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Why Only One Top Banker Went to Jail for the Financial Crisis


This article is a collaboration between The Times and ProPublica, the independent nonprofit investigative organization.

On the evening of Jan. 27, Kareem Serageldin walked out of his Times Square apartment with his brother and an old Yale roommate and took off on the four-hour drive to Philipsburg, a small town smack in the middle of Pennsylvania. Despite once earning nearly $7 million a year as an executive at Credit Suisse, Serageldin, who is 41, had always lived fairly modestly. A previous apartment, overlooking Victoria Station in London, struck his friends as a grown-up dorm room; Serageldin lived with bachelor-pad furniture and little of it — his central piece was a night stand overflowing with economics books, prospectuses and earnings reports. In the years since, his apartments served as places where he would log five or six hours of sleep before going back to work, creating and trading complex financial instruments. One friend called him an “investment-banking monk.”

Serageldin’s life was about to become more ascetic. Two months earlier, he sat in a Lower Manhattan courtroom adjusting and readjusting his tie as he waited for a judge to deliver his prison sentence. During the worst of the financial crisis, according to prosecutors, Serageldin had approved the concealment of hundreds of millions in losses in Credit Suisse’s mortgage-backed securities portfolio. But on that November morning, the judge seemed almost torn. Serageldin lied about the value of his bank’s securities — that was a crime, of course — but other bankers behaved far worse. Serageldin’s former employer, for one, had revised its past financial statements to account for $2.7 billion that should have been reported. Lehman Brothers, AIG, Citigroup, Countrywide and many others had also admitted that they were in much worse shape than they initially allowed. Merrill Lynch, in particular, announced a loss of nearly $8 billion three weeks after claiming it was $4.5 billion. Serageldin’s conduct was, in the judge’s words, “a small piece of an overall evil climate within the bank and with many other banks.” Nevertheless, after a brief pause, he eased down his gavel and sentenced Serageldin, an Egyptian-born trader who grew up in the barren pinelands of Michigan’s Upper Peninsula, to 30 months in jail. Serageldin would begin serving his time at Moshannon Valley Correctional Center, in Philipsburg, where he would earn the distinction of being the only Wall Street executive sent to jail for his part in the financial crisis.

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks. In the ’90s and early aughts, when the bursting of the Nasdaq bubble revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison.

The credit crisis of 2008 dwarfed those busts, and it was only to be expected that a similar round of crackdowns would ensue. In 2009, the Obama administration appointed Lanny Breuer to lead the Justice Department’s criminal division. Breuer quickly focused on professionalizing the operation, introducing the rigor of a prestigious firm like Covington & Burling, where he had spent much of his career. He recruited elite lawyers from corporate firms and the Breu Crew, as they would later be known, were repeatedly urged by Breuer to “take it to the next level.”

But the crackdown never happened. Over the past year, I’ve interviewed Wall Street traders, bank executives, defense lawyers and dozens of current and former prosecutors to understand why the largest man-made economic catastrophe since the Depression resulted in the jailing of a single investment banker — one who happened to be several rungs from the corporate suite at a second-tier financial institution. Many assume that the federal authorities simply lacked the guts to go after powerful Wall Street bankers, but that obscures a far more complicated dynamic. During the past decade, the Justice Department suffered a series of corporate prosecutorial fiascos, which led to critical changes in how it approached white-collar crime. The department began to focus on reaching settlements rather than seeking prison sentences, which over time unintentionally deprived its ranks of the experience needed to win trials against the most formidable law firms. By the time Serageldin committed his crime, Justice Department leadership, as well as prosecutors in integral United States attorney’s offices, were de-emphasizing complicated financial cases — even neglecting clues that suggested that Lehman executives knew more than they were letting on about their bank’s liquidity problem. In the mid-’90s, white-collar prosecutions represented an average of 17.6 percent of all federal cases. In the three years ending in 2012, the share was 9.4 percent.

After the evening drive to Philipsburg, Serageldin checked into a motel. He didn’t need to report to Moshannon Valley until 2 p.m. the next day, but he was advised to show up early to get a head start on his processing. Moshannon is a low-security facility, with controlled prisoner movements, a bit tougher than the one portrayed on “Orange Is the New Black.” Friends of Serageldin’s worried about the violence; he was counseled to keep his head down and never change the channel on the TV no matter who seemed to be watching. Serageldin, who is tall and thin with a regal bearing, was largely preoccupied with how, after a decade of 18-hour trading days, he would pass the time. He was planning on doing math-problem sets and studying economics. He had delayed marrying his longtime girlfriend, a private-equity executive in London, but the plan was for her to visit him frequently.

Other bankers have spoken out about feeling unfairly maligned by the financial crisis, pegged as “banksters” by politicians and commentators. But Serageldin was contrite. “I don’t feel angry,” he told me in early winter. “I made a mistake. I take responsibility. I’m ready to pay my debt to society.” Still, the fact that the only top banker to go to jail for his role in the crisis was neither a mortgage executive (who created toxic products) nor the C.E.O. of a bank (who peddled them) is something of a paradox, but it’s one that reflects the many paradoxes that got us here in the first place.

Part of the Justice Department’s futility can be traced to the rise of its own ambition. Until the 1980s, government prosecutors generally focused on going after individual corporate criminals. But after watching their fellow prosecutors successfully take down entire mafia families, like the Gambino and Bonanno clans, many felt that they should also be going after more high-profile convictions and that the best way to root out corruption was to take on the whole organization. A long-ignored Supreme Court ruling, from 1909, conveniently opened the door for criminal charges against entire corporations. And in 2001, Michael Chertoff, George W. Bush’s new criminal division chief, arrived at the Justice Department ready to put it to use.

Chertoff, who worked at the U.S. Attorney’s office under Rudolph W. Giuliani, the godfather of the Wall Street perp walk, seemed like just the guy to jump-start the initiative — and he arrived at an opportune moment. Prosecutors were beginning their investigation of Enron and probe into Arthur Andersen, the accounting firm that had blessed the energy-trading giant’s phony balance sheets and shredded documents shortly after it detonated. Early in his tenure, Chertoff found himself sitting in a conference room at Justice Department headquarters on Pennsylvania Avenue, listening with growing irritation as lawyers for Arthur Andersen tried to dispose of the Enron case with yet another settlement. The company previously oversaw the fraudulent books of Waste Management and Sunbeam, and it dealt with those previous scrapes by reaching settlements and a consent decree with regulators, vowing never to commit such a crime again. For its Waste Management infractions, the firm paid $7 million. Then, it was the largest civil penalty ever paid.

