— William K. Black, head of fraud prosecution in the Savings & Loan scandal.
— William K. Black, head of fraud prosecution in the Savings & Loan scandal.
Why does “too big to jail” matter?
A. Declining to prosecute either the banks themselves or individuals at the banks for financial fraud sends the message that crime pays and in the unlikely event of a financial penalty from the Justice Department in lieu of prison, that any financial penalty is just part of the cost of doing business. It enables those willing to commit crime to do it repeatedly. Meanwhile, the best deterrent to crime is to put criminals in prison. That includes those at powerful banks and corporations. No one should be above the law.
Of course, naming the problem is important. It is more important to see action, and a change in policy.
Gregor MacGregor invented, in the early 1800s, an entire nation, government, and development plan. He sold investors in Europe hundreds of thousands of pounds of bonds of his mythical nation, Poyais. He organized a voyage across the Atlantic, filling it with would-be settlers for his made-up nation. When they arrived, in the region of modern-day Honduras, they found it had all been an exaggeration — yet they refused to believe they had been misled. This gullibility cost two-thirds of them their lives.
Bernie Madoff may have scammed more in dollar terms, but the gradiose nature of Gregor MacGregor’s Poyais scam outclasses Madoff in the annals of fraud.
Though one has to wonder if our current government’s underlying strategy of attempting to return a heavily-indebted nation to prosperity by piling on more debt might be a scam of an even higher magnitude.
If you needed another reminder of how Obama has bent himself over backwards several times to save banks who engaged in massive fraud, here it is.
If I read this article from Naked Capitalism correctly, the story goes like this.
In 2008, as part of dealing with the collapse in the real estate market and the threat of our major banks going bankrupt, Congress created the Federal Housing Finance Agency (FHFA), to oversee and regulate real estate-related government sponsored entities like Fannie Mae and Freddie Mac.
The FHFA, under its director Ed DeMarco, brought a lawsuit against the biggest banks in the country for fraud — something I have been complaining about since 2009 in every forum I participate in. The FHFA asserts that the banks “duped” Fannie and Freddie and presumably other government sponsored entities into buying mortgage backed securities. I don’t know why they use the term “duped” since this is just another word for fraud. They fooled the purchasers of these securities into believing they were more secure (AAA credit rating) than they actually were.
If the banks were to lose this lawsuit, it could mean up to $200 billion in penalties.
The lawsuit appears to be going badly for the banks.
It appears that DeMarco intends to press this suit to its full conclusion. This could hurt bank profits!!! No, we can’t have that. The Obama Administration wants to replace DeMarco, presumably with a “softer” regulator who might choose to settle the suit, rather than press it forward. Because that would be embarrassing, not to mention ghastly expensive, for the banks. No, we can’t have that, can we?
Every day in every way this President makes me more convinced he is the worst. President. Ever. If fraud is not prosecuted, we will get more fraud. The government should not be an advocate for fraudsters, but is has been. Shame.
Harsh words from Karl Denninger, the libertarian-minded financial blogger. True, the alternatives are masters of spin as well. Libertarians should probably demand a little higher standard.
The most egregious fib here is the first one Denninger mentions. The idea that no crimes were committed by the mortgage lenders or Wall Street in the bubble that led to the financial collapse is unsupportable. Either Johnson is high on weed, or he’s deliberately falsifying the record, covering for the thieves who wrote fraudulent real estate loans for people who could never pay them back, then sold those loans to Wall Street, who misrepresented the mortgage investments they were selling to clients. Fraud is a simple concept, and it undeniably occurred. Johnson’s denial puts him in the same category as the Obama administration, which has spent four years covering up for the financial criminals and bailing them out of their bad investments.
As for the other lies, people can make their own judgments. Gary Johnson’s pursuit of the White House is a quixotic one, and a distraction from the two viable options, imperfect as they are, that America must choose from. Perhaps it’s just more palatable to hear lies coming from the two major parties. We have learned not to expect any better. Ron Paul set a different standard.
I am sooooo tired of the mainstream media virtually ignoring massive fraud in the banking system that has not been prosecuted. Taxpayers, clients, shareholders have been ripped off for hundreds of billions, if not trillions of dollars as a result of this fraud. Of late, the LIBOR scandal has either been the last straw or something the media could not ignore. That’s a good thing, though it is probably too little, too late.
James Surowiecki, the Financial Page writer for The New Yorker magazine, has been seemingly untroubled by the fraud, until now. For four years, he’s been running interference for the Obama administration, touting TARP and related bailouts, the Federal Reserve’s money-printing efforts, and Obama’s “stimulus package” as necessary medicine for the economy’s ills. I read the column regularly. Perhaps my memory is failing, but I don’t recall Surowiecki ever suggesting that bankers should go to jail. Until now.
