanese subsidiary will reportedly edm it wrongdoing pleading guilty to a criminal charge however the f.t. cite this source saying the bank will not lose its ability to conduct business in

japan in addition about three dozen bankers and senior managers will be implicated in the alleged rigging now all of these folks will not reportedly face criminal or civil charges but we have seen a few arrests others have been notified they are being investigated so here to talk about how exactly to see this expected deal is neil barofsky really the best person to talk to his former special special inspector general of tarp an author of the book you see right here bailout which was just an amazing account of the wall street bailouts during the financial crisis and brought skis role in trying to police the entities doling out that cash so first of all professor proxy thanks so much for being here this is i was so excited we had you booked today when more details are coming out of this expected deal so thanks so much both usually these days it's a pretty good bet or you pick any single day you're probably going to have one banking scandal or another in iraq it's just becoming so common and you know that is a very fair point but nonetheless i am still thrilled that this particular one we have

you here because in this case we see something that we haven't seen from banks instead of the just typical settlements where they're not admitting or denying wrongdoing this time reportedly we're going to get an admission of criminal guilt from the japanese subsidiary of u.b.s. so what is the impact of this deal if that is the case in your view. well you know it's hard to know without seeing what the exact conduct that's being detailed right now we're relying on you know a series of leaks seemingly coming from the department of justice and it really depends you know one of the early reporting said that the reason why the japanese subsidiary is going to plead guilty and not the parent company which apparently there is some indication will enter into another one of yet another deferred prosecution agreement is that a concern that if the parent company were to take a plea that it would have a system wide impact that it would jeopardize the global financial system now if that's the case it's much less reason to celebrate if

a big bag is once again we saw this last week with h.s.b.c. essentially getting a pass as far as the full range of of responsibility and accountability that we would see simply for the reason that it's too big to fail and too big to jail and that an indictment or criminal charges could upset the financial system then we're seeing some small degree of progress but not nearly where we need to be because it indicates tuesday different tiers of justice in this country one for everyone else and one for the large too big to fail banks so i think we really need to see what happens with what the conduct is whether it was limited to just the japanese subsidiary or whether this was in some ways yet another type of backdoor ballad of the parent company because of these systemic concerns right so just to be clear if the admission of criminal wrongdoing is just on the part of the japanese to get harry will that be a path for u.b.s. you know if if this is if the conduct was really truly live it is

a just that japanese subsidiary you know then that probably makes sense but indications that the parent company is going to enter in to some sort of broader agreement it suggests that this was you know rather than the right degree of justice to to match the crimes that occurred that this was somewhat of a compromise because of u.b.s. the special. connected bank and as i said this is better than what we saw last week where h.s.b.c. just got to walk essentially no no criminal liability because of its size and interconnectedness but still a very very deep concern for the future of our financial system one hundred percent and i want to get more into h.s.b.c. because i know you've been so highly critical of that settlement and you've been writing about it now talking about it i want to get more to that but you mentioned that you think these leaks on this u.b.s. deal are coming from the d.o.j. i want to ask does this deal with the admission of criminal wrongdoing if it comes in regardless if it matters for u.b.s. bigger picture is this kind of

a fake allowance of looking tough on the part of the d.o.j. does this lead them get that headline of a criminal admission from a big bank which makes them look like they are now being tough on wall street and giving main street that toughness that they've been hoping for. that's certainly how they're going to spin it and how they've been spinning at each step of the way look this department of justice unfortunately in recent months really since the beginning of this year seems to be putting the press conference slightly above justice accountability and the terence and so they're really questions that we see all the all the facts that are outlined in the investigation it's hard to really give a grade and say whether this is yet another and paper lawsuit with puffery that really supports the bag or is the appropriate result and again i don't mean to be too overly critical it is good that we're going to have a guilty plea at one of these cases involving large bags i think the first time in ten years that is certainly

a step in the right direction i just don't know if it's mission to bring that level of deterrence that we're going to need to try to deter more bad behavior by big bags and that i'm a little skeptical what about the size of the fine if it is a one or one point six billion dollar fine that would be double or even triple what barclays paid which was the first bank to settle and live or it paid four hundred fifty million dollars with that being a fine tantamount to. the level of the crime. well you know it is sort of have to get put in perspective if this was in fact activity it was directed at the parent company level and they're not having you know what is a death sentence for a bank like u.b.s. which would be an indictment of the parent company for this behavior would have all sorts of ramifications and if department have the evidence for that and decided not to do that for whatever reasons including concerns of being too big to fail well then the penalty should really be if you want to substitute the financial penalties penalty to be the deterrence to keep this behavior from recurring it has to be

