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Obstruction of Justice

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Two years ago, I was inspired to write a piece entitled, “Justice Denied” after seeing hedge fund manager, David Einhorn interviewed by Charlie Rose.  I also discussed an essay Jesse Eisenger wrote for the DealBook blog at The New York Times entitled, “The Feds Stage a Sideshow While the Big Tent Sits Empty”.  The piece reinforced my suspicion that the “insider trading” investigation which received so much publicity in December of 2010 was simply a diversionary tactic to direct public attention away from the crimes which caused the financial crisis.

Since that time, a good deal of commentary has been written, lamenting the fact that no criminal charges have been brought against the miscreants who caused the financial crisis.  Unfortunately, Attorney General Eric Hold-Harmless has taken no action against those responsible, while the time for bringing those charges within the applicable Statutes of Limitations was allowed to tick away.

With the expiration of the relevant Statutes of Limitations, the next question becomes:  Does the failure to prosecute those cases rise to the level of obstruction of justice?  Although President Obama has repeatedly insisted that “no crimes were committed” which could have caused the financial crisis, we are now learning that such was not the case.

Jesse Eisenger recently wrote another piece for the Deal Book blog at the New York Times entitled, “Financial Crisis Lawsuit Suggests Bad Behavior at Morgan Stanley” which appeared on January 23.  In that essay, Eisenger discussed how the discovery process in civil lawsuits against the Wall Street Banks involved in the creation of the collateralized debt obligations (CDOs) based on subprime mortgages, revealed that those CDOs were known to be toxic at the time they were marketed.

The Naked Capitalism website has provided and excellent roadmap to the skulduggery involving the role CDOs played in causing the financial crisis.

Matt Taibbi has written another magnum opus on the financial crisis, this time focusing on sleazy conduct which took place after the meltdown.  In his article for Rolling Stone entitled, “Secrets and Lies of the Bailout”, we were reminded how the bank bailouts not only unjustly enriched the culprits who caused the problem – but they also provided the opportunity for those too-big-to-fail institutions to become even bigger while facilitating the cover-up of how the original mess occurred:

The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue.  Money wasn’t the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us.  And it was all done in the name of helping regular people and creating jobs.  “It is,” says former bailout Inspector General Neil Barofsky, “the ultimate bait-and-switch.”

Despite so many efforts to hide the truth from “the little people”, the truth is slowly leaking out as a result of the dogged investigation by journalists and bloggers.  As discovery proceeds in the civil lawsuits against the megabanks, revealing the extent of criminal activity which brought about the most catastrophic economic disaster since the Great Depression, people will begin to ask:  “How did they get away with this?”  Perhaps the best way to answer that question would be to bring criminal charges against those who allowed the perpetrators to get away with it.


 

Justice Denied

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A recent article written by former New York Mayor Ed Koch began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:

Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees.  The shocking truth is that those who did the damage are still in charge.  Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.

Most of us assumed that the Enron scandal had set a precedent for the prosecution of corporate financial crime.  A few Enron executives received prison sentences and the CEO, Ken Lay, died while serving time.  Enron’s auditor, Arthur Andersen & Company, was forced out of business.  In the wake of the Savings and Loan Crisis of the late 1980s, Charles Keating and a few of his associates were indicted by the State of California.  Keating eventually received a ten-year prison sentence for fraud, racketeering and conspiracy.  Keating’s prosecution resulted from pressure brought by William Black, former litigation director for the Federal Home Loan Bank Board.  At one point during Black’s investigation, Keating issued a written memo to one of his minions, with this directive:  “If you can’t get Wright and Congress to get Black . . .  Kill him dead.”

These days, William Black has been doing quite a bit of speaking and writing about the need to initiate criminal proceedings against the culprits responsible for causing the financial crisis.  On December 28, Black characterized the failure to prosecute those crimes as “de facto decriminalization of elite financial fraud”:

The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis.  While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders.  The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.

What has gone so catastrophically wrong with DOJ, and why has it continued so long?  The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals.