Andersen was expecting the same kind of wrist-slap. As Chertoff recalls, one high-ranking executive noted brazenly that such settlements were merely “a cost of doing business” — the routine surcharges applied to the nation’s largest corporations. That comment enraged Chertoff, and soon after, his prosecutors indicted the firm. “Destroy documents?” he told me. “It’s hard to view that as a stumble outside of its core business.” In June 2002, Arthur Andersen was convicted by a jury, and within months, the firm closed down, costing tens of thousands of people their jobs.

The Andersen case was supposed to embolden the Justice Department, but it quickly backfired. Chertoff’s chutzpah shocked much of the corporate world and even many prosecutors, who thought the department had abused its powers at the cost of thousands of innocent workers. Almost immediately, the Andersen verdict resulted not in more boldness but in more caution on the part of federal prosecutors, including Chertoff himself. In 2003, his investigators were digging into questionable off-balance-sheet deals between the Pittsburgh-based PNC Bank and AIG Financial Products. They contemplated indicting the bank, which spurred Herbert Biern, at the time a top banking-supervision official at the Fed, to demand a meeting with Chertoff to warn him against it. Chertoff told Biern, according to attendees, that if the Justice Department “can’t bring these cases because it may bring harm, then maybe these banks are too big.” In the end, though, Chertoff and the Justice Department blinked. They didn’t indict, and PNC entered into a deferred prosecution agreement. No bank executives were prosecuted. Two years later, the Supreme Court overturned the Arthur Andersen conviction.

From 2004 to 2012, the Justice Department reached 242 deferred and nonprosecution agreements with corporations, compared with 26 in the previous 12 years, according to a study by David M. Uhlmann, a former prosecutor and law professor at the University of Michigan. And while companies paid large sums in the settlements — the days of $7 million cost-of-doing-business fees were over — several veteran Justice Department officials told me that these settlements emboldened defense lawyers. More crucial, they allowed the Justice Department’s lawyers to “succeed” without learning how to develop important prosecutorial skills. Investigations of individuals are more time-consuming and require a different approach than those of a corporation. Indeed, the department now effectively outsources many of its investigations of corporate executives to outside firms, which invariably produce reports that exculpate those at the top. Jed Rakoff, the U.S. District Court judge and former federal prosecutor who has become the most prominent legal critic of the Justice Department, explained the process to me this way: “The report says: ‘Mistakes were made. We are here to take our lumps’ ” — in other words, settlements and, if the transgressions are particularly bad, further oversight. “Lost in that whole thing,” Rakoff said, “was anyone trying to investigate whether the individuals did something wrong.”

The Bush administration may have earned a reputation as being friendly to business interests, but it wasn’t always that way. Around the time of the Andersen investigation, Larry Thompson, the deputy attorney general, was summoned to the White House to defend his department. He and Robert Mueller, the director of the F.B.I., met with the president in the Roosevelt Room of the White House, where they decided not to present legal theory but to show evidence that prosecutors had amassed in matters like the Enron case, demonstrating that executives had made up numbers and lied to the public. Bush seemed stunned. He turned to Mueller and Thompson and said, “Bobby and L.T., continue what you are doing.”

If Chertoff had signaled a green light for going after entire companies, Thompson drafted a memo in 2003 that offered a post-Andersen playbook that went right at the heart of how large corporations protected themselves. For years, big businesses, like tobacco companies, shielded questionable conduct by invoking attorney-client privilege, which could render details of troubling executive dealings inadmissible in court. If a company came under federal scrutiny, it typically paid its executives’ legal bills, hiring some of the nation’s best firms, those who could slow or derail any inquiries. And when multiple executives fell under suspicion, their lawyers would often sign joint defense agreements allowing them to share with one another what they learned about the feds’ case.

Thompson’s memo declared that prosecutors could, in essence, offer a deal, but it wasn’t a very generous one. Companies could win Brownie points for being cooperative only if they eschewed privileges like joint defense agreements. Almost immediately, members of the white-collar bar asserted that this overreach eroded a fundamental right, but they didn’t have to argue incessantly; once again, the Justice Department’s ambition backfired. In the summer of 2006, the government’s once-promising prosecution of executives from KPMG, an accounting and consulting firm suspected of selling illegal tax shelters to wealthy clients, started going bad. (The U.S. attorney’s office in Manhattan felt so confident that it indicted 17 KPMG executives.) The case fell apart when the judge ruled that those prosecutors had violated constitutional rights by pressuring the firm to waive attorney-client privilege and stop paying employees’ legal fees; the government’s zeal, he noted, had gotten “in the way of its judgment.” With the “greatest reluctance,” he threw out the cases against 13 of the executives. (Two others were convicted.)

Soon after, the counteroffensive to the Justice Department’s overreach peaked, led by the white-collar bar and corporate lobbies and aided by The Wall Street Journal’s editorial page, the U.S. Chamber of Commerce and even the American Civil Liberties Union. Senator Patrick Leahy, Democrat of Vermont, contended that the department was abusing corporations; his colleague Arlen Specter, then a Republican from Pennsylvania, readied a bill to prevent the Justice Department from receiving attorney-client privilege waivers. To cut that off, Paul McNulty, the deputy attorney general, released a revised set of rules stating, among other things, that no federal prosecutor could ask a company to waive attorney-client privilege without permission from higher-ups.

Over the years, the KPMG debacle and the corporate revolt would lead the Justice Department to roll back the Thompson memo to nearly the point of reversal. Today prosecutors are prohibited from even asking companies to waive their attorney-client privilege. They are also prohibited from pushing a company to cut off the legal fees for indicted executives or pressuring it to forgo joint defense agreements. “It was very much a game-changer in the business of investigating and defending in those cases,” says Michael Bromwich, a top white-collar lawyer and former inspector general of the Department of Justice.

In the decade since, the courts dulled other prosecutorial tools. A Supreme Court ruling allowed sentences to be set below previously determined mandatory minimums (which made executives less likely to “flip”). Another narrowed an often-used legal theory that said employees were guilty of fraud if they deprived their companies of “honest services” (which helped nab Enron’s former C.E.O., Jeffrey Skilling, among others). No change was momentous on its own — and some may have legitimately restored the rights of defendants — but taken together they marked a significant, if almost unnoted, shift toward the defense. After Lanny Breuer entered the Department of Justice, he testified in front of Congress to restore the honest-services charge for corrupt government officials. But he didn’t even try to broach the topic of a private-sector fix.

Life on Wall Street is often portrayed as hours of kinetic fury with billions on the line, but the work is more often suited to wonks who are comfortable digesting Excel spreadsheets. Serageldin, who joined Credit Suisse’s information-technology department right out of Yale in 1994, was assigned the late-night job of “cracking tapes” — transferring magnetic tape reels of data, decoding them and running analyses. Senior bankers quickly identified his talent and brought him over to the moneymaking side, where he was soon working in the bank’s catastrophe-bonds business, or securities that transfer the risk of earthquakes and hurricanes from seller to investor. It required mastering geology, fault lines and property-damage projections. In order to achieve the kind of informational advantages that Wall Street requires to make money, Serageldin had to put the statistical runs on a personal computer, waking up in the middle of the night for days at a time to reset it. By 2007, he oversaw about 70 people and generated $1.3 billion in trading revenue.