massive it has to be on the par of a death sentence so you know i think in these cases when you have these corporations especially one like u.b.s. which is a recidivist is just a couple of years ago that an eight hundred million dollar fine for for setting up legal tax shelters you know i'd like to see these fines not in the in the area of months of earnings which which was what this would be but of years really has to be a really really major standing if the primary form of punishment is going to be through these financial penalties at the parent level in order for have an impact because look it's a lot of money it's a lot of money absolutely and specifically but it is what u.b.s. earns and over the course of a few months and you know it really these settlements really have to bring a lot more pain than they have in the past because look in the past these big settlements have done very little to deter future criminal conduct absolutely once the banks start getting into this settlement process which can take

a long time they just are setting aside money you know every quarter you know putting it in reserve for this kind of litigation it never ends up being that big of a deal which brings me to h.s.b.c. because i saw you make a similar criticism on bloomberg over the penalty for h.s.b.c. they settled for one point nine billion dollars which sounds like a lot but you're saying the same thing you know that just amounts to what you know several months of earnings that is not enough in this case you as a prosecutor neil barofsky who has gone after drug cartel colombia. dr cartels over issues like money laundering you said this is a case where there should have been criminal charges what should have happened based on your experience what kind of charges should we have seen and i think more importantly than that in my opinion that was apparently the pinion of prosecutors within the department of justice apparently within the district attorney's office here in new york that was also participating that there should be criminal charges and a plea to go to to criminal charges along the lines of money laundering or something

perhaps a little bit lesser included that was the that was what the prosecutors wanted and it got knocked down by the treasury department invoking this fear of systemic instability and this is to me this is one of those we should be out in the streets with pitchforks moments because when the prosecutors make a determination that a crime has been committed and that this is the appropriate answer and then the of their protectors in chief their bailout or as in chief at treasury intervene in the process invoking too big to fail this really does should be a benchmark should be a turning point in recognition of how severely broken down only our financial system is but our criminal justice system has become as well that we're literally being held hostage by these banks with the threat that if the normal aspects of the criminal justice system work the way they were supposed to that it would put our whole economy in danger and it's just yet another reason why we need to break these banks and i know i've heard you say that before that's one thing you advocate for

and others do and i tend to agree how would you advocate breaking them up though exactly through what mechanism because you have been very critical of the way washington works and the dysfunction of lawmakers in washington so how do you break them up in a way that is actually a good way and not a way to get corrupted by all of the influences we see going on in washington. well i think belts and suspenders so i think that you know one thing is bringing back a form of glass steagall the depression era law that got carved up and eventually killed at the end of the clinton administration that separates the commercial banking the the part that look the government supports and is going to support the deposit insurance and lending from the federal reserve which are good important things for a stable financial system but getting that part away from the riskier aspect of the bank for which is frankly the government and as a from a public policy purpose we have no interest in protecting so i think that's part of it i think also looking at size caps just to do something about the great size and

interconnectedness and increasing their capital requirements so they're it's less with borrowed money and more of their own money that's what i would do from a legislative perspective but from a department of justice perspective i think that if a bank goes in and makes the argument which h.s.b.c. apparently did and says we should have leniency because of our role as being so big and systemically significant why the department of justice then has an obligation if they're going to give into that argument which they did and look i think it's understandable that they did they don't want to destabilize the global financial system but in terms of that agreement i think they need to send a message that saying you know what h.s.b.c. and every other bank that makes this argument because trust me every other bank does make this argument they should say you get to make this one time a one time only and part of not giving you the death sentence of a criminal indictment here you're going to have to break yourself up so that you can never make this argument again so that you can't be so systemically significant yeah i think those are sort of two has the same good desirable goal that

a protector system seems like that should have been a good concession for the settlement hopefully we will see that we're going to talk more you know brocky more i want to get to with you former as special inspector general of tarp author a lot more in just a moment and also still ahead main opposition leader in japan shinzo abe was elected prime minister what does this mean for keeley and jumpin couldn't borrow. if it's unlimited and if inflation targets go up to two percent well this guy's in loose change but first your closing market numbers. are low. elite. little. ily

