Ted Kaufman filled Joe Biden’s seat representing the state of Delaware in the United States Senate on January 15, 2009, when Biden resigned to serve as Vice-President. Kaufman’s 22-month term as Senator concluded on November 15, when Chris Coons was sworn in after defeating Christine O’Donnell in the 2010 election.
Senator Kaufman served as Chairman of the Congressional Oversight Panel – the entity created to monitor TARP on behalf of Congress. The panel’s November Oversight Report was released at the COP website with an embedded, five-minute video of Senator Kaufman’s introduction to the Report. At the DelawareOnline website, Nicole Gaudiano began her article about Kaufman’s term by pointing out that C-SPAN ranked Kaufman as the 10th-highest among Senators for the number of days (126) when he spoke on the Senate floor during the current Congressional session. Senator Kaufman was a high-profile advocate of financial reform, who devoted a good deal of effort toward investigating the causes of the 2008 financial crisis.
On November 9, Senator Kaufman was interviewed by NPR’s Robert Siegel, who immediately focused on the fact that aside from the Securities and Exchange Commission’s civil suit against Goldman Sachs and the small fine levied against Goldman by FINRA, we have yet to see any criminal prosecutions arising from the fraud and other violations of federal law which caused the financial crisis. Kaufman responded by asserting his belief that those prosecutions will eventually proceed, although “it takes a while” to investigate and prepare these very complex cases:
When you commit fraud on Wall Street or endanger it, you have good attorneys around you to kind of clean up after you. So they clean up as they go. And then when you actually go to trial, these are very, very, very complex cases. But I still think we will have some good cases. And I also think that if isn’t a deterrent, they will continue to do that. And I think we have the people in place now at the Securities Exchange Commission and the Justice Department to hold them accountable.
We can only hope so . . .
Back on March 17, I discussed a number of reactions to the recently-released Valukas Report on the demise of Lehman Brothers, which exposed the complete lack of oversight by the Federal Reserve Bank of New York — the entity with investigators in place inside of Lehman Brothers after the collapse of Bear Stearns. The FRBNY had the perfect vantage point to conduct effective oversight of Lehman. Not only did the FRBNY fail to do so — it actually helped Lehman maintain a false image of being financially solvent. It is important to keep in mind that Lehman CEO Richard Fuld was a class B director of the FRBNY during this period. Senator Kaufman’s reaction to the Valukas Report resulted in his widely-quoted March 15 speech from the Senate floor, in which he emphasized that the government needs to return the rule of law to Wall Street:
We all understood that to restore the public’s faith in our financial markets and the rule of law, we must identify, prosecute, and send to prison the participants in those markets who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.
* * *
Many have said we should not seek to “punish” anyone, as all of Wall Street was in a delirium of profit-making and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values. But this is not about retribution. This is about addressing the continuum of behavior that took place — some of it fraudulent and illegal — and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.
As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes.
The nagging suspicion that those nefarious activities at Lehman Brothers could be taking place “at other banks as well” became a key point in Senator Kaufman’s speech:
Mr. President, I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel. Enron engaged in similar deceit with some of its assets. And while we don’t have the benefit of an examiner’s report for other firms with a business model like Lehman’s, law enforcement authorities should be well on their way in conducting investigations of whether others used similar “accounting gimmicks” to hide dangerous risk from investors and the public.
Within a few months after that speech by Senator Kaufman, a weak financial reform bill was enacted to appease (or more importantly: deceive) the outraged taxpayers. Despite that legislative sham, polling results documented the increased public skepticism about the government’s ability or willingness to do right by the American public.
On October 20, Sam Gustin interviewed economist Joseph Stiglitz for the DailyFinance website. Their discussion focused on the recent legislative attempt to address the causes of the financial crisis. Professor Stiglitz emphasized the legal system’s inability to control that type of sleazy behavior:
The corporations have the right to give campaign contributions. So basically we have a system in which the corporate executives, the CEOs, are trying to make sure the legal system works not for the companies, not for the shareholders, not for the bondholders – but for themselves.
So it’s like theft, if you want to think about it that way. These corporations are basically now working now for the CEOs and the executives and not for any of the other stakeholders in the corporation, let alone for our broader society.
You look at who won with the excessive risk-taking and shortsighted behavior of the banks. It wasn’t the shareholder or the bondholders. It certainly wasn’t American taxpayers. It wasn’t American workers. It wasn’t American homeowners. It was the CEOs, the executives.
* * *
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
And that’s why, for instance, in our antitrust law, we often don’t catch people when they behave badly, but when we do we say there are treble damages. You pay three times the amount of the damage that you do. That’s a strong deterrent.
For now, there are no such deterrents for those CEOs who nearly collapsed the American economy and destroyed 15 million jobs. Robert Scheer recently provided us with an update about what life is now like for Sandy Weill, the former CEO of Citigroup. Scheer’s essay – entitled “The Man Who Shattered Our Economy” revealed that Weill just purchased a vineyard estate in Sonoma, California for a record $31 million. That number should serve as a guidepost when considering the proposition expressed by Professor Stiglitz:
If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
What are the chances of that happening?