His column Bankers Gone Wild talks about big banks worldwide gaming the system that sets the London Interbank Overnight Rate [LIBOR] — in essence the banks were giving false information about interest rates, and this benchmark composite [i.e. LIBOR] affected profit and loss for many other financial contracts worldwide. Banks colluded in fudging the numbers, the story goes.
This kind of cheating appears to be systemic in the banking system, since in this case it was described openly in communications between bank traders and their colleagues.
How do we rein them in? We could start by making it harder for the banks to game the system—LIBOR, for instance, should be revamped so that it reflects actual market rates, not self-serving guesses. Then we need to admit that fraud is a crime and throw some people in jail.
Wow, real punishment for criminal conduct. What a concept! Now if we could only get CNN to talk about jailing big financial criminals, or better yet CBS, which actually still has a number of viewers.
Let’s say you’re one of the most important banking regulators in America, and you get word that some of the world’s biggest banks are manipulating an interest rate that affects borrowing costs throughout the economy. Do you: a) leap into action and not rest until the problem is solved, or b) write a strongly worded memo and then hope for the best?
President of the New York Federal Reserve, our current Treasury Secretary Tim Geithner chose (b), he wrote a memo about how to fix this benchmark, LIBOR, the interbank lending rate.
In addition to regulatory penalties, the 16 banks involved in the fraudulent skewing of interest rates, those who were harmed because they booked losses from contracts that were based on those interest rates may come back and sue the banks.
Additional coverage in this article: New York Fed’s Libor Documents Reveal Cozy Relationship Between Regulators, Banks
The New York Federal Reserve on Friday released documents showing it knew banks were manipulating a key interest rate more than four years ago.
The documents, which date back to 2007, show that the Fed became fully aware that banks were lying about their borrowing costs when setting Libor, and chose to take no action against them.
This is one of the fundamental benchmarks of the world economic order, and it has been found to be fraudulent, gamed, manipulated. So what else did regulators see, and look the other way?
Daily Beast writes:
Despite his populist posturing, the president has failed to pin a single top finance exec on criminal charges since the economic collapse.
Two months into his presidency, Obama summoned the titans of finance to the White House, where he told them, “My administration is the only thing between you and the pitchforks.”
The bankers may have found the president’s tone unsettling. Candidate Obama had been their guy, accepting vast amounts of Wall Street campaign money… Obama far outraised his Republican rival, John McCain, on Wall Street—around $16 million to $9 million. As it turned out, Obama apparently actually meant what he said at that White House meeting—his administration effectively would stand between Big Finance and anything like a severe accounting. To the dismay of many of Obama’s supporters, nearly four years after the disaster, there has not been a single criminal charge filed by the federal government against any top executive of the elite financial institutions.
The financial fraud in mortgage lending, securitization, and derivatives has been well-documented, and summarized by critics like Janet Tavakoli and William Black (who prosecuted fraud cases in the wake of the Savings & Loan crisis). William Black presented his case in 2009 on Bill Moyers Journal (click link for video) in a straightforward and easy-to-digest discussion of how the financial crisis was built on massive fraud.
Obama has been the best friend of the criminal fraction of the top 1% that the financial sector has ever seen.
Herman Cain calls the Occupy Wall Street protesters “un-American,” and further claims that bankers and others on Wall Street have created jobs.
Like most political rhetoric, this is half-true, on both counts. There is a large contingent of socialist and anti-capitalist, anti-free market sentiment in the protests. Since this has not been the historical orientation of our nation, it could reasonably be called un-American.
However, Americans do have a strong sense of justice, and they have a clear impression that they have been swindled by Wall Street. A combination of new laws, a repeal of regulations, and the refusal of government regulators to actually police Wall Street to ensure a free and fair market, led to an environment where fraud proliferated. When the inevitable result of Wall Street Ponzi schemes caused a near-breakdown of the entire financial system, taxpayers were left with the bill, while the Ponzi-creators took large bonuses, in the multi-million dollar range. At our expense.
To the extent that protesters want those who have deceived and stolen, and kept their ill-gotten gains, the protesters are not at all un-American.
Do Wall Street and the too-big-to-fail banks create jobs? Under the traditional role of the stock and bond markets, capital can be raised for companies from investors by the sale of new shares or bonds. If these funds are put to work expanding businesses in America, then certainly Wall Street and big banks have created jobs. But lately, Wall Street has turned increasingly to fraudulent schemes as sources of profit, instead of serving the traditional role in an honest capitalist system of money-raising for corporate investment in legitimate businesses providing needed (and profitable) goods and services.
Creating jobs is something that Wall Street has done and can continue to do. But when it is more profitable to lie, cheat, and steal, because the government will not enforce the laws against fraud, there is little resistance on Wall Street to conducting business by financial trickery. Ultimately this benefits no one but the perpetrators of the fraud (and their cronies in Congress and the regulator apparatus).
Wanting justice is not un-American. There is a specific series of dishonest practices which led to the financial meltdown. These will be explored in future tumblrs.