ily . you know how sometimes you see a story and it seems so for lengthly you think you understand it and then you glimpse something else and you hear or see some other part of it and realize everything you thought you knew you don't know i'm tom hartman welcome to the big picture. the worst you're going to. write out to the day a radio guy and for lauderdale a minute from a quick hospital i want you to watch closely to go good you've never seen anything

like this i'm cold. welcome back we're talking about the insidious continuation of too big to fail that we see impact possibly the settlement with banks like h.s.b.c. over money laundering and u.b.s. over libel rigging and neil barofsky who is former special inspector general of tarp and author of bailout is here talking to us about it also professor brodsky i do want to ask one more question about the h.s.b.c. case because you in the post that i saw you write the column we're talking about

your experience in prosecuting minors money laundering cases in the case of colombia i know you went after the fark as well and nearly had your life on the line with some of the witnesses that you talk to but i want to know what we typically you'd see in these kinds of cases with this kind of money at stake would you see a lot of people prosecuted what kind of punishment with a face what kind of charges would they face. you know we would routinely do money laundering only cases for narcotics you know basically providing service for narcotics cartels there's zero cottage industry of money launderers who you know for us return for a certain fee will provide that service of getting u.s. dollars back to to colombia or colombia dollars. and then turn those dollars into pesos and you know they charge a fee and we go investigate them and after above a certain threshold five ten fifteen million dollars you know they'll come and when we get them we put them in we try and we convict them and put them in jail those

jail sentence could be five ten fifteen years depending on the amount of money and here with h.s.b.c. which is performing in many ways the exact same function in many ways i mean eight hundred something million dollars was alleged in in the settlement and it was doing some part of this whole idea of taking cartel money and helping to wash it and turn it from u.s. dollars into colombian pesos that could be used out there so you would think decades and decades of prisoner of prison time if they weren't wearing suits and ties and being bankers but were instead just the more of the more looked like more like the common criminals that we were dealing with the money laundering cases and it is overwhelmingly striking that you have this type of conduct and so far it appears not a single individual criminally charge. as well as the entity for this type of scott conduct i mean it's somewhat breathtaking compared to how much resources that we put in as the federal government in pursuing money laundering cases against

individuals involved in large laundering narcotics money it is very and i think that your examples really highlight that people's discussion the two tiered justice system it just makes such more of an impact when you have examples as you do i want to get more into this issue than it too big to fail because it's such a complex issue you know we're talking about to begin fail existing and impacting a banking. and they're not on the brink of financial collapse it's just to keep them from from getting into a situation where they could possibly be i asked sheila bair about this recently she was on my show former chairman of the f.d.i.c she thinks too big to fail is over here's our conversation a bit of it if one was brought to the brink and it was deemed systemically important or systemically dangerous i have a hard time believing the government wouldn't step in and bail them out. i don't think they would and i think. put forward the blueprint that they would for what we got a ban on that kind of one off you can't do that anymore specifically prohibits it.

so do you agree that from a dog frank standpoint if a if a bank was on the brink too big to fail is over and it will get bailed out. you know it pains me to disagree wish it was show bear i agree with her probably about ninety nine point nine percent of things but on this one i do respectfully disagree with her and i think look i think this h.s.b.c. is proof positive that we still have a problem to big to fail because if it wasn't such a concern that the treasury department wouldn't have had to go to the department of justice and say don't indict them because we're afraid of the systemic risk the normal workings of the department of justice would it and the criminal justice system would have been in play instead we have this residual fear that if we destabilized one bank that it could bring down the entire system and i think realistically if we're in the midst of a financial crisis we're going to be back where we were in two thousand and eight the banks were big then they're twenty to twenty five percent bigger now and that proves that that tendency towards bail out the fear of what would happen otherwise

i think is still in place and i think far more significantly that is still what the market believes yeah so much of the distortions that come with too big to fail are based on the presumption of bail out it almost becomes a tautology those presumptions are still there which still gives those financial institutions the advantages and all the incentives to pile on more risk there you go you have another financial crisis and neil barofsky thank you so much for vanish a really great to have your insight today he's a former state thanks so much. all right time now for word of the day where we break down a financial term for our smart viewer just not the expert and today it is interest rate swap especially as many u.s. municipalities entered into these swap agreements tied to the libel rate in many

