MR. KOJO NNAMDIThe headlines read "Bankers Behaving Badly," and not just on the business pages, but on page A1 in most newspapers. A recent string of scandals turned a spotlight on shady transactions at some big-name banks. We all learned terms like LIBOR as in the benchmark interest rate that at least one major bank was manipulating and outrage boiled over with stories of banks laundering Mexican drug money and funds destined for terrorist groups. Some say the culture of banking is rotten. Others say regulators simply were not doing their jobs.

MR. KOJO NNAMDIJoining us in studio to discuss this is Phillip Swagel. He's a professor of international economic policy at the Maryland School of Public Policy. He was the assistant secretary for Economic Policy at the Treasury Department in the George W. Bush Administration from 2006 to 2009. Phillip Swagel, welcome.

MR. PHILLIP SWAGELHey, thank you.

NNAMDIAlso joining us from studios at the Wall Street Journal offices in London is David Enrich. He is the European banking editor for the Wall Street Journal. David Enrich, thank you for joining us.

MR. DAVID ENRICHMy pleasure.

NNAMDIAnd, David, I'll start with you. The most recent scandal Chartered, a British Bank, was called a rogue institution by New York State regulators. Pretty sensational language. What did Standard Chartered do?

ENRICHWell, what Standard Chartered is alleged to have done is over a period of years violate U.S. -- or -- yeah, violate U.S. sanctions against doing business with Iranian institutions. And according to the New York state regulator there is a pattern of just egregious violations of the U.S. policy and basically deliberately ignoring American law in terms of its dealings with the Iranian government and related institutions, which are subject to U.S. sanctions.

NNAMDIPhillip Swagel, was this just business as usual?

SWAGELIt looks like what happened in this case went beyond business as usual, that the -- that alleged actions include taking the word Iran off of the electronic messaging in a systematic way. You know, sort of a little bit at a time at first and then finding a way to automatically do it. And if that's the case, that -- to me, that seems to go well beyond business as usual.

NNAMDIIf you'd like to join the conversation, you can call us at 800-433-8850. What do you think about the recent string of banking scandals? Do you think they're related to the culture in financial institutions? 800-433-8850 or you can send us email to kojo@wamu.org or send us a Tweet at kojoshow. There was some tension, Phillip, among the U.S. regulators over the Standard Chartered crackdown. And one New York state regulator stands out. Can you talk about that?

SWAGELRight, that's what's interesting is that the New York State banking regulator Benjamin Lawsky went public with allegations against Standard Chartered. And it turned out the other regulators at the Federal Reserve and the Office of the Comptroller of the Currency were already looking at it. And it looked like they were pretty surprised that he went public. And it's just not clear yet whether he was trying to push them to do more or he was really just trying to grab the headlines. But it really put the bank in a tough spot.

NNAMDIThat regulator being Benjamin Lawsky, I guess. Dodd-Frank, which went into effect last year, really had no role in any of this.

SWAGELNo, it didn't. You know, the regulators involved had all the power they needed to get at this behavior before. So it's not an issue of Dodd-Frank. It's really of was the behavior illegal and then how do our regulators between the state level and the federal level, how do they interact and how do they get at this bad behavior.

NNAMDIAnd presumably all of these transactions we're talking about are subject to U.S. regulations because why, they pass the U.S. -- or the American banking system?

SWAGELThat's exactly it. The bank is providing dollar denominated services to countries like Iran and Iran has to transact some things in dollars. And those transactions eventually will pass through the U.S. financial system.

NNAMDIIs that basically why, David Enrich, so many transactions pass through the U.S. in the first place?

ENRICHYeah, I mean, that's basically why but I think -- I mean, the broader issue here I think is that regardless of the weird way in which a New York regulator announced this and kind of the magnitude of what Standard Chartered was doing the issue here is that this is part of a broad -- or (word?) part of a broad pattern where financial institutions all over the world have in the past five years or so been shown to be looking out primarily for themselves and not for anyone else. Whether that's their customers or that's regulators, whether that's just kind of the rule of law.