*   *   *

Our best bet is to continue to win the scholarly disputes and to continue to push media representatives to take fraud seriously. If the media demands for prosecution of the elite banking frauds expand there is a chance to create a bipartisan coalition in Congress and the administration supporting prosecutions.  In the S&L debacle, Representative Annunzio was one of the leading opponents of reregulation and leading supporters of Charles Keating.  After we brought several hundred successful prosecutions he began wearing a huge button:  “Jail the S&L Crooks!”  Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived.  It makes tens of thousands of documents detailing the frauds public.  It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds.  All of this increases the saliency of fraud and increases demands for serious reforms, adequate resources for the regulators and criminal justice bodies, and makes clear that elite fraud poses a severe danger.  Collectively, this creates the political space for real reform, vigorous regulators, and real prosecutors.

Hedge fund manager, David Einhorn (author of  Fooling Some of the People All of the Time) was recently interviewed by Charlie Rose.  At one point during the interview, Charlie Rose asked Einhorn to address the argument that regulators lacked the tools necessary for preventing the financial crisis.  Mr. Einhorn gave this response:

I would actually disagree with that.  I think that the problem was that the laws were not enforced.  After Enron you had Sarbanes Oxley.  And there have been hardly any prosecutions under Sarbanes Oxley.  You put in a tough anti-fraud law.  The CEO has to sign there is no fraud.

The CFO has to sign that the financial statements are correct.  If it’s not, there are going to be criminal consequences to all of this.  And the result was that effectively you passed a law but then they didn’t enforce the law.

And once the bad guys figured out that the law wasn’t being enforced, it effectively provided cover because everybody said, look we have the tough antifraud law.  The fraud must have gone away.

We often hear the expression “crime of the century” to describe some sensational act of blood lust.  Nevertheless, keep in mind that the financial crisis resulted from a massive fraud scheme, involving the packaging and “securitization” of mortgages known to be “liars’ loans”, which were then sold to unsuspecting investors by the creators of those products — who happened to be betting against the value of those items.  In consideration of the fact that the credit crisis resulting from this scam caused fifteen million people to lose their jobs as well as an expected 8 – 12 million foreclosures by 2012, one may easily conclude that this fraud scheme should be considered the crime of both the last century as well as the current century.

While many people have been getting excited about the “insider trading” investigation currently underway, I have been sitting here, wearing my tinfoil hat, viewing the entire episode as a diversionary tactic to direct public attention away from the crimes that caused the financial crisis.  Fortunately, I am not the only cynic with such an outlook.  Jesse Eisenger recently wrote a piece for the DealBook blog at The New York Times entitled, “The Feds Stage a Sideshow While the Big Tent Sits Empty”.  Here is some of what Eisenger had to say about the “insider trading” investigation:

In fact, plenty of people on Wall Street are happy about the investigation.  The ones with clean consciences like the idea that the world of special access to favorable tips is being cleaned up.

But others are pleased for a different reason:  They realize the investigation is a sideshow.

All the hype carries an air of defensiveness.  Everyone is wondering:  Where are the investigations related to the financial crisis?

John Hueston, a former lead Enron prosecutor, wonders, “Have they committed the resources in the right place?  Do these scandals warrant apparent national priority status?”

Nobody from Lehman, Merrill Lynch or Citigroup has been charged criminally with anything.  No top executives at Bear Stearns have been indicted.  All former American International Group executives are running free.  No big mortgage company executive has had to face the law.

There’s an old saying:  “Justice delayed is justice denied.”  The government has demonstrated that it is in no hurry to bring any significant criminal charges against the perpetrators of the crimes that caused the financial crisis.  With the passing of time, it becomes increasingly obvious that those crimes will go unpunished.  The cause of justice is simply no match for the ability of certain individuals to operate “above the law”.  In fact, it never has been.


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ObamaWatch

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June 14, 2010

Last week, I highlighted some criticism of Barack Obama’s presidency, which came from such unlikely sources as Maureen Dowd and Frank Rich of The New York Times, as well as Tony Norman of the Pittsburgh Post-Gazette.  The man whom I described as the “Disappointer-in-Chief” during his third month in office, has continued to draw harsh criticism from unlikely sources.  At this point, the subject pondered by many commentators concerns whether any of this dissatisfaction will stick long enough to have an impact on the mid-term elections and beyond.

