TheCenterLane.com

© 2008 – 2019 John T. Burke, Jr.

Another Slap On the Wrists

Comments Off on Another Slap On the Wrists

In case you might be wondering whether the miscreants responsible for causing the financial crisis might ever be prosecuted by Attorney General Eric Hold-harmless – don’t hold your breath.  At the close of 2010, I expressed my disappointment and skepticism that the culprits responsible for having caused the financial crisis would ever be brought to justice.  I found it hard to understand why neither the Securities and Exchange Commission nor the Justice Department would be willing to investigate malefaction, which I described in the following terms:

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.

During that same week, former New York Mayor Ed Koch wrote an article which 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.

“Accountability” is a relative term.  If you believe that the imposition of fines – resulting from civil actions by the Justice Department – could provide accountability for the crimes which led to the financial crisis, then you might have reason to feel enthusiastic.  On the other hand if you agree with Matt Taibbi’s contention that some of those characters deserve to be in prison – then get ready for another disappointment.

Last week, Reuters described plans by the Justice Department to make use of President Obama’s Financial Fraud Task Force (which I discussed last January) by relying on a statute (FIRREA- the Financial Institutions Reform, Recovery, and Enforcement Act) which was passed in the wake of the 1980s Savings & Loan crisis:

FIRREA allows the government to bring civil charges if prosecutors believe defendants violated certain criminal laws but have only enough information to meet a threshold that proves a claim based on the “preponderance of the evidence.”

Adam Lurie, a lawyer at Cadwalader, Wickersham & Taft who worked in the Justice Department’s criminal division until last month, said that although criminal cases based on problematic e-mails without a cooperating witness could be difficult to prove, the same evidence could meet a “preponderance” standard.

On the other hand, William K. Black, who was responsible for many of the reforms which followed the Savings & Loan Crisis, has frequently emphasized that – unlike the 2008 financial crisis – the S&L Crisis actually resulted in criminal prosecutions against those whose wrongdoing was responsible for the crisis.  On December 28, Black characterized the failure to prosecute those crimes which led to the financial crisis 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.

This isn’t (just) about revenge.  Bruce Judson of the Roosevelt Institute recently wrote an essay entitled “For Capitalism to Survive, Crime Must Not Pay”:

In effect, equal enforcement of the law is not simply important for democracy or to ensure that economic activity takes place, it is fundamental to ensuring that capitalism works.  Without equal enforcement of the law, the economy operates with participants who are competitively advantaged and disadvantaged.  The rogue firms are in effect receiving a giant government subsidy:  the freedom to engage in profitable activities that are prohibited to lesser entities.  This becomes a self-reinforcing cycle (like the growth of WorldCom from a regional phone carrier to a national giant that included MCI), so that inequality becomes ever greater.  Ultimately, we all lose as our entire economy is distorted, valuable entities are crushed or never get off the ground because they can’t compete on a playing field that is not level, and most likely wealth is destroyed.

Does the Justice Department really believe that it is going to impress us with FIRREA lawsuits?  We’ve already had enough theatre – during the Financial Crisis Inquiry Commission hearings and the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman’s “Fab Four” testified about selling their customers the Abacus CDO and that “shitty” Timberwolf deal.  It’s time for some “perp walks”.


 

wordpress stats

Obama Presidency Continues To Self-Destruct

Comments Off on Obama Presidency Continues To Self-Destruct

It’s been almost a year since the “Velma Moment”.  On September 20, 2010, President Obama appeared at a CNBC town hall meeting in Washington.  One of the audience members, Velma Hart, posed a question to the President, which was emblematic of the plight experienced by many 2008 Obama supporters.  Peggy Noonan had some fun with the event in her article, “The Enraged vs. The Exhausted” which characterized the 2010 elections as a battle between those two emotional factions.  The “Velma Moment” exposed Obama’s political vulnerability as an aloof leader, lacking the ability to emotionally connect with his supporters:

The president looked relieved when she stood.  Perhaps he thought she might lob a sympathetic question that would allow him to hit a reply out of the park.  Instead, and in the nicest possible way, Velma Hart lobbed a hand grenade.

“I’m a mother. I’m a wife.  I’m an American veteran, and I’m one of your middle-class Americans.  And quite frankly I’m exhausted.  I’m exhausted of defending you, defending your administration, defending the mantle of change that I voted for, and deeply disappointed with where we are.”  She said, “The financial recession has taken an enormous toll on my family.”  She said, “My husband and I have joked for years that we thought we were well beyond the hot-dogs-and-beans era of our lives.  But, quite frankly, it is starting to knock on our door and ring true that that might be where we are headed.”