cases which is why we have seen so many stories like this bank space suits as states weigh libel or losses. or more states dig into live war scandal so since we're talking about why bore today we thought to be a good one to break it down in addition interest rate swaps are a large part of the over the counter derivatives market globally so what exactly is an interest rate swap well let's bring the definition it is an agreement between two parties where one stream of future interest payments is exchange for another based on a specified principal amount so an example of an interest rate swap is one where a party such as a state exchanges a payment linked to a variable interest rate one going up or down such as libel or for a fixed payment now in our example let's say a city government is paying a variable rate on a loan ok so this rate can go up or down so the city might want to enter into an interest rate swap with the bank to mitigate the risk of it going up so the city

commits to a fixed rate and it pays that fixed rate to the bank it commits to that rate and the bank agrees to a variable rate now not all this money changes hands i'm going explain how this works as a hedge so let's take a look at a chart that will show that because how it works is if the variable rate is below the fixed rate right here you're going to have the city giving money to the bank the difference however if the fixed rate is above the variable rate you're going to have the bank crediting the city the difference so the city can theoretically have that fixed rate it agreed to because in theory the difference is that i just explained between the variable the fixed rate agreed upon between the parties that are doing this wop that difference plus the variable rate that the city or state is paying on their loan should amount to that fixed rate now cities and states going to trouble as their borrowing costs or during the financial crisis yet those swaps they entered into as a hedge that were based on live war paid substantially lower rates cities and of

having to make up the difference between these ever widening rates now because so many municipality. entered into interest rate swaps in some cases tied to libel or it may take a long time for these cases these lawsuits to play out but now you know a little more about interest rates swaps. all right let's separate with loose change dimitri on friday we were talking about the front runner to be the next prime minister of japan shinzo abbate and he won and here is jim grant on friday saying why we should possibly pay attention on thinking that this might be something worth watching because there is no other

reason the japanese will be getting on with all of which they seem to have put it in to do they'll be following the world and implementing truly radical monetary policies. so if we see unlimited easing in japan as the prime minister wants and he wants to raise the inflation target to two percent it's right now one percent do you think we will see the end of last decade and deflation in japan was different to the end of last decade in the terms of this isn't going to solve the economic growth problem the real question is will this solve the nominal deflation issue i don't think it will be you know what jim graham is a good point which is that at the end of the the but the bear the bond bear market people thought that the central bank would be impotent. that inflation was something that he couldn't couldn't get under control in the volcker prove that it actually couldn't be do that or coincided with the bull markets at the end of a bull market in bonds the mentality is there's there's nothing that the faith can

do to create inflation. or and in this case it would be the b.o.j. because the bidders ahead i think ahead of the fed in that regard to be doing this for a longer prison so i don't think so but jim graham made a very good point so yeah yeah great point so let's move on because we can't say it any better than mr grant can probably because we want to let you know that the california highway patrol division chief became the best paid officer in california and in many states collecting four hundred eighty three thousand dollars and four hundred eighty three thousand five hundred eighty one dollars in salary pension and other compensation according to bloomberg now for context this is more than the president of the united states makes in his salary of four hundred thousand dollars a year of course there are other perks of being president but we earlier asked you know why is the president need the money but it turns out looking back in history presidents have declared bankruptcy we wanted to bring a few of them to you so that we have a blink in he was

a failed shop keeper ok he opened a shop in eighteen thirty two it went bankrupt in eight hundred thirty three predators took him to court he lost two remaining assets a horse and surveying gear who's paying off debt for seventeen years ulysses s. grant went bankrupt after. leaving office and becoming a partner in investment firm venture a guess is when they have their own capital on the line unknown to you lisey's the firm's other partner was stealing investors' money in an eight hundred eighty four the firm and grant both went bankrupt he started to write his memoir in order to pay off his debt which is pretty amusing and thomas jefferson let's just get to him he faced personal bankruptcy several times at one time jefferson applied to the virginia legislature to grant him a lottery to help pay off his debt so dimitri sorry we don't have much time to talk about this one but i wanted to get through that very fancy and illustrative graphic to show that presidents went bankrupt pass probably not going to happen again today with all those speaker fees they can rack up after they leave office let's leave it there though thank you so much for watching be sure to come back tomorrow and in the meantime you know you can follow me on twitter at lauren lyster you can like us

at our facebook page right there you can give us feedback on this show or catch any you misstate you tube dot com slash capital account you can watch us an h d on hulu at hulu dot com slash capital dash account for everyone here if the show thank you so much for watching and have yourself a great night. for . glory.

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