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Wednesday, May 07, 2014

Jon Stewart Compares 'Wall Street' Justice to 'Occupy Wall Street' Justice

AlterNet / By Cliff Weathers

The Daily Show Host and Samantha Bee compare the only two convictions resulting from the banking scandal.

With his tongue firmly implanted in his cheek, Jon Stewart mocked the mainstream media's stalwart defense of the banking industry last night. 

"As we all know, every since they innocently crashed our entire economy through purposeful and fraudulent activity, banks and the bankers who...bank them have weathered attacks from all quarters," Stewart teased before showing clips of Larry Kudlow, Stuart Varney and other pundits cheerleading for the banking industry. 

Stewart went on to compare the recent guilty plee of Credit Suisse banker Kareem Serageldin to the conviction of Occupy Wall Street protester Cecily McMillan. 

Serageldin admitted to looking the other way as his traders lied about the value of mortgage-backed securities, actions which helped lead to the economic meltdown in 2008. McMillan demonstrated against the banks as part of the Occupy protests in 2011. She was convicted of assaulting a New York City police officer by elbowing him after he grabbed her breast. Serageldin faces a 30-month sentence while McMillan faces up to seven years in prison. 

Stewart joked that with one banker and one Occupier behind bars, the two sides are now even.
The segment cut to Samanta Bee, reporting from New York's financial district. She corrected Stewart, saying the score between the two sides are not even: 

“Wasn’t this about the 99% against the 1%?” she joked. “That means that one banker is worth 99 protesters. And by my count, that puts us 98 convicted hippies short of true justice.”

It’s Good – no – Great to be the CEO Running a Huge Criminal Bank

By William K. Black

Every day brings multiple new scandals.  At least they used to be scandals.  Now they’re simply news items strained of ethical content by business journalists who see no evil, hear no evil, and speak not about evil.  The Wall Street Journal, our principal U.S. financial journal ran two such stories today.

 The first story deals with tax evasion, and begins with this cheery (and tellingly inaccurate) headline:

 “U.S. Banks to Help Authorities With Tax Evasion Probe.”  Here’s an alternative headline, drawn from the facts of the article: “Senior Officers of Goldman Sachs and Morgan Stanley Aided and Abetted Tax Fraud by Wealthiest Americans, Failed to Make Required Criminal Referrals, and Demanded Immunity from Prosecution for Themselves and the Banks before Complying with the U.S. Subpoenas: U.S. Department of Justice Caves in to Banker’s Demands Continuing its Practice of Effectively Immunizing Fraud by Most Financial Elites.”

Oh, and the feckless DOJ (again) did not require any officer who committed the felony of aiding and abetting tax fraud to resign or to repay the bonuses he “earned” through his crimes.  But not to worry, the banks – not the bankers – may have to pay fines as the cost of doing their felonious business.  The feckless regulators did not even require Goldman Sachs and Morgan Stanley to disclose to shareholders their participation in the program.

Best of all, the “cooperation” the banks will offer will be of vastly reduced value because under Swiss law they will not report the names or any identifying information of the wealthy U.S. taxpayers that they helped commit felonies.  But not to worry says DOJ:
“’Through the program, as well as through ongoing investigations and other law enforcement tools, we are confident that we will obtain information that will lead us to account holders who have thought for too long that they can keep hiding,’” said Dena Iverson, a Justice Department spokeswoman.
And did I mention that there was an U.S. amnesty program for wealthy U.S. tax cheats who used Swiss banks to commit their felonies?

Note that this aspect of Switzerland’s deliberate national policy of aiding tax evasion by the world’s wealthiest tax cheats fits into the article I wrote earlier this week about Dr. Hans Geiger’s rage that FATF is seeking to require banks to make criminal referrals against tax cheats.  Geiger is a leader in a Swiss movement to block that requirement.  He has also written that requirements that the banks file criminal referrals when they discover evidence indicating that they may have aided money laundering, the funding of terrorists, or international sanctions busting should be eliminated.