The President experienced another “Velma Moment” on Monday.  This time, it was Maureen Dowd who had some fun describing the confrontation:

After assuring Obama that she was a supporter, an Iowa mother named Emily asked the president at a town hall at the Seed Savers Exchange in Decorah what had gone wrong.

*   *   *

“So when you ran for office you built a tremendous amount of trust with the American people, that you seemed like someone who wouldn’t move the bar on us,” she said.  “And it seems, especially in the last year, as if your negotiating tactics have sort of cut away at that trust by compromising some key principles that we believed in, like repealing the tax cut, not fighting harder for single-payer.  Even Social Security and Medicare seemed on the line when we were dealing with the debt ceiling.  So I’m just curious, moving forward, what prevents you from taking a harder negotiating stance, being that it seems that the Republicans are taking a really hard stance?”

President Obama can no longer blame the Republicans and Fox News for his poor approval ratings.  He has become his own worst enemy.  As for what Obama has been doing wrong – the title of Andrew Malcolm’s recent piece for the Los Angeles Times summed it up quite well:  “On Day 938 of his presidency, Obama says he’ll have a jobs plan in a month or so”.

Lydia Saad of the Gallup Organization provided this report on the President’s most recent approval ratings:

A new low of 26% of Americans approve of President Barack Obama’s handling of the economy, down 11 percentage points since Gallup last measured it in mid-May and well below his previous low of 35% in November 2010.

Obama earns similarly low approval for his handling of the federal budget deficit (24%) and creating jobs (29%).

*   *   *

President Obama’s approval rating has dwindled in recent weeks to the point that it is barely hugging the 40% line. Three months earlier, it approached or exceeded 50%.

The voters have finally caught on to the fact that Barack Obama’s foremost mission is to serve as a tool for Wall Street.  In Monday’s edition of The Washington Post, Zachary Goldfarb gave us a peek at Obama’s latest gift to the banksters:  a plan to provide a government guarantee of mortgage backed securities:

President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar with the matter.

The administration’s reaction to curiosity about the plan was a tip-off that the whole thing stinks.  Mr. Goldfarb’s article included the official White House retort, which was based on the contention that the controversial proposal is just one of three options outlined earlier this year in an administration white paper concerning reform of the housing finance system:

“It is simply false that there has been a decision to move forward with any particular option,” said Matt Vogel, a White House spokesman.  “All three options remain under active consideration and we are deepening our analysis around how each would potentially be implemented.  No recommendation has been made to the president by his economic advisers.”

And if you believe that, you might be interested in buying some real estate located in  . . .

Zachary Goldfarb explained the plan:

Fannie, Freddie or other successor firms would charge a fee to mortgage lenders and banks and use the money to create an insurance pool to cover losses on mortgage securities caused by defaults on the underlying loans.  The government would be the last line of defense in case of another housing market meltdown, using taxpayer money to cover losses only if the insurance pool ran dry.

The Washington Post report inspired economist Dean Baker to expose the ugly truth about this scheme:

It would be difficult to find an economic rationale for this policy other than subsidizing the financial industry. The government can and does directly subsidize the purchase of homes through the mortgage interest deduction.  This can be made more generous and better targeted toward low and moderate income families by capping it and converting it into a tax credit (e.g. all homeowners can deduct 15 percent of the interest paid on mortgages of $300,000 or less from their taxes).

There is no obvious reason to have an additional subsidy through the system of mortgage finance.  Analysis by Mark Zandi showed that the subsidy provided by a government guarantee would largely translate into higher home prices.  This would leave monthly mortgage payments virtually unaffected.  The diversion of capital from elsewhere in the economy would mean slower economic growth and would kill jobs for auto workers, steel workers and other workers in the manufacturing sector.

For these reasons, if President Obama was really against big government and job killing measures, he would oppose this new scheme to subsidize mortgage securitization.  On the other hand, if the goal is to ensure high profits and big salaries for top executives in the financial sector, then a government subsidy for mortgage securitization is good policy.

Frustration with the inevitability that the 2012 Presidential Election will ultimately become a choice between two corporatists has inspired a movement to encourage a Democratic Primary challenge to Obama.  The organization – StopHoping.org – is based on this simple objective:

The majority of U.S. citizens favor protecting Social Security, Medicare, and Medicaid; taxing the rich; cutting military spending; and protecting the environment.  We don’t have a candidate . . . yet.  Potential candidates supported on this site will be notified and encouraged to run.