ENRICHAnd I think that's why this is -- in these cases of banks violating anti-money-laundering laws used to be pretty routine. And they would generate headlines in the business pages for one day and then quickly fade from memory. And what we've seen in the past couple of months is that there's just so much pent up anger and frustration toward the banking industry over what's happened in the global financial system in recent years that all of a sudden we're starting to really -- people are starting to take this a lot more seriously.

ENRICHAnd it's not -- it's partly in the media, but also, I think, in the regulatory community. So you see someone like Benjamin Lawsky in New York, who is -- and rightly or wrongly -- making this into a bigger deal than it would've been a year ago I think.

NNAMDIAnd I guess this is why authorities are cracking down now even this many years after the financial crisis, right?

ENRICHWell, I mean, authorities have been trying to crack down on this type of activity for a really long time. I mean, for -- and they've been doing that pretty effectively I would argue. They impose big fines and penalties on institutions and probably several times a year on a major institution for violating this type of law.

ENRICHThe interesting thing now is that all of a sudden, you know, we're on the radio talking about this, whereas even a few months ago I think a violation like this -- or an alleged violation like this would've generated a day of negative headlines and nasty press for the institution involved and would've quickly faded from people's memories. Because there just wasn't -- for some reason until very recently there wasn't the same level of public consciousness or attention paid to these types of and what had been fairly routine abuses by banks.

NNAMDIWell, Phillip, remind us about the LIBOR scandal. First, what is LIBOR and why does it matter?

SWAGELOh, okay. So LIBOR is the London Interbank offered Rate, so it's the interest rate that banks charge to each other to borrow from one another. If one bank needs some extra cash, go to another bank and borrow. It matters to everyone, to cities, to states, to families because it's the benchmark for many other interest rates. So many people's mortgage rates, for example, are based off of LIBOR. So if banks such as Barclays artificially manipulated LIBOR that will affect mortgage rates.

SWAGELAnd it's kind of the irony here is that if Barclays or others push the LIBOR down, for many American families that actually meant lower mortgage interest rates.

NNAMDISo remind us again about the recent scandals because they're noteworthy because these were U.S. regulators and congress looking at British banks. What do you make of that?

SWAGELYeah, it's interesting the interaction between the American regulatory system and the UK system where there's a sense in which the American regulators are going to the UK and a little bit poking them saying, hey, you gotta do something about this. And the British seem to be somewhat slow in reacting. They're doing it this year but the emails that were released by the New York Fed over the last couple months show that the New York Fed, you know, really gave them a lot of information a couple years ago. And the UK response was -- it was pretty lackluster.

NNAMDIWe're talking with Phillip Swagel. He is a professor of International Economic Policy at the Maryland School of Public Policy. He was the assistant secretary for economic policy at the Treasury Department in the George W. Bush Administration from 2006 to 2009. He joins us in our Washington studio. Joining us from studios at the Wall Street Journal offices in London is David Enrich. He's the European banking editor for the Wall Street Journal.

NNAMDIWe're inviting your calls at 800-433-8850. You can also send email to us at kojo@wamu.org. I will start with Roger in Chevy Chase, Md. Roger, you're on the air. Go ahead, please.

ROGERThank you, Kojo. I don't know if this is a simplistic question but perhaps your guests can address this. We didn't seem to have these problems with banking and investment banking prior to Glass-Steagall being rescinded. What are the possibilities of reinstating Glass-Steagall and would that have a beneficial effect?

NNAMDIDavid Enrich?

ENRICHWell, and I think it's true that we didn't have these exact same problems before Glass-Steagall was repealed but there certainly were other problems in the financial system. And we had the savings and loan crisis just as one of many examples. We certainly had examples at the time of banks behaving badly in idiosyncratic ways, whether that was violating anti-money-laundering laws, which is what Standard Chartered and HSBC recently have been accused of doing or having individual employees within the banks doing bad things.

ENRICHBut I do think that the interesting thing to me is that this is -- the attitude toward the banking sector in general in the past several years has shifted very dramatically recently I think. And people have gone from being, you know, fed up with the banks for the role they played in causing the financial crisis and the subsequent economic downturn. But until very recently there hasn't been a shift toward really holding senior executives accountable at those banks.