The Ethics-Free WSJ Story on the Regulator’s Latest Betrayal of Homeowners

The context of this WSJ story is the broader series of betrayals of homeowners by the regulators and prosecutors led initially by Treasury Secretary Timothy Geithner and his infamous “foam the runways” comment in which he admitted and urged that programs “sold” as benefitting distressed homeowners be used instead to aid the banks (more precisely, the bank CEOs) whose frauds caused the crisis.  The WSJ article deals with one of the several settlements with the banks that “service” home mortgages and foreclose on them.  Private attorneys first obtained the evidence that the servicers were engaged in massive foreclosure fraud involving knowingly filing hundreds of thousands of false affidavits under (non) penalty of perjury.  As a senior former AUSA said publicly at the INET conference a few weeks ago about these cases – they were slam dunk prosecutions.  But you know what happened; no senior banker or bank was prosecuted.  No banker was sued civilly by the government.  No banker had to pay back his bonus that he “earned” through fraud.

Naturally, the WSJ provides none of that context, but what the article does discuss remains a travesty.  It is entitled “GAO: U.S. Foreclosure Review Could Have Generated Higher Payments: Review Could Have Delivered $1.5 Billion More to Consumers if Not Halted, Federal Watchdog Finds.”

I’ve added emphasis to the dishonest euphemisms the WSJ employs (and quotes) for the “f” word (fraud).
  • “The Government Accountability Office, in a report being released Tuesday, evaluated federal bank regulators’ decision last year to cancel a prolonged review of foreclosure-processing and loan-assistance mistakes.”
  • “The GAO report shows that the settlement ‘was reached without adequate investigation into the harms committed by the servicers,’ Rep. Maxine Waters (D., Calif.) said in a prepared statement.”
  • “‘Many of the files did not contain complete data, making it impossible to know whether borrowers were disqualified from the possibility of the greatest cash payouts’ [the WSJ quoting Water’s prepared statement].”
  • But finishing this process would have been a long and complicated affair. Doing so, the GAO said, would have taken up to two more years for consulting firms to scour thousands of foreclosure files for errors, at a cost to banks of about $4.6 billion.
  • The foreclosure review was ordered three years ago by the Office of the Comptroller of the Currency and the Federal Reserve, which told banks to hire independent consultants to evaluate allegations the firms used shoddy practices when handling a huge volume of foreclosures during the housing bust.
Sadly, I tend to read the underlying documents and the truly bad news is that the GAO report uses the “f” word only once and is otherwise a mass of euphemisms.  This sentence will give you an accurate flavor of the Report.
“In September 2010, allegations surfaced that several servicers’ documents in support of judicial foreclosure may have been inappropriately signed or notarized” [GAO 2014: 7, emphasis added].
In addition to the euphemisms and the fact that the sentence reads like it was written by the banks’ criminal defense counsel, it is a sentence crafted to mislead.  By that time there were sworn statements by a series of servicer personnel admitting that their offices engaged in systematic foreclosure fraud through filing affidavits that were known to be false.  They admitted to tens of thousands of criminal acts by their organizations.

The one time the GAO uses the word fraud is to report that the foreclosure payout program carefully protects itself from fraud by the victims – by providing that the checks expire after 90 days [GAO 2014: 34 n. 51].  In a very dark Irish humor kind of way I find this hysterically funny.  By contrast, when the GAO discusses real frauds the passage again reads as if it were drafted by the bank’s criminal defense lawyers.
“Failure to review documents filed in support of a judicial foreclosure may violate consumer protection and foreclosure laws, which vary by state and which establish certain procedures that mortgage servicers must follow when conducting foreclosures” [GAO 2014: 7 n.13].
Everyone involved in the faux foreclosure review – the “consultants” hired who to do the review, the mortgage servicers, the (non) regulators, and the GAO performed abysmally.  The “review” was an expensive farce.  The regulators did not conduct the review.  The servicers did not conduct the review.  The consultants were chosen by the servicers, which the regulators should never have allowed.  The consultants were allowed to have additional conflicts of interest such as having worked on the loan foreclosures they were reviewing.  The “design” of the (non) study was an embarrassment.  The (non) study collapsed almost immediately because it turned out that many of the servicers’ files were so pathetic that the study “design” could not be followed.  Rather than stop and reconsider the implications of those file defects for the likelihood that the servicers engaged in fraud in order to foreclose the regulators decided to continue.  The more severe the file defects the greater the incentive of servicers to engage in foreclosure fraud.

