Remember all the talk inside and outside the US Department of Justice that charging – and even investigating – big banks for criminal fraud might damage their stock prices?  A former DoJ criminal division chief was said to have lost his job due to two interviews where he admitted that investigations into fraud were blocked and certain big banks were in fact too big to prosecute?

Lloyds Banking

Market looks at fraud charges with a yawn

Those strange policy guidelines are proven as bunk by the stock prices of several banks faced with public admissions of common criminal fraud.  As a recent Investec research report notes, the market looks at fraud charges with a yawn – exactly the opposite of what current US Attorney General Eric Holder was so concerned about in 1999. This is when a then young prospect named Eric Holder, working as a lawyer in the Department of Justice, essentially gave what was interpreted as the green light not to investigate large banking interests involved in what was said to be criminal activity.  “The Holder Letter” is the decree to which it has come to be known but is seldom reported in the press.

The Holder Letter essentially said that if the prosecutor feared negative market reactions that might put big banks in jeopardy, the prosecutor could provide special consideration to the bank participants. They used different code words such as systematically significant financial institution in order to confuse, hide the issue, but it was plain and simple protection for the largest banks.

In the research report titled “Catch us if you can!” Investec researchers provide incidental evidence this concern just doesn’t hold water.

Lloyds’ LIBOR manipulation

“The market has, (quite rightly in our view), taken disclosure of Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY)’ “reprehensible” LIBOR manipulation and (immaterial) £0.2bn fine in its stride,” the letter said, then pointed to what matters. “What drives the share price is the operational performance, and today’s Q2 2014 results show (we think) further solid underlying progress.”

Criminal behavior is immaterial in the performance of a bank, all that matters is next quarter, is a message being interpreted. While that may sound amazing, is it that untrue? As previously reported in ValueWalk, time after time massive fines fail to deter the banks – instead punishing shareholders while the guilty tend to keep their bonuses and freedoms.

For Investec what matters is the operational beat in net interest income. One wonders with interest rates if their income tied to trading in this activity will be impacted.  Trading is a little easier when one knows the direction of interest rates.  But perhaps this is viewed as helping the Fed, which, as the ultimate controller of the market, has set the tone in terms of pushing free market dynamics to the side.