don't typically see u.b.s. is japanese subsidiary will reportedly at mit wrongdoing pleading guilty to a criminal charge however the f.t.c. isis for 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 ski's 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 erupted this is a very fair point but nonetheless. we have you here because in this case we see something that we haven't seen from banks instead of these 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 is 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 get another deferred prosecution agreement is that a concern that if the parent company were to take the 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 a criminal charges could have in the financial system then we're seeing some small degree of progress but not nearly where we need to be because it indicates to sit 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 back door bell out 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 that theory will that be a path for u.b.s. . you know if if this is if the conduct was really truly live it it 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. a special status as a giant interconnected bank and as i said this is better than what we saw last week where h.s.b.c. just got to walk essentially that 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 regard as 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 then 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 what 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. 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 of the first time in ten years so 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 a 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 be a fine tantamount to the 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 or 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 there's 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 would 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 that 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 what u.b.s.

earns is 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 the settlement process which can take a long time they just start 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 colombo. drug 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 paralegal 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 they're 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 worked the way they were supposed to that it would put our whole economy in danger and it just yet another reason why we need to break these banks up and i know i've heard you say it up before that's one thing you advocate for and others do and i tend to agree how would you advocate breaking that not the exactly through what mechanism because you have been very critical of the way washington works in 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 that gets corrupted by all of the influences we see going on in washington. well i think belts and suspenders 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 aspects 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 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 there was elected prime minister what does this mean for keeley and jumpin could it work. if it's unlimited and if inflation targets go up to two percent what is got in there is change but first your closing market numbers.

which brightened. from feinstein pressure. these firms don't talk don't come.

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welcome back we're talking about the insidious continuation of too big to fail that we see and packed possibly the settlements with banks like his 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 barofsky 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 money 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 would typically you

see in these kinds of cases with this kind of money at stake would you see a lot of people prosecuted what kind of punishments would they 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 it 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 various i think that your examples really highlight that to 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 too big to fail existing at any packing a bank. 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.t. i see 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 well 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

a 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 too 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 the incentives to pile on more risk there you go yet another financial crisis and neil barofsky thank you so much for vanish a really great to have your insight today he's that for our sake 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 explain 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 gone to trouble as their borrowing costs were during the financial crisis yet the 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 wops. all right let's wrap up with loose change dimitri on friday we were talking about the front runner to be the next prime minister of japan shinzo abi and he won and here is jim grant on friday saying why we should possibly pay attention i'm thinking that this might be something worth watching. following which they seem to have a propensity to do that we fall. so

if we unlimited easing into one percent do you think we will see the. end of last decades most of this isn't going to solve the economic growth problem the real question is will this. at a good point which is that at the end of the. the inflation was something that he couldn't couldn't get under control of a bull market. and in this case they would be the b.o.j. . grow it's made

a very good point so. because we want to let you know collecting four hundred but we earlier in the money but it turns out looking back in history presidents have declared bankruptcy we want to bring a few of them to you so we have a blink in he was a failed shop keeper ok open it up but. up to eight hundred thirty three creditors took him to court the last two remaining assets over wars and surveying gear who is 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 has probably not going to happen again today with all those speaker fees they can rack up after they leave office well to 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 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 so thank you so much for

watching and have yourself a great night. you know some glitches to a story and it's so you think you understand it and then you glimpse something else here's some other part of it and realize that everything you thought you knew you don't know. is a big. on

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