Serageldin’s group made so much money that some colleagues believed his bosses gave him a pass on risk controls. But by disposition, and by practice, he was anything but a swashbuckler. When the value of mortgage securities began to crater, on what became known as the Valentine’s Day Massacre of February 2007, most traders kept trading, pumping out securities, boosting their personal earnings while endangering — and in some cases destroying — their institutions. Serageldin, however, began ordering his traders to get out of their riskiest positions. The bank’s head of fixed income at the time, James Healy, would later note that Serageldin’s decisions “took courage and personal conviction, in the face of immense pressure” from the sales force.

Yet Serageldin’s caution failed him in one crucial moment. Later that summer, traders in one of his portfolios began to avoid taking the necessary losses on their mortgage-backed securities. Traders are required to hold securities at their current value, known as marking to market, determining how much the portfolio made or lost that day. At one desperate point, one of Serageldin’s traders approached a friend at a small regional bank to give him a so-called independent price that happened to be nearly identical to the prices in the portfolio, enabling them to conceal the size of the losses. In early December, that spreadsheet tallying the losses made its way to Serageldin, who would later admit to recognizing that the prices should have been lower. He had assumed the positions were hedged, a friend of his told me, but instead of saying anything, he tried to protect his reputation. By early 2008, he was out at Credit Suisse. The bank reported him to the U.S. attorney’s office in the Southern District of New York.

In a matter of months, the markets plummeted in a financial crisis that made Enron look like small-time pilfering. And as tens of millions of Americans lost their jobs or homes, an inchoate but palpable demand for justice — for a crackdown — emerged. Breuer may have come with the right pedigree, but he now faced troubles that hurt as much as the debacles of Arthur Andersen and KPMG, or the retreat from the Thompson memo: austerity. The department faced periodic hiring freezes. The F.B.I., which assigned dozens of agents to Enron, had shifted resources to terrorism. The Postal Service wound down an elite unit that had specialized in complex financial investigations. President Obama’s Fraud Enforcement and Recovery Act, which was designed to give hundreds of millions to prosecute financial criminals, was able to deliver only $65 million in 2010 and 2011. Prosecutors reporting to Breuer proposed setting up a mortgage-fraud initiative, a “Prosecutorial Strike Force,” as one July 2009 memo put it, but the Justice Department dithered. Finally it set up the Financial Fraud Enforcement Task Force, an enormous coordinating committee with essentially no investigative operation. One former Justice Department official derided it as “the turtle.”

Resources aside, the erosion of the department’s actual trial skills would soon become apparent. In November 2009, the U.S. attorney’s office in Brooklyn lost the first criminal case of the crisis against two Bear Stearns executives accused of misleading investors. The prosecutors rushed into trial, failing to prepare for the exculpatory emails uncovered by the defense team. After two days, the jury acquitted the two money managers. “For sure,” one former federal prosecutor told me, “it put a chill” on investigations. “Politicos care about winning and losing.”

The fear first wrought by the Andersen case, meanwhile, ossified around financial firms. In early 2009, the Obama administration deliberated over serious tax misconduct by UBS, the Swiss bank, but top Treasury and Justice department officials worried about the effects criminal charges could have on the financial system. UBS settled with the government. Breuer had another shot, in 2012, when the department was moving toward a resolution of a six-year investigation into HSBC, which had become the preferred bank for Mexican and Colombian drug cartels and conducted transactions with countries under American sanctions, including Iran and Libya. Breuer surveyed Washington and London regulators and policy hands and sought assurance that the system could weather an indictment. A top Treasury Department official told Breuer, in carefully couched language, that an indictment could cause broader problems in the financial system. Breuer even went as far as discussing whether banks were too big to indict with H. Rodgin Cohen, a partner at Sullivan & Cromwell, who was representing HSBC in his very own case. Cohen told Breuer that while the Justice Department can’t have a rule not to indict a large bank, prosecutors should, well, take into account how the target has cooperated and what changes it has made to fix the problems. Of course, HSBC happened to have taken those very measures. The Justice Department blinked again. That December, the bank was fined $650 million and forfeited almost $1.3 billion in profits. No one went to jail.

It would be easy to blame the Justice Department’s ineptitude on past mistakes alone. But again, the very ambitions of its prosecutors played a prominent role. Top governmental lawyers generally don’t want to spend their entire careers in the public sector. Many want to score marquee victories and avoid mistakes and eventually leave for prominent corporate firms with starting salaries at 10 times what they make at the Department of Justice. According to numerous former criminal-division employees, Breuer almost immediately signaled his interest in bigger things. In October 2009, Steven Fagell, his deputy chief of staff and former Covington colleague, sent an email to the division. “Do you like giving toasts? Do you think it should have been you accepting the writing Emmy for ‘30 Rock?’ ” Fagell wrote. “If so, we need your wit, smarts and gift for the written word! We’re putting together a speechwriting team for the assistant attorney general.” Prosecutors developing cases against Mexican drug cartels and Al Qaeda members found it more than a little tone deaf. (Fagell says the email request was intended “both to foster internal morale and to send a message of deterrence to the public.”)

According to numerous sources from the Justice Department, the Breu Crew instilled a careerist culture that was fearful of sullying its reputation by losing cases. Kathy Ruemmler, who worked on the Enron task force and later became Obama’s counsel, would needle Breuer: “How many cases are you dismissing this week?” Later Ruemmler was upset when the Justice Department decided against retrying a case against Merrill Lynch executives who helped Enron boost its earnings with an infamous transaction involving a Nigerian barge. (Breuer was recused from the barge case.) A former prosecutor at the Justice Department in Washington concurred that Breuer’s staff didn’t “want to pursue cases where they feel the person is 100 percent guilty but they are only 70 percent sure they can win at trial.” Prosecutors contrasted that with previous eras, some fondly recalling a line favored by James Comey, who served as one of George W. Bush’s deputy attorneys general and emphasized the need for “real-time” white-collar prosecutions. “We have a name for prosecutors who have never lost — the ‘Chicken(expletive) Club.’ ” (In a statement, Breuer said he had a strong record of white-collar enforcement: “Where there were cases to bring, we brought them, and where there were not, we took a pass.”)