The consultants were soon hopelessly behind schedule and budget because of the severity of the loan file defects.  Eventually, the (non) regulators gave up and brought the (non) study to an end, not with a bang but with a whimper.  Real regulators would have had great negotiating leverage.  The servicers had agreed to conduct the study and failed.  It would cost the servicers more to complete the review than simply boost the payout by several billion dollars.  The two obvious answers were to continue the study and order interim payouts or to stop the study and in return for a significantly larger payout to homeowners.  Naturally, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve found a third, far worse choice.  They left the cash on the table that could have gone to the homeowners.  The GAO was no stronger.  They do agree that the OCC and the Fed left billions on the table but they also give them a pass, saying that the settlement is in the “range” that would emerge from the regulators assumed rate of bad foreclosures.  The problem, as the facts disclosed in the GAO’s report make clear, but GAO’s analysis ignores, is that the regulators’ assumed rate of bad foreclosures had no reliable basis and was proven to be far too low an estimate by the fact that the loan files were so incomplete that the consultants could not complete the study.

  So, there is no reliable basis for GAO’s claim that there is any “range” of reasonableness for the payments to homeowners.  This passage from the GAO report conveys the GAO and the regulators’ unique approach to (non) quantification.
• Failure to maintain sufficient documentation of ownership. Although the 2010 coordinated reviews found that servicers generally had sufficient documentation authority to foreclose, examiners noted instances where documentation in the foreclosure file may not have been sufficient to prove ownership of the mortgage note. Likewise, during the subsequent consent order file reviews, some consultants found cases of insufficient documentation to demonstrate ownership [GAO 2014: 55].
“Generally,” “instances,” and “some consultants found cases” – billions of dollars were spent to produce nothing but these useless, vague phrases.  The “study” “results” were so worthless that the GAO reports that the consultants did not even bother to create reports on their work.  Instead, and this is hilarious, the OCC and the Fed held “exit interviews” with the consultants.  Only a PR “expert” planning to put lipstick on a wild boar would spend even more money on such a useless exercise.”  The GAO tells us that many of the regulators’ exam teams given the exit interview materials concluded that they were useless.

Representative Maxine Waters, the ranking Democrat on the House Financial Services Committee, has been trying to get the regulators to do the right thing and has urged the chairman of the committee to investigate the servicers’ and regulators’ actions.  Waters has been, rightly, extremely critical of the servicers and the regulators.  Here is the link to an interview of her that is well worth reading in its entirety.

Postscript: The WSJ op ed’s Ode to Insider Trading

Henry Manne is back.  The WSJ published his op ed on same day these other two stories ran.  Manne ran the effort for decades to indoctrinate judges and law professors in theoclassical economics.  Manne’s metaphor is that insider trading is like prohibition.

Manne’s op ed asserts that insider trading cases target “low level functionaries.”  Manne’s so-called “low level functionaries” consist of millionaires and multi-millionaires that include the head of a major hedge funds and a senior official at Goldman Sachs.
“We see federal prosecutors making names for themselves by convicting mostly low-level functionaries. We see the so-called corruption of otherwise good folks, including medical researchers and high-tech specialists, with valuable information. Yet with so much wealth at stake, this ‘corruption’ surely goes far beyond what prosecutors have been able to demonstrate.”
Manne’s point is that if business officials have an incentive to cheat they will.
“There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world’s stock exchanges waiting for an ‘edge.’”
To use Manne’s metaphor, Wall Street is manned by alcoholics who are so addicted to greed and so devoid of ethics that Manne says it is impossible to deter them from committing these felonies even if you put hundreds of them in prison.
“The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope. The payoffs are too big and too accessible and the number of willing players too great for the practice to be significantly inhibited by scores of convictions.”
So, the financial industry is run by alcoholics who are so addicted to greed that they think they have the right to profit personally from confidential corporate information – and Manne’s answer is to roll out the keg and shout “drinks for everyone.”  Manne provides another proof of one of our family rules: it is impossible to compete with unintentional self-parody.