I hope they succeed!


 

wordpress stats

Goldman Sachs In The Crosshairs

Comments Off on Goldman Sachs In The Crosshairs

Last December, I expressed my disappointment and skepticism that the culprits responsible for having caused the financial crisis would ever be brought to justice.  I found it hard to understand why neither the Securities and Exchange Commission nor the Justice Department would be willing to investigate malefaction, which I described in the following terms:

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.

Fortunately, the tide seems to have turned with the recent release of the Senate Investigations Subcommittee report on the financial crisis.  The two-year, bipartisan investigation, led by Senators Carl Levin (D-Michigan) and Tom Coburn (R-Oklahoma) has given rise to new hope that the banks responsible for causing the financial crisis – particularly Goldman Sachs – could face criminal prosecution.  Tom Braithwaite of the Financial Times put it this way:

The Senate report criticised rating agencies, regulators and other banks.  But Goldman has drawn particular focus.  Eric Holder, attorney-general, said this month the justice department was looking at the report “that deals with Goldman”.

Will Attorney General Eric Hold-harmless initiate criminal proceedings against President Obama’s leading private source of 2008 campaign contributions?  I doubt it.  Nevertheless, the widespread meme that no laws were violated by Goldman or any of the other Wall Street megabanks, is coming under increased attack.  Matt Taibbi recently wrote an excellent piece for Rolling Stone entitled, “The People vs. Goldman Sachs”, which took a humorous jab at those who deny that the financial crisis resulted from illegal activity:

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money.  We now know, unequivocally, that this is bullshit.  Goldman isn’t a pudgy housewife who broke her diet with a few Nilla Wafers between meals – it’s an advanced-stage, 1,100-pound medical emergency who hasn’t left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes.  If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana.  Caught, but still free:  above the law.

Taibbi focused on the easiest case to prosecute:  a perjury charge against Goldman CEO Lloyd Blankfein for his testimony before the Levin-Coburn Senate Subcommittee.  Blankfein denied under oath that his firm had a “short” position, betting against the very Collateralized Debt Obligations (CDOs) that Goldman had been selling to its customers.  As Taibbi pointed out, this conflict of interest was the subject of a book by Michael Lewis entitled, The Big Short.  At issue is the response Blankfein gave to the question about whether Goldman Sachs had such a short position:

“Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market.  The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008.  We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.”

As Tom Braithwaite explained in the Financial Times, Senator Levin expressed concern that Blankfein could defend a perjury charge, based on his use of the words “consistently or significantly” in the above-quoted response.  Levin’s concern is that those words could be deemed significantly equivocal as to prevent the characterization of Blankfein’s response as a denial that Goldman had such a short position.  Nevertheless, the last sentence of the response is an unqualified, compound statement, which could support a perjury charge:

We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.

I would be very amused to watch someone make the specious argument that Goldman’s $13 billion short position was not “massive”.

Meanwhile, New York Attorney General Eric Schneiderman is moving ahead to pursue an investigation concerning the role of the Wall Street banks in causing the financial crisis.  Gretchen Morgenson of The New York Times provided this explanation of Schneiderman’s current effort:

The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.

*   *   *

It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

*   *   *

The requests for information by Mr. Schneiderman’s office also seem to confirm that the New York attorney general is operating independently of peers from other states who are negotiating a broad settlement with large banks over foreclosure practices.

By opening a new inquiry into bank practices, Mr. Schneiderman has indicated his unwillingness to accept one of the settlement’s terms proposed by financial institutions – that is, a broad agreement by regulators not to conduct additional investigations into the banks’ activities during the mortgage crisis.  Mr. Schneiderman has said in recent weeks that signing such a release was unacceptable.

*   *   *

It is unclear whether Mr. Schneiderman’s investigation will be pursued as a criminal or civil matter.

Are the banksters running scared yet?  John Carney of CNBC’s NetNet blog, noted some developments, which could signal that some potential “persons of interest” might be seeking cover:

A Warning Sign:  CFOs Resigning

The chief financial officers of both Wells Fargo and Bank of America recently resigned.  JPMorgan Chase replaced its CFO last year.  While each of these moves has been spun as benign news by the banks, it could be a warning sign that something is deeply amiss.

Hope springs eternal!


wordpress stats