ENRICHAnd what we've seen with Barclays, the big British bank that just got caught up in the whole LIBOR scandal is that as a result of that for the first time that I can really remember, the CEO, the chairman and another top executive of that bank were very quickly forced to resign. And so I think there's so much -- people are so unhappy with the big banks that have gotten much bigger as a result of the repealed Glass-Steagall that we're finally seeing enough of a shift in attitude, that there is likely to be more demands for top level people to be held accountable in the future.

NNAMDIPhillip Swagel.

SWAGELOh yes, I absolutely agree with what David just said. And I'd just add to that that in a sense it goes to the question about the role of big banks in society. So it's not exactly Glass-Steagall but if big banks make sense -- and I think they do, I think they add value to the economy -- the management of the banks have to show that they can manage the banks. And exactly like David said, this is an instance in which it didn't seem like the management was on top of things and that the consequences went straight to the top.

NNAMDIAnd, David, of course Glass-Steagall goes back to the early or the middle part of the 20th century. It was the regulation under which the Federal Deposit Insurance corps was created, correct?

ENRICHWell, I think that's right. The thing it's more better known for is that it was enacted after the Great Depression and it was...

NNAMDIRight, 1933.

ENRICH...yeah, it split up -- it required banks to not do both investment banking and retail banking. So it was a real impediment to banks growing into these giant global financial institutions that we see today. So -- and it was repealed in the late '90s actually at the behest of Citi Group which was trying to do this huge merger to create what at the time was going to become this -- the world's largest bank.

NNAMDI(unintelligible) go ahead, please.

ENRICHAnd so there's -- and I think one of the biggest things that's become clear in the financial crisis is that some of these banks, not all of them, but some of them were, first of all, too big to fail and that they couldn't collapse safely without endangering the entire financial system, but also in many cases, probably too big to manage. And that they operate in hundreds of countries, they have hundreds of thousands of employees. And just clearly as a result of the financial problems they encountered it became clear that whoever was at the top of these organizations was not doing a very good job of managing risk and managing the behavior of all their employees.

ENRICHAnd -- but I don't think -- to answer the caller's question, I don't think the odds of Glass-Steagall being reinstated are particularly good. There's been -- the main kind of attempt to have reform in the financial system was Dodd-Frank which stopped far short of reinstating Glass-Steagall.

ENRICHIt's interesting though. On some -- I'm in London and in the UK and in some other European countries there are -- there's greater talk about if not simply separating retail and investment banking, that at least have recreating some of the internal divisions within banks to protect the retail banks which hold normal customers' money from misadventures that take part in the kind of riskier investment banking side of the business. And also to make it easier in a crisis if a big bank gets in trouble, to break that bank up safely and dismantle it basically without endangering the entire financial system, which is what we saw in the U.S. crisis with Citi Group and Lehman Brothers and things like that.

NNAMDIWe move on now to Jim in Annapolis, Md. Jim, your turn.

JIMOkay. For your guests, Kojo, LIBOR is used as kind of a foundation rate for an untold number of other rates and derivative contracts with nominal value in the trillions of dollars. And you've got some lawsuits that have been launched -- or I guess spawned as a function of the alleged LIBOR manipulation. How big could the whole lawsuit scenario become and could it threaten the existence of some large banks?

NNAMDIPhillip Swagel?

SWAGELOkay. That's right. As the caller -- as Jim mentioned, there's lawsuits. They City of Baltimore is in a sense the leader of this. Baltimore entered into certain interest rate swaps, changing variable rate obligations into fixed rate obligations, and because of the details of the way it was done, a lower LIBOR hurt Baltimore. So, you know, most families like a lower interest rate. Just because the way that Baltimore's derivatives transactions were set up, it hurt Baltimore.

SWAGELThe numbers I've seen are in the millions or tens of millions, so that is a lot of money, but it's not the kind of thing that's going to threaten, you know, Barclays as an institution. It's more, I think, the reputational risk. And so even if it's Baltimore and dozens of other cities, it's still a modest amount of money for a large corporation.

NNAMDIJim, thank you very much for your call. We've got to take a short break. When we come back, if you have called, stay on the line. We'll try to get to your calls as quickly as possible. The number is 800-433-8850. Do you think financial regulators are doing their jobs? You can also send email to us at kojo@wamu.org, a tweet @kojoshow, or go to our website, kojoshow.org, ask a question or make a comment there. I'm Kojo Nnamdi.