Is anyone on Wall Street horrified by Manne’s “defense” (indictment) of them?  Now would be a good time for you to take a public stand and lead a long-term public campaign to clean up the Street.

Fundamentals of Shadow Banking: Dealer Model

Dr. Perry Merhling presented this seminar at UMKC on 4/30/14. He presented on the Shadow Banking System, in particular, the Dealer Model. The slides are immediately below the video.

Tuesday, May 06, 2014

Why Does Refusing to Put Fraudulent Banks into Receivership Help the Economy?

By William K. Black

Conservative economists love “creative destruction.” They can’t wait to “get their Schumpeter on” when a business fails and thousands of workers lose their jobs. There is no more “creative destruction” conceivable than when we put a bank that has become a fraudulent enterprise into receivership, remove the controlling officers leading the fraud, and sell the bank through an FDIC-assisted acquisition. Indeed, the pinnacle of creative destruction would be doing this with a systemically dangerous institution (SDI) through a process that split the supposedly “too big to fail” bank into smaller components that (1) were no longer large enough to pose a systemic risk, (2) were more efficient than the bloated SDI, (3) no longer extorted a large (implicit) government subsidy that made real competition impossible, and (4) no longer had dominant political power via crony capitalism. Unlike the situation in which an SDI collapses suddenly in the midst of causing a global crisis when its frauds cause a liquidity crisis, it is vastly easier to put fraudulent SDIs in receivership in today’s circumstances. Unlike Arthur Anderson, the receivership power allows us to keep the enterprise alive and create more competitors rather than fewer.

As I often remarked, it is a testament to the financial and moral sophistication of our successors as financial regulators relative to our primitive era that they have realized that keeping fraudulent CEOs in charge of our largest banks – and virtually never putting such banks into receivership however massive and damaging their serial felonies – is the key to achieving financial stability. Their system, it must be admitted, has proven far superior. GDP losses are merely far more than 100X greater in the current crisis than in the savings and loan debacle. The jihad against effective regulation and prosecution of elite control frauds has been an enormous success. The primary question is whether to classify the resultant epidemics of accounting control fraud as “unintended consequences” of the three “de’s” (deregulation, desupervision, and de facto decriminalization) or as a very “intended consequences.”

I am deliberately violating the fundamental guild rules of theoclassical economists by using the “f” word, by noting that negative “unintended consequences” are the norm when we employ the three “de’s,” and that elite CEOs who use corporate power to produce the three “de’s” frequently intend to use the resultant criminogenic environment to defraud with impunity. It is verboten under guild rules to use the “f” word, to point out that the key to understanding our financial crises is that it is the CEO’s perverse incentives rather than “the bank’s incentives” that matter, to discuss the role of power, to point out that elite class status is important, and to point out that fraudulent CEOs often intend the negative consequences of the three “de’s.” In sum, theoclassical economics is a faith-based creed devoted to the worship of (and service to) the wealthy, particularly elite frauds. They are, of course, well compensated for championing the causes, and puffing the fragile egos, of the fraudulent plutocrats. I mean this literally. George Benston, Daniel Fischel, and Alan Greenspan were three of Charles Keating’s most valuable fraud allies. Lanny Breuer’s infamous “lamentations” speech (while head of DOJ’s Criminal Division) underscored how he fell hook, line, and sinker for the absurd claims of economists hired by today’s most elite fraudulent banksters that banks (and bankers!) should be “too big to prosecute.” By Breuer’s own bumbling admission, he lay awake at night for fear that his (always hypothetical) prosecutions of the major banks might “cause” a fraudulent bank to “fail.” This is, of course, heresy under the Schumpeterian creed of “creative destruction,” but theoclassical economists are very forgiving of their co-religionists who get rich by spreading heresy in the service of fraudulent elites.

