NEW YORK – As the Senate Judiciary Committee considers the role of attorney-general nominee Loretta Lynch in allowing HSBC to avoid criminal charges in a massive money-laundering scheme, the banking giant is facing a possible shutdown or splitting of its U.S. operations under the 2010 Dodd-Frank Act.
Federal regulators have vetoed as “unrealistic” the bank’s “living will” wind-down strategy for managing a potential bankruptcy crisis to avoid repeating the 2008 disaster of Lehman Brothers collapse or requiring the type of expensive government bailout AIG was granted the same year.
The Federal Reserve and Federal Deposit Insurance Corporation, the two federal agencies that share responsibility for evaluating banks’ living wills, announced Monday that HSBC’s plan contained “unrealistic or inadequately supported assumptions about the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators; and inadequate analysis regarding interconnections within the firms.”
“Failing to satisfy the two regulators is the first step on a perilous pathway,” Tom Braithwaite and Eric Platt reported in the Financial Times. “Officials ultimately have the power under the 2010 Dodd-Frank Act to shut down or split up the operations of a U.S. entity or the U.S. operations of a foreign entity.”
HSBC joins a list of 14 banks, including Bank of America, Barclays, Deutsche Bank and JPMorgan Chase, that have failed to formulate “living will” plans to the satisfaction of the federal regulators.
HSBC joins Royal Bank of Scotland and BNP Paribas in a group of three banks the FDIC concluded had plans that were “not credible,” with the Fed demanding “immediate action” to improve the plans.
“Banks have spent several years and hundreds of millions of dollars trying to make their businesses more streamlined to satisfy regulators that they could be wound down should they suffer a catastrophic shock,” the Financial Times continued. “Despite closing dozens of legal entities to simplify their structure and ‘netting’ derivatives contracts to shrink and simplify their books, they have failed to win over officials.
“The living wills, required by the Dodd-Frank Act, are meant to show big banks can be shuttered without threatening the broader financial system,” Bloomberg reported.
Bloomberg added that by the next deadline, Dec. 31, HSBC and the other two banks found to have inadequate living will plans must satisfy the regulators that changes to the U.S. operation will have been made. The banks must assure the FDIC and the Fed that they can stay intact through a crisis, with the ability to produce reliable information as they manage an emergency.
The Wall Street Journal noted that under Dodd-Frank, federal regulators can impose severe sanctions if HSBC and the other banks under scrutiny do not make significant progress on their living will plans by July. The regulators after repeated warnings could ultimately force HSBC and the other banks to sell subsidiaries or to break apart their U.S. operations.
Lynch’s HSBC troubles
Lynch’s confirmation vote in the Senate initially was postponed after Sen. David Vitter, R-La., a member of the Senate Judiciary Committee, opened the investigation of Lynch’s role in the HSBC deferred prosecution after his staff quizzed John Cruz, a former HSBC employee-turned-whistleblower whose trove of original evidence of money laundering was reported first by WND.
Cruz delivered to WND early in 2012 approximately 1,000 pages of customer account records and numerous recorded conversations with bank management and compliance employees in New York documenting massive, ongoing illegal money-laundering activity.
As WND reported in a series of articles beginning Feb. 1, 2012, Cruz found money from Mexican drug cartels and Middle Eastern terrorists was being laundered thorough thousands of bogus accounts created by using the names and Social Security numbers of hundreds of unsuspecting current and former customers. The scheme had the active participation of regional bank managers, branch managers and employees, as well as bank compliance officials at hundreds of HSBC locations throughout the nation, Cruz discovered.
In 2012, Lynch, as the U.S. attorney for the Eastern District of New York, oversaw the investigation of money-laundering allegations against HSBC.
The Department of Justice investigation culminated Dec. 11, 2012, in a “deferred prosecution agreement” Lynch signed with HSBC in which the bank admitted “willful criminal activity” and paid a $1.9 billion fine in return for not bringing criminal charges against any HSBC employee.
On Wednesday, Rep. Emanuel Cleaver, D-Mo., charged that the opposition of Senate Republicans to the Lynch nomination is rooted in racism.
Cleaver told Bloomberg Politics that failure to confirm Lynch would be further evidence race relations in the United States have deteriorated as Senate Republicans square off against the first black president, rejecting his first-ever nomination of a black woman to be attorney general.
“It would be yet another sign that the chasm we thought was narrowing is in fact just as it was before we entered into this new millennium as it relates to issues of race,” Cleaver said. “For many minorities, Latinos and African Americans, it would be just another contemporary sign that we have not moved as far as we had hoped.”
A Rasmussen poll released this week showed only 33 percent of likely U.S. voters believe the Senate should confirm Lynch to replace Eric Holder.
The survey found that 40 percent remain undecided, comprising a majority when added to the 27 percent of likely voters who oppose Lynch’s confirmation.
A Senate vote on the Lynch nomination is not expected now until mid-April.
WND reported Monday Senate Majority Leader Mitch McConnell’s office confirmed the Senate has once again postponed the vote on Lynch’s nomination.
McConnell, R-Ky., said in a CNN interview Sunday he won’t hold a confirmation vote for Lynch before the Senate completes its work on a human-trafficking bill.
The majority leader’s further delay the Lynch confirmation vote is widely viewed by Washington insiders as a Republican rebuke to President Obama’s controversial executive actions, including de facto amnesty for up to 5 million illegal aliens. Also, the Obama administration has refused to acknowledge a legitimate role for Senate consideration of any agreement Secretary of State John Kerry may conclude with Iran in the current round of negotiations in Geneva over Tehran’s nuclear program.
On Tuesday, NorthJersey.com reported Sen. Bob Menendez, D-N.J., may be the key to Lynch’s nomination as attorney general.
The New Jersey newspaper reported an ethics expert maintained it would not be a conflict of interest for Menendez to cast the deciding vote, even as the senator expects the Department of Justice to hand down an indictment for alleged corruption.