NNAMDIWelcome back. We're talking bankers behaving badly with Phillip Swagel, professional of international economic policy at the Maryland school of Public policy. Phillip Swagel was the assistant secretary for economic policy at the treasury department between the years 2006 and 2009. He joins us in our Washington studio. Joining us from studios at the Wall Street Journal offices in London in David Enrich. He is the European banking editor for the Wall Street Journal. Feel free to call us and join the conversation at 800-433-8850.

NNAMDIDavid, you mentioned Barclays. Barclays, of course, being the bank that paid a big settlement in the LIBOR case. You mentioned that it led to several resignations, but it wasn't the only bank caught manipulating rates, and if I might read from your August 8th piece in the Wall Street Journal, you said, quoting an official, it says, "it happens with such regularity that you can't say it's just one bad apple," said a senior London investment banker who has campaigned against tougher regulations. It keeps looking like every barrel has a rotten apple.

NNAMDIAnd we got this email from Michael in Mount Joy, Pennsylvania, David. Michael writes, "I do not believe large fines levied against violating banks is meaningful. The banks just recoup money paid for fines by squeezing more from their customers. Some high-level bankers will have to go to jail before we can expect significant change on the part of banks." Care to comment?

ENRICHYeah. No. I think that's a really interesting point, and I think that emailer speaks for a lot of people out there, not just in the public, but also an increasing number of regulators and politicians. And I think that's why this Barclays situation was such a really watershed moment. Until this Barclays scandal erupted earlier this summer, there have been many, many cases of regulators in the U.S. and the U.K. elsewhere in the world, imposing what seemed to normal people like really big financial finds in the hundreds of millions of dollars often.

ENRICHBut to a bank the size of Barclays, which is a multi-trillion dollar balance sheet, it just doesn't matter. That's not a significant sum of money to them. So when Barclays had its chairman, CEO, and another very senior executive were all basically forced to resign under pressure from the public and from regulators in England, that was one of the first times that I at least can recall where there's been such high level accountability for broadly for bad behavior at a bank.

ENRICHAnd I think that that -- it's really changed the way that everyone is now looking at these scandals. Just a week or two after the Barclays scandal erupted, HSBC, another big British bank, got in trouble...

NNAMDII was about to get to that. Go ahead.

ENRICHOh, okay. Well, sorry. Didn't mean to jump the gun. But they got in trouble in the U.S. when a Senate committee that had been investigating money laundering issues for, I believe more than a year, published this really damming report that alleged that HSBC had knowing, and basically deliberately tried to violate U.S. money laundering rules to allow them to continue doing business with everyone from terrorist organizations to Mexican drug gangs.

ENRICHAnd immediately the way everyone started looking at that scandal was we need the CEO to resign. We want someone -- a very senior head to role, and that's just a -- and the fact that that's now being taken seriously as a possible response to what until very recently have just been considered a routine transgression for a bank the size of HSBC, that's a real watershed moment, I think.

NNAMDIWell, the committee said that HSBC had found a pattern of irresponsible behavior. Phillip, and I'm going to get back to LIBOR in a second, but now that we're on HSBC, is it a bank's job not only to know where the money is coming from and going to, because it seemed like it was subsidiaries doing this for the most part. Does that make any difference at all?

SWAGELNo. It shouldn't make any difference. From HSBC's point of view, that was part of the problem. Their reaction has been, you know, look, we are a very decentralized global institution. The problems in Mexico were the problems of our Mexican subsidiary. From the point of view of regulators in the U.S. or anywhere, it doesn't matter. It's one bank. And so there's a cultural change that's needed. Now, I should say just actually, HSBC has come out with a response and they said yes, we get it.

SWAGELWe understand we were too decentralized, and we're going to centralize more and really focus our efforts. So I think they have to get some credit for a response, but of course, you know, we have to see what happens going forward.

NNAMDISure. When the official agency makes a response and gets some credit for us, we often don't look at what the internal culture is. The LIBOR fixing was happening at the bank level, and of course so the bank makes a response and Barclays' officials resigned, but you point out Phillip, that it was also going on on an individual level. You were shocked by some of the emails that were passing between bank employees.