Breuer was so bad that he obscured what we primitive regulators and white-collar criminologists had emphasized for decades. First, no banker is “too big to jail.” They are easily replaceable and removing a fraudulent bank CEO from power is the single most productive act that regulators and prosecutors can accomplish. Breuer and Attorney General Eric Holder were involved in a con when they claimed that their failure to prosecute the senior bank officers leading the frauds was in any way related to “too big to fail.” Hilariously, they even applied the “rationale” for non-prosecution to former bank officers – as if a bank would fail “because” its former officers were prosecuted. It is a testament to the weakness of the reportage that this claim was not treated with ridicule.

Second, valid fraud prosecutions do not “cause” a business to fail. The fraud causes them to fail. They should fail when their “profits” arise from fraud. In particular, they should fail in the case of accounting control fraud because their “profits” are the fictional product of accounting fraud. The markets and the economy are greatly improved when fraudulent enterprises are destroyed. There is no more creative form of destruction than removing the frauds that drive the Gresham’s dynamics that cause markets to become so perverse that “bad ethics drive good ethics out of the markets” (and professions).

Third, very little is actually “destroyed,” when we place a fraudulent bank in receivership, fire the crooked CEO, and sell the bank to an acquirer of integrity and competence. The new bank will, net, be greatly improved because it has been freed from control by the fraudulent leadership that was “looting” the bank (George Akerlof and Paul Romer, 1993, “Looting: The Economic Underworld of Bankruptcy for Profit”).

Fourth, there is rarely a need to prosecute a bank. In virtually every case in which the bank’s frauds cause serious harm senior officers of the bank will have led the fraud and profited from it. Everyone in law enforcement realizes that any effective deterrence will come from prosecuting those officers and not only removing their fraud proceeds but also imposing fines that will leave the officers bankrupt.

Fifth, the bank’s controlling officers are in an immense conflict of interest when their frauds are detected. They control the bank and its resources. Their first priority is to prevent their own prosecution. Their second priority is to prevent any substantial “claw back” of their compensation. Their third and fourth priorities are to do the same for less senior officers. This isn’t altruism (though it certainly has an aspect of class-based affinity). Fraudulent CEOs realize that it is risky to allow the prosecutors to gain any leverage over more junior officers who may “flip” and testify against the CEO. The fraudulent officers controlling the bank, therefore, will gladly trade seemingly huge fines in exchange for obtaining their top four priorities.

Sixth, Holder and Breuer were delighted by that trade. They got to report record fines without having to try a single major criminal case against the fraudulent bankers who led the fraud epidemics that caused the financial crisis. Breuer “declared victory and went home” (to Covington & Burling).
Seventh, under the Geithner-Breuer-Holder (GBH) doctrine the fines sought against the SDIs were guaranteed to be large in absolute dollar terms – and non-threatening in real terms. The GBH doctrine compels that result because the rationale is that we must take no regulatory or prosecutorial action that poses any conceivable risk of imperiling an SDI lest we trigger the next global financial crisis.

 This means that DOJ (non) prosecutors had very little negotiating leverage because they could not credibly threaten to enforce the rule of law against SDIs (particularly with a boss like Lanny Breuer lying awake at night in fear that he would be blamed for the next global crisis). Fortunately for DOJ, the SDIs are so enormous (as are the bailouts they received) that their officers can agree to fines that sound large but represent merely a (none-too-high) price of doing fraudulent business. The GBH doctrine is intensely criminogenic. It produces what Akerlof and Romer warned was the “sure thing” of CEO “looting” through accounting control fraud plus the assurance that the CEO will not be prosecuted, forced to surrender his fraud proceeds, or forced to pay fines that bankrupt him.

Unsurprisingly, the result has been unprecedented accounting control fraud by elite banksters.

