"Rogue institution" or "grandstanding" regulator? "A victory for Benjamin M. Lawsky and his 10-month old agency" or a bank that "acted with pragmatism and integrity in the face of extreme provocation?"
The case at issue is the New York State Department of Financial Services (DFS) and its head, Benjamin Lawsky, versus the New York branch of a 150-year-old British banking giant, Standard Chartered Plc. On August 6, the DFS issued a scathing order against the bank. The order charged Standard Chartered (SCB) with "willful and egregious violation of law" over more than a decade. Specifically, the bank "schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees. SCB's actions left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity."
The reaction in the financial markets was swift and brutal. Between the close of business on Friday August 3 and the following Tuesday, Standard Chartered's share price fell in London from £15.45 to £12.11. The loss in market value was nearly £8 billion. That was just the start. Analysts speculated that the New York DFS might fine the bank $1.5 billion and that its senior management might be forced to resign. Worst of all, from Standard Chartered's point of view, the DFS was threatening to revoke the bank's license to conduct business in New York. This combination of penalties would have weakened the share price further, making the bank a sitting duck for a rival to acquire.
Lawsky's announcement was a complete surprise to the financial world, including Standard Chartered. Yet, the bank was quick to deny the allegations. It claimed that 99.9% of its Iranian transactions were in compliance with US law. A mere handful were not, and their dollar value was less $14 million. We may pause here to ask, if the DFS's order was a bolt from the blue, how could Standard Chartered produce an immediate and detailed response? It turns out that the bank's Iranian business has been under investigation since 2010 by, among other, the Department of Justice, the Federal Reserve Bank of New York, and the US Treasury. But none of the other regulators or governmental authorities nor the bank knew the DFS order was imminent. The surprise was that Lawsky acted without informing the other government agencies and before what they had understood to be a cooperative investigation was complete.
The combined surprise of its vituperative tone and suddenness dramatically heightened the order's effect. Standard Chartered had thought the investigation was just business as usual, or at least that was its public pose. On August 1, the bank issued a lengthy press release describing its earnings for the first half of 2012: The following paragraphs were buried deep in a section on risks the Standard Chartered Group of banking businesses was facing:
"We have a commitment to maintaining strong relationships with governments and regulators in the countries in which we operate. At any time the Group may be in discussion with a range of authorities and regulatory bodies in different countries on matters that relate to its past or current business activities. These discussions may lead to financial penalties or other enforcement actions which are not material to the Group [Emphasis added]
"As reported previously, the Group is conducting a review of its historical US sanctions compliance and is discussing that review with US enforcement agencies and regulators. The Group cannot predict when this review and these discussions will be completed or what the outcome will be."
It became frighteningly apparent a few days later when "the Group's" share price cratered, that potential "penalties or other enforcement actions" could be very material indeed. Representatives of Standard Chartered and the New York DFS held a series of emergency meetings and reached a settlement on August 14. The key point was a $340 million fine that the Bank agreed to pay to the DFS. Like the original order, neither the negotiations nor its outcome involved the Fed, the Treasury, Justice, or any other governmental body. As I write, the final details are being worked out, but it's a safe bet that there will be no direct admission of guilt by Standard Chartered.
Let's examine what this $340 million fine really means, first for Standard Chartered. As I noted above, the bank lost nearly a quarter of its market value immediately after the DFS published its order. That loss was nearly £8 billion, or, in American money, $12.8 billion, But, the stock began to recover just as quickly. By the close on August 15, when the settlement had been made public, it made almost two-thirds of its loss or more than £5 billion ($8.2 billion). The stock's price is now just where it was in early July. Its one-year return is 7.81%. Only speculators who leaned very much the wrong way in the last couple of weeks lost serious money. The $340 million fine is chickenfeed in comparison to these billion pound swings. It's also less than 10% of Standard Chartered's net income for the first half of 2012. Overall, Standard Chartered came out way ahead by settling quickly.
Next, what about the New York Department of Financial Services and Benjamin Lawsky? Media reaction has been mixed. The New York Times hailed Lawsky's "victory" while the Wall Street Journal accused him of "grandstanding" to "get a big publicity score." The Journal got it right. Lawsky was grandstanding, probably to further his own political career, in the long, New York tough-guy-prosecutor tradition of Theodore Roosevelt, Thomas Dewey, Rudy Giuliani, and Eliot Spitzer. (The Journal only compared Lawsky to Spitzer, perhaps because the others were Republicans.) His eagerness to put the spotlight on himself has done little to illumine the case against Standard Chartered and may well have made the probe by the Department of Justice and the others more difficult.
In the end, it will be hard for any outsider to know for sure who are the real good guys or bad guys. The probe has already taken years and involves tens of thousands of documents. Given the complexity and detail of the case, we will have to settle for the opposing spins of government and bank officials. But this much should be plain: If Standard Chartered systematically and deliberately broke US law for more than 10 years, the only commensurate punishment is the loss of its license to operate in New York.
By his precipitate action, Lawsky may have put the State of New York in a very unpleasant position. If further investigation proves the allegations against Standard Chartered, the paltriness of $340 million fine will be obvious. If, however, the investigation goes in Standard Chartered's favor, well, it seems to me the bank would have strong basis for legal action against Lawsky's DFS. Either way, New York loses.