SWAGELRight. Some of the emails that have been released and discussed in the press where they say, oh, could you fix the rate here, it would really help my position, and then acknowledging though, this is wrong, but we're going to do it anyway, and everyone does it. It's that kind of culture that's going to change. It has to change. And I think the bright light of these scandals will, you know, will push the culture.

NNAMDIHere is John in Fairfax, Va. John, you're on the air. Go ahead, please.

JOHNHi, Kojo, gentlemen, listeners. At least with the savings and loans, some people went to jail, and in 2000, the corporate elite made sure that George Bush was elected so that he in turn could stop enforcing laws and deregulate people so they can make money. Brooks Lee Bourne was really fired because she wanted to stop fraud, and Alan Greenspan said no, we can't do that. Fraud has become a way of making business, and until people go to jail, it's going to be smart business.

JOHNYou know this -- when you pay a fine of so much less than what you cost other people, instead of triple damages which is what they owe, then you're gonna have more fraud, and luckily we now have -- although the Justice Department Justice said they were not going to prosecute Goldman Sachs for their horrendous fraud worldwide selling crap stuff, you know. It's ...

NNAMDIWell, in addition to what you have to say, John, and thank you for your call, I will go to Menier (sp?) in Manassas, Va. Menier, you're on the air. Go ahead, please.

MENIERGood afternoon. There was a comment actually that has been repeated (unintelligible) when we look at the CEOs at Barclays or HSBC and other banks that are asked to resign. And it's great there's a shuffle at the top of the bank to kind of bring some new kind of a head in there. But these CEOs are asked to resign, they're also given a fat check for resigning. Now, at the end of the day, they might resign from this one bank and turning around six months, a year later they are at the top of another bank or other institution making their millions again.

MENIERIs there really a punishment being, you know, executed upon on behalf of the consumer, because somebody who lost their pension, who lost their life saving, who lost everything in these, you know, bank scandals, how is he being compensated while somebody who is sitting at the top of bank, hey, can you please resign, and the guy resigns at gets $20 million for resigning, and then next year or two, year after, he just gets another position at some other bank. Is the system really working to punish those who are guilty? Is the system really helping the consumer at the end of the day, or is it just kind of, you know, wrapping it -- gift wrapping one thing with another and taking the wrap off and just kind of wrapping it with something else making it look different?

NNAMDIDavid Enrich.

ENRICHWell, those are -- I think the sentiment that both callers just expressed is very illuminating about the attitude that's really widely held among the public and the U.S., the U.K., and elsewhere. And there's a real thirst for people to be held accountable in a way that doesn't simply mean losing their jobs and walking away with a multi-million dollar severance package. And I think there is a stronger likelihood now than there has been in the past that authorities are going to pursue criminal charges against individuals who were involved in some of this wrongdoing.

ENRICHI mean, I think one really interesting thing to watch will be how senior those people are, because in the past we have had some criminal actions brought against people, but it's generally focused on relatively low level people who were, in some cases, stupid enough to, you know, put in writing what they were about to do and kind of indicate that they knew it was wrong. So far we've seen very little criminal -- and I don't think there's been any criminal action in fact brought against people who are running any of these banks that have been involved in the financial crisis, and that said I think there's this thirst for justice, which I completely understand, but there's also, you know, it's not just as simple as a prosecutor going up to someone who's very unpopular and locking them up and throwing away the keys.

ENRICHThere's a very hard to prove to a jury that someone has committed a crime and actually -- in a substantive enough way to actually send that person to jail. So it's not -- and we want it to be that way. You don't want to have a system where just because there's public outrage toward an entire industry that we start prosecuting everyone, which -- but I do think there's likely to be prosecutions I think, but I think the absence of that to a large extent reflects the difficult of building these really complex criminal cases.

NNAMDIMenier, thank you for your call. Phillip Swagel?