But given that Washington rejected a unified national task force, these career motivations would prove particularly relevant. When Preet Bharara, former chief counsel for Senator Charles E. Schumer, arrived in the Southern District of New York in 2009, he had a decision to make. There were cases arising from the financial crisis, which could take years to investigate and, after all that, never make it to a jury. Or there were insider-trading cases, which were far more straightforward. Someone improperly learns nonpublic details about a company and makes a killing on the stock market. “You do have a tough choice,” one former Southern District prosecutor says. “Am I going to chase after crimes I don’t know were committed and don’t know who by, or do we go after crimes we do know were committed and by whom?”

Bharara focused on insider trading, and his office has amassed a stunning 80-0 record of prosecutions, locking up the hedge-fund titan Raj Rajaratnam and Rajat Gupta, the former managing director of McKinsey & Company and a director at Goldman Sachs. They took down eight former employees of Steven A. Cohen’s notorious SAC Capital hedge fund. (Notably, however, they haven’t been able to bring charges against the man himself.) Time magazine put Bharara on its cover, with the bold headline: “This Man Is Busting Wall Street.” Yet Bharara didn’t touch Wall Street’s real players — top bankers. The former prosecutor was almost sheepish about the insider-trading cases when I spoke to him: “They made our careers, but they don’t change the world.” In fact, several former prosecutors in the office told me that going after bankers was never a real priority. “The government failed,” another former prosecutor said. “We didn’t do what we needed to do.”

As a result, Bharara and his team neglected seemingly winnable cases in their own backyard, including one particularly big one. After Lehman imploded, the Justice Department’s Washington headquarters split responsibility investigating what the bank’s executives knew among three U.S. attorney’s offices: the Southern and Eastern districts of New York and the New Jersey operation. But for all of that manpower, to those closest to the Lehman probe, the government’s case was seemingly conducted by one lawyer, Bonnie Jonas, an assistant U.S. attorney for the Southern District. She would make pilgrimages to the offices of Jenner & Block, a prestigious law firm that had been assigned to investigate the Lehman bankruptcy. Jonas would pore over the 40 million-odd pages of Lehman documents the firm assembled. (The Southern District says it devoted multiple people and ample resources to the investigation.)

Nonetheless, the Justice Department never aggressively pursued what may have been the most promising angle. On Sept. 10, 2008, the chief financial officer of Lehman Brothers, Ian Lowitt, told shareholders and the public that the bank had $42 billion of available cash, or liquidity. The bank’s position, Lowitt reassured, “remains very strong.” Lehman would file for bankruptcy five days later. “What they were saying was not just wrong but materially wrong,” Robert Byman, a Jenner & Block partner, told me.

Over 14 months, Jenner & Block would put about 130 lawyers on the case to prepare a report on the collapse. At one point, recalls Stephen Ascher, a partner, one of them discovered “this wonderful chart” breaking down the liquidity figure into three categories: high, moderate and low. Of those billions, $15 billion was in the “low” category, generally because it had been pledged as collateral to other banks. One former Lehman executive told me that several other company managers understood that they could not tap much, if any, of that encumbered money. And at least two executives objected to how the bank was representing its liquidity, including its international treasurer, Carlo Pellerani, according to the Jenner & Block report. The law firm found that regulators, credit-rating agencies and Lehman’s outside lawyer had no idea that the liquidity pool wasn’t, in fact, all that liquid. When Lowitt came to talk to Jenner & Block, he explained that he had not fully understood the issues when he assured investors of its liquid assets. That may be a reasonable defense, but it does not appear that prosecutors and federal investigators made a serious attempt to test how much Lehman’s chief financial officer knew about his own books. Three Lehman executives and one regulator at the Federal Reserve, all of whom were involved in the bank’s desperate attempts to keep itself liquid, told me they were never even interviewed by any federal-government officials.

When Wall Street bankers are arrested, they often do what is known in finance as an expected-value analysis: They weigh the cost of fighting, how long it would take and the chances of the best and worst outcomes. Serageldin was a Wall Street banker with a foreign name who helped make securities that played a role in blowing up the global economy. He seemed to reach a logical conclusion: Plead guilty and take his chances with a judge’s sentence. Other bankers made the opposite choice. After ignoring the risks of the housing and credit bubbles, they took the high-risk-high-reward gamble again, hiring top lawyers and claiming that they never intended to deceive. As it turned out, they benefited from a decade of subtle changes that favored corporate executives under investigation. Serageldin took the sucker’s bet. Prosecutors simply got their man by default.

In his first months in prison, Serageldin has tried to remain upbeat. The investment-banking monk is now spending his nights in a basketball-court-size room with about 70 others. If the problem sets don’t occupy him, he is allowed five books at a time. After explaining that he had lived abroad, Serageldin became known as London. The extent of his crime, meanwhile, has been revised. Initially prosecutors implied that the trader had been part of a conspiracy to hide $540 million worth of losses. By the time he was sentenced, the government was down to accusing him of conspiring to hide about $100 million. An internal Credit Suisse analysis put the misstatement at $37 million. “There’s not a moment’s doubt on my part” that such mismarking happened elsewhere during the crisis, Fiachra O’Driscoll, a friend and former colleague of Serageldin’s, who has been an expert witness in private litigation, told me. “I have seen evidence along the way that similar things happened dozens of times.”

Federal prosecutors have their own explanation for how only one Wall Street executive landed in jail in the wake of the financial crisis. The cases were complex to investigate and would have been infernally difficult to explain to juries, some told me. Much of the crisis and banker transgressions stemmed from recklessness, not criminality. They also suggest that deferred prosecutions — with their billions in settlements and additional oversights — can be stricter punishments than indictments. Still, while the Department of Justice has not been without its successes — it won a guilty plea from BP in the Deepwater Horizon spill, and it’s currently going after traders in the wake of the JPMorgan Chase London Whale trading loss — these remain exceptions even beyond the financial sector. Federal prosecutors almost never bring criminal charges against top executives of large corporations, from banking to pharmaceuticals to technology. In March, the Justice Department entered into a deferred prosecution against Toyota but did not indict the company or any top executives. As the economy limps back from the Great Recession, compensation has recovered, corporate profits are at record levels and executives see that few, if any, of their peers ever go to prison anymore. Perhaps one reason Americans have come to begrudge the wealthy is a resentment of their culture of impunity.

Larry Thompson became known for his memo, but back in the Clinton administration, the deputy attorney general Eric Holder laid out his own memo for strengthening corporate prosecutions. But he undermined his own words by also explaining that prosecutors needed to take into account the collateral economic consequences. In testimony in front of the Senate in March, Holder, who is now the U.S. attorney general, seemed to lament the position government enforcers had found themselves in. “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy.” Holder quickly walked back the remarks. Soon after, Lanny Breuer returned to Covington & Burling as a vice chairman.