If the President read Tim Dickenson’s recent essay for Rolling Stone, “The Spill, The Scandal and the President”, it must have been painful.  Mr. Dickenson didn’t pull any punches while explaining Mr. Obama’s role in the Deepwater Horizon disaster:

Like the attacks by Al Qaeda, the disaster in the Gulf was preceded by ample warnings – yet the administration had ignored them.  Instead of cracking down on MMS, as he had vowed to do even before taking office, Obama left in place many of the top officials who oversaw the agency’s culture of corruption.  He permitted it to rubber-stamp dangerous drilling operations by BP – a firm with the worst safety record of any oil company – with virtually no environmental safeguards, using industry-friendly regulations drafted during the Bush years.  He calibrated his response to the Gulf spill based on flawed and misleading estimates from BP – and then deployed his top aides to lowball the flow rate at a laughable 5,000 barrels a day, long after the best science made clear this catastrophe would eclipse the Exxon Valdez.

At the Naked Capitalism website, Yves Smith summed up a good number of the Obama Administration’s shortcomings in the first paragraph of her June 11 piece about the BP mess:

As readers may know, I’ve been consistently disappointed by the Obama Administration:  its faux progressive packaging versus its corporatist posture, its half-hearted, halting reforms which are noisily trumpeted as the real thing, its deep seated belief that public antipathy to its initiatives means it needs to work harder on selling its message, when it really needs a new strategy.

But the escalating disaster of the Gulf oil spill, and the unique constellation it presents, namely, a big, rich, isolated, foreign perp, which is largely if not solely responsible for the mess, in close proximity to contested mid-term elections, might actually rouse Obama to do something uncharacteristic, namely get tough.

This is by no means a likely outcome, but we are seeing some novel behaviors.  First is that Obama finally may have succeeded in getting someone important afraid of him.  This is a critically important lesson; Machiavelli told his prince it was much more important to be feared than loved.  Mere anger is often negotiation posturing or a manifestation of CEO Derangement Syndrome; fear is much harder to fake.  And BP is finally starting to get rattled.

In case you are wondering whether the President is still popular in Hollywood, The Hill recently turned to a couple of southern California bloggers to provide some insight as to whether Mr. Obama has begun to lose his sparkle in Tinsel Town.  John Nolte of Andrew Breitbart’s Big Hollywood blog expressed the belief that the President’s supporters in Hollywood have been keeping the faith:

If anything, Hollywood is worried about and for Obama.  Worried about the upcoming mid-terms, his re-election chances, his sliding poll numbers, and his gilded ship sailing off course and landing in Carter-ita-ville instead of Mt. Rushmore.

From the more left-leaning perspective, Deborah White of The Liberal OC blog gave us the impression that the President’s Hollywood supporters are becoming increasingly disappointed, although not yet disgruntled:

As of now, President Obama has not lost the support of most Hollywood liberals.  But Democrats in Hollywood are also no longer lavishing praise on Obama as they did in hopeful droves before his triumphant election.

Hollywood liberals no longer view Barack Obama as someone they blindly “want to follow… somewhere, anywhere” as pal George Clooney famously told Charlie Rose in early 2008.

Meanwhile, Maureen Dowd has continued with her unrestrained criticism of the President.  Her June 11 column must have irritated more than a few people on Pennsylvania Avenue:

The press traveling with Obama on the campaign never had a lovey-dovey relationship with him.  He treated us with aloof correctness, and occasional spurts of irritation.  Like many Democrats, he thinks the press is supposed to be on his side.

The patrician George Bush senior was always gracious with reporters while conveying the sense that what we do for a living was rude.

The former constitutional lawyer now in the White House understands that the press has a role in the democracy.  But he is an elitist, too, as well as thin-skinned and controlling.  So he ends up regarding scribes as intrusive, conveying a distaste for what he sees as the fundamental unseriousness of a press driven by blog-around-the-clock deadlines.

During the Presidential election campaign, Mr. Obama was often described as a “Rorschach test” — people saw in him whatever they imagined.  Now that the President has been able to disappoint his supporters, the criticism is gradually becoming increasingly harsh.  As frustration over the BP crisis, unemployment and the economy continues to build — the criticism voiced by those who voted for him is likely to become more caustic.