SWAGELRight. So I would just say two things quickly. One is the difference between what's wrong and what's illegal, and it's a fine line, but it's important that we keep track of that line, and this goes for the regulators as well. So the Dodd-Frank legislation, Kojo, that you mentioned before, gives a lot of new power to the regulators, and one thing I think we have to expect is that they use is wisely. So we just saw Goldman wasn't charged, but of course the SEC had this blaze of publicity against Goldman. They settled later for a fine which everyone kind of said, oh, that's just, you know, basically a slap on the wrist.

SWAGELThere's no admission of guilt. And so in terms of was there really wrongdoing or not, well, we really don't know from the SEC. I think we need to expect more from our regulators going forward, that if they do bring charges like this, they have to go all the way and expose the facts and not just settle for a, you know, a fine with no admission of guilt.

NNAMDIYou mentioned Dodd-Frank. That's what Susan in Alexandria, Va. would like to talk about. Susan, your turn.

SUSANHi Kojo. I just think we need to keep our eye on the efforts that are being made, hundreds of millions of dollars, by the banks and by the Chamber of Commerce as a lobbying arm for big banks to repeal Dodd-Frank, and failing that, to at least cut off the funds of the regulating agencies so that they can't operate effectively. We talk about wanting to hold people accountable. Well, we have to watch the under-the-table efforts to take away the regulator's power.

NNAMDICare to comment Phillip Swagel?

SWAGELSo I would say the Dodd-Frank law has many, many features. Some good, some not so good. It doesn't seem likely it's going to be repealed outright, but I think there would be useful changes in it including in the governance of some of the institutions, the Consumer Financial Protection Bureau for example. You know, look. I think financial institutions lobbying for changes in regulation is part of democracy, and so it's -- I don't think it's under the table. I mean, heck, it's on top of the table. So, you know...

ENRICHWell, I would just interject there that -- I would disagree with you on that, because there -- first of all the -- as a reporter who tries to write about what the banks are lobbying for in all sorts of regulatory forms, they make quite an effort to keep it under the table, and I feel like if banks were -- didn't have anything to hide about that, that that would be a much less -- they would be much more open about the way they were trying to influence the process, and I think there's a huge machinery that the banks use to try and not only change the way laws are interpreted and enforced, but also to keep their efforts very secret.

ENRICHAnd I think that's a very -- regardless of whether you agree or disagree with the substance of the law, I think most people can probably agree that it's not healthy and not very democratic to have all this happening, and as secretive a way as it currently does, at least from my perspective.

NNAMDIYou may have been answering my next question, which I would also like to address to Phillip Swagel, and David, you first. Do you think, therefore, that we're likely to see a new era of transparency among banks and bank executives who fear being the next headline? You seem to be suggesting not so much.

ENRICHNo. I think that would be a wonderful side effect if that happened, but I would not hold my breath that it will. I think there's -- we'll see though, you know, and I think that's the -- I think that's the goal of a lot of people, but I think that there is also not -- there's just not much impetus for that to actually happen right now, and I don't think the -- I don't think anyone is powerful enough to really force that to come about very quickly.1

NNAMDIDavid -- I'm sorry, Phillip Swagel?

SWAGELI think one place where we might see a change of culture is in the national security side, this is with Iran, with the drug money in Mexico, et cetera. That we see financial policy and national security policy really merging together, and I think people and banks have to be and will be more aware of that issues.

NNAMDIPhillip Swagel. He is a professor of international economic policy at the Maryland School of Public Policy. He was the assistant secretary for economic policy at the Treasury Department in the George W. Bush administration between 2006 and 2009. Phillip, thank you for joining us.

SWAGELThank you.

NNAMDIDavid Enrich is the European banking editor for the Wall Street Journal. David, thank you for joining us.

ENRICHMy pleasure.

NNAMDI"The Kojo Nnamdi Show" is produced by Brendan Sweeney, Michael Martinez, Ingalisa Schrobsdorff, and Tayla Burney, with assistance from Kathy Goldgeier and Elizabeth Weinstein. The managing producer is Diane Vogel. Our engineer in Timmy Olmstead. Natalie Yuravlivker is on the phones. Podcasts of all shows, audio archives, CDs and free transcripts are available at our website, kojoshow.org. We encourage you to share questions or comments with us by emailing us at kojo@wamu.org, by joining us on Facebook, or by tweeting @kojoshow. Thank you all for listening. I'm Kojo Nnamdi.