At the end of World War 2 the United States Army rounded up all of the Nazi intelligence officers it could locate. The most notable individual included in this group was Heinrich Muller who was know to be in the custody of the US Army in December of 1945. Muller was head of the Nazi Gestapo, the Nazi's homeland security service. Muller participated in the planning for the extermination of Europe's Jews and others the Nazis considered to be undesirable and ordered the murder of may Germans who opposed the Nazis and may others. Muller disappeared after World War 2 was never found and was never held accountable for his crimes. There is evidence that Muller was located in Washington DC, at Fort Mead between 1948 and 1952. Fort Mead is the location of the National Security Agency headquarters. Muller was also observed to be in the company of Allen Dulles who was head of US National Intelligence after the war and was instrumental in the development of America's intelligence community, including the NSA, after World War II. Muller was said to be Dulles' right had man, Muller was also Heinrich Himmler's right hand man.

After the Soviets tested their first nuclear weapon in 1949 America was in a state of panic and used many former Nazis to help gather intelligence on the Soviets and build a national intelligence infrastructure to monitor them. This became the US Central Intelligence Agency and the National Security Agency which is a part of the US Defense Department. The Nazis also used the threat of terrorism as an excuse for imposing tyranny on the German people. The Nazis closely monitored Germany's communications infrastructure, reading mail and monitoring phone calls. The Nazis locked up anyone who resisted in insane asylums, accused them of crimes, manufactured evidence, engaged in character assassination and eventually simply murdered anyone who got in the way. The Nazis destroyed lives of anyone who resisted in any manner possible. The NSA regularly engages in the same tactics in the United States today, they are more subtle than the Nazis.



Life got worse in US since 2008 financial crisis

— here’s why

November 8, 2016

Are you better off than you were eight years ago?

In 1980 Republican Ronald Reagan asked a similar question during a debate against Jimmy Carter, the incumbent Democratic president.

There’s a lot more going on this year — a whole lot more.  But in the end a  Presidential election turns mostly on how people feel about their own well-being.  Voters are selfish and that shouldn’t surprise anyone because voters are human.

These days well-being includes things like feeling safe from crime and terrorism. But it’s mostly about money.

Let’s face it.  If people have enough money they can do a good job keeping  themselves safe.  Move to a better neighborhood or a different country.  Buy a bigger gun.  Hire guards.

Maybe money doesn’t buy happiness, but it can buy security.

Back in January, the Gallup Organization randomly polled 1,022 adults in all 50 states and the District of Columbia about whether they were better off than they were eight years ago.

Remember, there was financial panic in this country eight years ago. George Bush’s presidency was ending; Barack Obama’s was beginning. The financial markets, we were told, were about to collapse and maybe the whole banking system as well.

Maybe money doesn’t buy happiness — but it can buy security.

And unemployment was soaring as US businesses retreated to the safety of indecision.

This past January when Gallup called people neither political party had picked its Presidential candidate, although the Democrats seemed hell bent on going with Hillary Clinton.  The Republicans were still far from settling on Donald Trump.

What did those people who were polled have to say?  Only 50 percent of those surveyed said they were better off than eight years before. Forty-two percent said they weren’t.  And 6 percent volunteered that they were just as well off.  The remaining people had no opinion.

The percentage who said they were better off was much lower than the 73 percent who had a similar response in 2000.  At the turn of the century, only 19 percent felt they weren’t better off and 7 percent volunteered that were just as well off.

So what gives? If you look at the economic statistics being put out by Washington a lot more people should be happier with their financial situation now.

The unemployment rate is down sharply since the Great Recession. There have been 18 million jobs created since 2008.  And the US economy, as measured by the Gross Domestic Product, has been rising almost without interruption.

And unemployment in 2008 was soaring as US businesses retreated to the safety of indecision.

So what did Gallup find?

That only 50 percent of those surveyed said they were better off now compared with eight years ago. Forty-two percent said they weren’t. And 6 percent volunteered that they were just as well off. The remaining people had no opinion.

In 2000, 73 percent said they were better off than in 1992.

In January’s survey, 66 percent of those who are Republicans or leaning that way said things were better in 2008 — while 71 percent of those who call themselves Democrats or leaned in that direction felt things were better in 2016.

So what gives? According to the economic statistics being put out by Washington, a lot more people should be happier with their financial situation now.

The unemployment rate is down sharply since the Great Recession. There have been 18 million jobs created since 2008. And the US economy, as measured by the gross domestic product, has been rising almost without interruption.Are the sour findings in the Gallup poll simply because people are grumpier  than they were in 2000?

Or is there something hidden in the economic data that’s faking us out?  Is the economy not really as good as the numbers would have you think?  Perhaps, even — as I believe — someone has been fiddling with the numbers and changing the way the data is presented to make today’s situation appear better than it really is.

First, let’s look at those 18 million new jobs.

Right now the US has 145.9 million jobs and annual growth in employment has been unspectacular, but steady. I’ve already told you in other columns about the tricks — optimistic assumptions, wacky seasonal adjustments and changes in what is called a “job.”

Forget all that for this column.

Those 145.9 million jobs are only 6 million more than the country had back in late 2007, which was when hard times began.  In fact, it took the US until the summer of 2014 to exceed the 139.5 million jobs that existed in Nov., 2007.

Six million new jobs — from the 2007 peak — just aren’t enough when you need to put people back to work, plus absorb all the folks who are trying to enter the workforce for the first time.  In fact, the experts have always thought — until they recently changed their thinking — that 150,000 jobs a month were needed just to put the newcomers to work.

That means over 16 million jobs would have been needed in the last nine years just for new workers.

Maybe that’s why people aren’t particularly happy now.

The low unemployment rate of 4.9 percent is a joke because it doesn’t count people who’ve given up looking for work.  Even by the U.S. Labor Department’s optimistic standards, the real rate is closer to 10 percent when you include people who have become mildly discouraged or want a full time job but can only find part time work.

Add to that figure all the Americans who’ve completely disappeared from the workforce because they’ve given up and the jobless rate is probably closer to 20 percent — although nobody really knows because the government doesn’t make this calculation.

Maybe that’s why people aren’t happier.

Or perhaps it’s because a large percentage of the new jobs created aren’t  good ones.  The quality of a job is hard to gauge except that everyone would seem to agree that if it doesn’t have benefits it’s not good.

And if someone has to have two poor-paying jobs to make ends meet instead of one good–paying job, then the need is greater for even more new jobs.  The shift to poor paying jobs has caused the median household income in the U.S. after adjusting for inflation to be 4.6 percent lower between 2007 and 2015.

This election has gone far beyond money issues.  But even some of the distractions are about money — like Donald Trump’s taxes and Hillary Clinton’s charitable foundation.

And just in case you care what I think, here it is again: Trump is a wise-ass who seems unable to control what he’s says and is thinking. Hillary Clinton and her husband, Bill, are liars and thieves.

Neither should be president, but one has to be.  So I’m voting for Trump. A least the wise-ass will kick Washington’s power brokers in the ass.



