A Japanese bank, Mizuho Financial, has agreed to pay $128 million to settle claims arising out of the actions of its US subsidiary. The accusation was that the Mizuho Securities, USA, had deliberately inflated the value of financial instruments it was marketing known as CDOs. CDO stands for collateral debt obligation and it is otherwise known as securitised debt – the beast at the heart of the sub-prime crisis which triggered the global recession in the first place.
Charges were prepared by the US Securities Exchange Commission (SEC), but the settlement means that Mizuho neither has to admit or deny the charges. It seems rather like a bank robber being allowed off Scott-free if they agree to put some of the money that they’ve stolen back into the vault. One could be forgiven for believing that financiers are not subject to the same rules as the rest of society.
The allegation was that brokers used phantom assets to increase the credit ratings of the CDOs in question which would be called fraud in any other sphere of business endeavour and would be subject to criminal proceedings. The assets in the vehicle were low value and risky – by this chicanery, they were made to make much more investment worthy.
As if to emphasise the point, Robert Khuzami, the SEC enforcement director noted: "This case demonstrates once again that bankers and market participants who embrace a 'get-the-deal-done-at-all-costs' strategy will be identified, charged and punished". Right…
Banking behaviour is set to become a political concern. Similar cases had been brought against JP Morgan and Citigroup. One could legitimately ask: “what were the ratings agencies doing in all this?” It is their role to assess the risk associated with such vehicles and it would seem that they, too, have been duped.
Mizuho was at pains to point out that it had cooperated with the SEC and that the problem was down to just three employees in their US subsidiary – of course, they did not share the number of employees active in that area such that one could put this information into perspective: such is the power of spin.