Crash course

The effects of the financial crisis are still being felt, five years on. This article, the first of a series of five on the lessons of the upheaval, looks at its causes

THE collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. It took huge taxpayer-financed bail-outs to shore up the industry. Even so, the ensuing credit crunch turned what was already a nasty downturn into the worst recession in 80 years. Massive monetary and fiscal stimulus prevented a buddy-can-you-spare-a-dime depression, but the recovery remains feeble compared with previous post-war upturns. GDP is still below its pre-crisis peak in many rich countries, especially in Europe, where the financial crisis has evolved into the euro crisis. The effects of the crash are still rippling through the world economy: witness the wobbles in financial markets as America’s Federal Reserve prepares to scale back its effort to pep up growth by buying bonds.

With half a decade’s hindsight, it is clear the crisis had multiple causes. The most obvious is the financiers themselves—especially the irrationally exuberant Anglo-Saxon sort, who claimed to have found a way to banish risk when in fact they had simply lost track of it. Central bankers and other regulators also bear blame, for it was they who tolerated this folly. The macroeconomic backdrop was important, too. The “Great Moderation”—years of low inflation and stable growth—fostered complacency and risk-taking. A “savings glut” in Asia pushed down global interest rates. Some research also implicates European banks, which borrowed greedily in American money markets before the crisis and used the funds to buy dodgy securities. All these factors came together to foster a surge of debt in what seemed to have become a less risky world.

Start with the folly of the financiers. The years before the crisis saw a flood of irresponsible mortgage lending in America. Loans were doled out to “subprime” borrowers with poor credit histories who struggled to repay them. These risky mortgages were passed on to financial engineers at the big banks, who turned them into supposedly low-risk securities by putting large numbers of them together in pools. Pooling works when the risks of each loan are uncorrelated. The big banks argued that the property markets in different American cities would rise and fall independently of one another. But this proved wrong. Starting in 2006, America suffered a nationwide house-price slump.

The pooled mortgages were used to back securities known as collateralised debt obligations (CDOs), which were sliced into tranches by degree of exposure to default. Investors bought the safer tranches because they trusted the triple-A credit ratings assigned by agencies such as Moody’s and Standard & Poor’s. This was another mistake. The agencies were paid by, and so beholden to, the banks that created the CDOs. They were far too generous in their assessments of them.

Investors sought out these securitised products because they appeared to be relatively safe while providing higher returns in a world of low interest rates. Economists still disagree over whether these low rates were the result of central bankers’ mistakes or broader shifts in the world economy. Some accuse the Fed of keeping short-term rates too low, pulling longer-term mortgage rates down with them. The Fed’s defenders shift the blame to the savings glut—the surfeit of saving over investment in emerging economies, especially China. That capital flooded into safe American-government bonds, driving down interest rates.

Low interest rates created an incentive for banks, hedge funds and other investors to hunt for riskier assets that offered higher returns. They also made it profitable for such outfits to borrow and use the extra cash to amplify their investments, on the assumption that the returns would exceed the cost of borrowing. The low volatility of the Great Moderation increased the temptation to “leverage” in this way. If short-term interest rates are low but unstable, investors will hesitate before leveraging their bets. But if rates appear stable, investors will take the risk of borrowing in the money markets to buy longer-dated, higher-yielding securities. That is indeed what happened.

From houses to money markets

When America’s housing market turned, a chain reaction exposed fragilities in the financial system. Pooling and other clever financial engineering did not provide investors with the promised protection. Mortgage-backed securities slumped in value, if they could be valued at all. Supposedly safe CDOs turned out to be worthless, despite the ratings agencies’ seal of approval. It became difficult to sell suspect assets at almost any price, or to use them as collateral for the short-term funding that so many banks relied on. Fire-sale prices, in turn, instantly dented banks’ capital thanks to “mark-to-market” accounting rules, which required them to revalue their assets at current prices and thus acknowledge losses on paper that might never actually be incurred.

Trust, the ultimate glue of all financial systems, began to dissolve in 2007—a year before Lehman’s bankruptcy—as banks started questioning the viability of their counterparties. They and other sources of wholesale funding began to withhold short-term credit, causing those most reliant on it to founder. Northern Rock, a British mortgage lender, was an early casualty in the autumn of 2007.

Complex chains of debt between counterparties were vulnerable to just one link breaking. Financial instruments such as credit-default swaps (in which the seller agrees to compensate the buyer if a third party defaults on a loan) that were meant to spread risk turned out to concentrate it. AIG, an American insurance giant buckled within days of the Lehman bankruptcy under the weight of the expansive credit-risk protection it had sold. The whole system was revealed to have been built on flimsy foundations: banks had allowed their balance-sheets to bloat (see chart 1), but set aside too little capital to absorb losses. In effect they had bet on themselves with borrowed money, a gamble that had paid off in good times but proved catastrophic in bad.

Regulators asleep at the wheel

Failures in finance were at the heart of the crash. But bankers were not the only people to blame. Central bankers and other regulators bear responsibility too, for mishandling the crisis, for failing to keep economic imbalances in check and for failing to exercise proper oversight of financial institutions.

The regulators’ most dramatic error was to let Lehman Brothers go bankrupt. This multiplied the panic in markets. Suddenly, nobody trusted anybody, so nobody would lend. Non-financial companies, unable to rely on being able to borrow to pay suppliers or workers, froze spending in order to hoard cash, causing a seizure in the real economy. Ironically, the decision to stand back and allow Lehman to go bankrupt resulted in more government intervention, not less. To stem the consequent panic, regulators had to rescue scores of other companies.

But the regulators made mistakes long before the Lehman bankruptcy, most notably by tolerating global current-account imbalances and the housing bubbles that they helped to inflate. Central bankers had long expressed concerns about America’s big deficit and the offsetting capital inflows from Asia’s excess savings. Ben Bernanke highlighted the savings glut in early 2005, a year before he took over as chairman of the Fed from Alan Greenspan. But the focus on net capital flows from Asia left a blind spot for the much bigger gross capital flows from European banks. They bought lots of dodgy American securities, financing their purchases in large part by borrowing from American money-market funds.

In other words, although Europeans claimed to be innocent victims of Anglo-Saxon excess, their banks were actually in the thick of things. The creation of the euro prompted an extraordinary expansion of the financial sector both within the euro area and in nearby banking hubs such as London and Switzerland. Recent research by Hyun Song Shin, an economist at Princeton University, has focused on the European role in fomenting the crisis. The glut that caused America’s loose credit conditions before the crisis, he argues, was in global banking rather than in world savings.

Moreover, Europe had its own internal imbalances that proved just as significant as those between America and China. Southern European economies racked up huge current-account deficits in the first decade of the euro while countries in northern Europe ran offsetting surpluses. The imbalances were financed by credit flows from the euro-zone core to the overheated housing markets of countries like Spain and Ireland. The euro crisis has in this respect been a continuation of the financial crisis by other means, as markets have agonised over the weaknesses of European banks loaded with bad debts following property busts.

Central banks could have done more to address all this. The Fed made no attempt to stem the housing bubble. The European Central Bank did nothing to restrain the credit surge on the periphery, believing (wrongly) that current-account imbalances did not matter in a monetary union. The Bank of England, having lost control over banking supervision when it was made independent in 1997, took a mistakenly narrow view of its responsibility to maintain financial stability.

Central bankers insist that it would have been difficult to temper the housing and credit boom through higher interest rates. Perhaps so, but they had other regulatory tools at their disposal, such as lowering maximum loan-to-value ratios for mortgages, or demanding that banks should set aside more capital.

Lax capital ratios proved the biggest shortcoming. Since 1988 a committee of central bankers and supervisors meeting in Basel has negotiated international rules for the minimum amount of capital banks must hold relative to their assets. But these rules did not define capital strictly enough, which let banks smuggle in forms of debt that did not have the same loss-absorbing capacity as equity.

Under pressure from shareholders to increase returns, banks operated with minimal equity, leaving them vulnerable if things went wrong. And from the mid-1990s they were allowed more and more to use their own internal models to assess risk—in effect setting their own capital requirements. Predictably, they judged their assets to be ever safer, allowing balance-sheets to balloon without a commensurate rise in capital (see chart 2).

The Basel committee also did not make any rules regarding the share of a bank’s assets that should be liquid. And it failed to set up a mechanism to allow a big international bank to go bust without causing the rest of the system to seize up.

All in it together

The regulatory reforms that have since been pushed through at Basel read as an extended mea culpa by central bankers for getting things so grievously wrong before the financial crisis. But regulators and bankers were not alone in making misjudgments. When economies are doing well there are powerful political pressures not to rock the boat. With inflation at bay central bankers could not appeal to their usual rationale for spoiling the party. The long period of economic and price stability over which they presided encouraged risk-taking. And as so often in the history of financial crashes, humble consumers also joined in the collective delusion that lasting prosperity could be built on ever-bigger piles of debt.


UBS Deal Shows Clinton’s Complicated Ties

July 30, 2015

Donations to family foundation increased after secretary of state’s involvement in tax case

Then-Secretary of State Hillary Clinton appeared with Swiss Foreign Minister Micheline Calmy-Rey, left, at the State Department on July 31, 2009, announcing a deal in principle to settle a legal case involving UBS. Photo: J. Scott Applewhite/AP


James V. Grimaldi and

Rebecca Ballhaus

A few weeks after Hillary Clinton was sworn in as secretary of state in early 2009, she was summoned to Geneva by her Swiss counterpart to discuss an urgent matter. The Internal Revenue Service was suing UBS AG to get the identities of Americans with secret accounts.

If the case proceeded, Switzerland’s largest bank would face an impossible choice: Violate Swiss secrecy laws by handing over the names, or refuse and face criminal charges in U.S. federal court.

Within months, Mrs. Clinton announced a tentative legal settlement—an unusual intervention by the top U.S. diplomat. UBS ultimately turned over information on 4,450 accounts, a fraction of the 52,000 sought by the IRS, an outcome that drew criticism from some lawmakers who wanted a more extensive crackdown.

From that point on, UBS’s engagement with the Clinton family’s charitable organization increased. Total donations by UBS to the Clinton Foundation grew from less than $60,000 through 2008 to a cumulative total of about $600,000 by the end of 2014, according to the foundation and the bank.

The bank also joined the Clinton Foundation to launch entrepreneurship and inner-city loan programs, through which it lent $32 million. And it paid former president Bill Clinton $1.5 million to participate in a series of question-and-answer sessions with UBS Wealth Management Chief Executive Bob McCann, making UBS his biggest single corporate source of speech income disclosed since he left the White House.

There is no evidence of any link between Mrs. Clinton’s involvement in the case and the bank’s donations to the Bill, Hillary and Chelsea Clinton Foundation, or its hiring of Mr. Clinton. But her involvement with UBS is a prime example of how the Clintons’ private and political activities overlap.

UBS is just one of a series of companies that engaged with both the Clinton family’s charitable organization and the State Department under Mrs. Clinton. And it is an unusual one: Unlike cases in which Mrs. Clinton went to bat for American companies seeking business abroad, such as General Electric Co. and Boeing Co., the UBS matter involved her helping solve a problem for a foreign bank—not a popular constituency among Democrats—and stepping into an area where government prosecutors had been taking the lead.

The flood of donations and speech income that followed exemplifies why the charity and its fundraising have been a running problem for the presidential campaign of Mrs. Clinton, the Democratic front-runner. Republicans as well as some Democrats have raised questions about potential conflicts of interest.

“They’ve engaged in behavior to make people wonder: What was this about?” says Harvard Law Professor Lawrence Lessig, who is a Democrat. “Was there something other than deciding the merits of these cases?”

Critics also have hit the charity for accepting donations from foreign governments, which they say could pose problems for her if she is elected, potentially opening her to criticism that she is obligated to foreign donors.

The Clintons have said accepting donations posed no conflicts of interest and broke no rule or law. To address the criticism, the Clinton Foundation decided to release donation information more frequently, and the foundation said earlier this year that the first disclosure is expected by the end of July.

UBS officials deny any connection between the legal case and the foundation donations. “Any insinuation that any of our philanthropic or business initiatives stems from support received from any current or former government official is ludicrous and without merit,” a bank spokeswoman said. UBS said the speeches by Mr. Clinton and the donations were part of a program to respond to the 2008 economic downturn.

A Clinton campaign spokesman said Mrs. Clinton is proud of the foundation’s work and her record as secretary of state. “Any suggestion that she was driven by anything but what’s in America’s best interest would be false. Period,” he said. He referred questions about the UBS matter to the State Department.

A State Department spokesman said that “UBS was a topic of serious discussion, among other issues, in our bilateral relations at that time” with the Swiss government. A spokeswoman in the Swiss embassy in Washington said the government had no comment.

In a CNN interview last month, Bill Clinton was asked if any foundation donors ever sought anything from the State Department. “I don’t know,” he replied. “I know of no example. But I—you never know what people’s motives are.”

Tax avoidance

UBS’s troubles began in 2007 when an American banker working in Switzerland told the U.S. Justice Department that UBS had recruited thousands of U.S. customers seeking to avoid U.S. taxes. The disclosure led UBS to enter into a deferred-prosecution agreement with the Justice Department in 2009. The bank admitted to helping set up sham companies, creating phony paperwork and deceiving customs officials. It paid a $780 million fine and turned over the names of 250 account holders.

The agreement left unresolved a separate legal standoff over whether UBS—in response to a summons from the IRS—would turn over the names of U.S. citizens who owned 52,000 secret accounts estimated to be worth $18 billion. “We should get all the accounts,” IRS Commissioner Dan Shulman maintained at a Senate hearing in 2009.

After a federal judge indicated he would rule quickly, UBS enlisted the Swiss government to approach the State Department.

“UBS believes this dispute should be resolved through diplomatic discussions between the two governments,” Mark Branson, then chief financial officer of UBS Global Wealth Management and Businesses, said at a separate congressional hearing.

John DiCicco, then the Justice Department’s top tax lawyer on the case, responded at the same hearing: “We are not going head-to-head with the Swiss government, but UBS.”


Mrs. Clinton’s role in resolving the matter was more extensive than previously reported. She didn’t initiate her involvement in the case, but was drawn into it by separate diplomatic concerns, according to interviews with people involved in the case and diplomatic cables first published by WikiLeaks.

On March 6, 2009, two days after the congressional hearing, Mrs. Clinton met Swiss Foreign Minister Micheline Calmy-Rey for the first time. Ms. Calmy-Rey suggested settling the UBS matter through the U.S.-Swiss treaty process.

But Mrs. Clinton also wanted to talk about other matters of concern to the U.S. She brought up a U.S. journalist jailed in Iran, the State Department said. The U.S. hadn’t had direct diplomatic relations with Iran since 1979, and the Swiss embassy in Tehran represented U.S. interests in Iran.

She also wanted to discuss a Swiss-based energy-consulting company, Colenco AG, that allegedly was violating international sanctions by providing civilian-nuclear technology to Iran, according to a State Department cable that July 1. And Mrs. Clinton wanted Switzerland to take some low-risk detainees from the prison in Guantanamo Bay, which President Barack Obama has vowed to close, according to the cable.

After the meeting broke up, Ms. Calmy-Rey spoke to reporters about the importance of resolving the UBS problem: “It was not in our common interest for the situation to escalate further as UBS is responsible for 30,000 jobs in the U.S., and the bank’s difficulties could weaken the international financial system.”

A State Department official wrote after the meeting in another cable that the UBS case was “a dark cloud over bilateral relations, with concerns it could escalate to a seriously damaging event.” The State Department declined to comment on any of the cables made public by WikiLeaks.

The Swiss appeared to act on Mrs. Clinton’s concerns. That May, the U.S. journalist was released. On July 1, the Swiss trade minister told the U.S. that Colenco would shut down its Iran operations. (The company said none of its activities violated international sanctions.) Economy Minister Doris Leuthard also expressed Switzerland’s willingness to accept Guantanamo detainees.

Ms. Leuthard, referring to Guantanamo and Iran, “made it clear that these two activities were linked to the achievement of a political settlement in the case of Swiss banking giant, UBS,” the July 1 cable said.

After the cable became public, Ms. Leuthard told a Swiss newspaper there was “no direct connection” between UBS and the Iran and Guantanamo issues. A Swiss embassy spokeswoman said Ms. Leuthard had no comment.

Out-of-court negotiations to settle the case intensified, according to lawyers involved in the case.

In mid-July, Ms. Calmy-Rey told a Swiss reporter she expected a resolution by the time she met with Mrs. Clinton in late July in Washington. She said the U.S.-Swiss relationship was at stake.

On July 31, Ms. Calmy-Rey appeared with Mrs. Clinton at the State Department to announce a deal in principle. The Justice Department and IRS agreed to dismiss the lawsuit and settle the disagreement under a U.S.-Swiss tax treaty, as Ms. Calmy-Rey had sought. UBS would turn over information on about 4,450 accounts, not 52,000.

“Our governments have worked very hard to reach this point,” Mrs. Clinton said.

Ms. Calmy-Rey called the agreement a “Peace Treaty” and UBS praised it.

Then-Sen. Carl Levin (D., Mich.), a longtime advocate of cracking down on tax avoiders with offshore accounts, criticized the deal. “It is disappointing that the U.S. government went along,” he said.

Carolyn Schenck, a senior counsel at the IRS, said at a conference earlier this year that many U.S. citizens with overseas accounts escaped IRS scrutiny in the settlement.

An IRS spokesman defended the deal, saying it had “resulted in criminal prosecutions, produced billions in penalties and taxes and forced a dramatic shift in the use of offshore banks to hide money.”

A Justice Department spokeswoman said the department has criminally charged 66 people who had UBS accounts, though she couldn’t say whether any of those cases were related to the settlement.

State warning

Mr. DiCicco, the senior Justice Department tax lawyer on the case who has since retired, said the State Department didn’t get involved in details of the settlement, but did warn about the ramifications of taking a tough line.

“There is a risk that if a large bank is indicted it would lose its ability to do business in the U.S.,” he said. “That was a consideration.” He said there was no “pressure” from the State Department on that issue.

As loose ends of the deal were being tied up in late 2009, UBS began making plans to create a small-businesses program. In early 2010 it decided to team up with a Clinton Foundation project called the

UBS Wealth Management Chief Executive Bob McCann took the stage with former President Bill Clinton at a Clinton Global Initiative event in 2011. Photo: Brian Kersey/UPI/Landov

UBS started a pilot entrepreneurs program in New York City in June 2011 with a $350,000 donation to the foundation, according to the bank. Its only previous donations were “membership fees” of about $20,000 a year. The 2011 donation also paid for an earlier appearance by Mr. Clinton at a UBS event where he discussed the economy, the bank said.

In 2012 the entrepreneurs program was listed as one of three of the Clinton Economic Opportunity Initiative’s most significant achievements of the year. UBS ultimately offered $32 million in loans to dozens of businesses in six cities. (The money didn’t go to the foundation.)

The bank dubbed the program Elevating Entrepreneurs and packaged it with appearances around the country by Mr. Clinton and former President George W. Bush.

Mr. Clinton earned $1.5 million for 11 appearances in New York, Dallas, Miami, Pittsburgh, San Francisco, Nashville and other cities. Mr. McCann, the UBS Wealth Management executive, conducted the panel discussions with Messrs. Clinton and Bush. Spokesmen for Mr. Bush and UBS declined to comment on how much Mr. Bush was paid.

UBS also gave $100,000 to the Clinton Foundation for a charity golf tournament.

Stu Gibson, who litigated the lawsuit against UBS for the Justice Department, said in a recent interview that he was unaware that the bank had increased its donations to the Clinton Foundation in the wake of the settlement.

“It raises questions that need to be addressed, or should be addressed,” said Mr. Gibson, who has left the government and now is editor of Tax Notes International. “Maybe there’s nothing to it. Maybe there is something to it.”