DOJ’s New Strategy of Aggressive Press Leaks

To review the bidding, the appraisers warned three administrations (Clinton, Bush, and Obama) that there was an epidemic of appraisal/mortgage fraud led by the lenders. That warning began, in writing, in 2000 – before Enron failed! The Financial Crisis Inquiry Commission (FCIC) Report emphasizes the point.
“From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets” (FCIC 2011:18).
It took two years to form this “coalition of appraisal organization,” agree on a common strategy, agree on a common text of the petition, and create the web site for the petition. That means that one of the three great epidemics of accounting control fraud that drove the crisis was already sufficiently severe by 1998 that it had been identified as a severe threat 16 years ago. During the 14 years since the appraisers began issuing their public warnings to the (non) regulators and the mortgage industry there have been zero prosecutions of any of the elite bankers for leading the three epidemics of accounting control fraud that drove the financial crisis and the Great Recession. During the decade 1998-2008, the banking regulatory agencies have not publicly identified a single criminal referral they made in response to the three most destructive financial fraud epidemics in history. The anti-regulators literally destroyed the criminal referral process that had once been so effective in prosecuting frauds by senior bank officers. A Pulitzer Prize awaits the investigative journalist who researches who ordered that destruction and when, why, and how it was accomplished. A second prize awaits the reporter who investigates why the Obama administration failed to make its resurrection a major policy initiative that it would tout.

The Bush and Obama administration have already allowed the statute of limitations to run on vast numbers of frauds led by the CEOs of mortgage bankers and the 10 year statute of limitations applicable to federally insured banks (which we obtained in response to the S&L debacle) is rapidly running. The recent DOJ IG report documented the hollow nature of the FBI investigations related to the crisis. Even when the statute of limitations has not run it becomes very difficult to try “old” cases because of the loss of documents and memory and the feeling of judges and juries that the matter cannot have been terribly grave if the FBI ignored it for eight years. Even if Holder had a “Road to Damascus” conversion today and tried to prosecute the elite bank frauds that drove the crisis he would be far too late. The DOJ will commit its greatest strategic failure to uphold the rule of law.

 That does not mean that it could not bring a dozen prosecutions against the most destructive and fraudulent bank CEOs during the waning years of the Obama administration, but there is no evidence that the FBI is even investigating those frauds.

Instead, Holder has given up on prosecuting the CEOs that led the frauds that caused our crisis. The new DOJ press leak indicates that DOJ may charge two foreign banks with committing frauds unrelated to the financial crisis. This is hardly a major accomplishment, but it is all that Holder can bring himself to do so it was ballyhooed in “Deal Book” under this sad title “2 Giant Banks, Seen as Immune, Become Targets.”

One might think that DOJ would be mortified that the Nation’s paper of record would put in print that DOJ has operated for over a decade in a manner in which the SDIs are “seen as immune,” but no, DOJ is immune to embarrassment over its policy of granting de facto immunity to elite bankers and banks from the rule of law. The article offers these damning passages about the GBH Doctrine.
“In doing so, prosecutors are confronting the popular belief that Wall Street institutions have grown so important to the economy that they cannot be charged. A lack of criminal prosecutions of banks and their leaders fueled a public outcry over the perception that Wall Street giants are ‘too big to jail.’
Addressing those concerns, prosecutors in Washington and New York have met with regulators about how to criminally punish banks without putting them out of business and damaging the economy, interviews with lawyers and records reviewed by The New York Times show.
The new strategy underpins the decision to seek guilty pleas in two of the most advanced investigations: one into Credit Suisse for offering tax shelters to Americans, and the other against France’s largest bank, BNP Paribas, over doing business with countries like Sudan that the United States has blacklisted. The approach applies to American banks, though those investigations are at an earlier stage.”
“Earlier stage” is a euphemism for “we cannot admit that we only go after foreign banks.” The article eventually refers to one investigation involving a U.S. bank (Citi) – the operations of its Mexican subsidiary. So, if it happens abroad the new DOJ doctrine is that it might ask for a guilty plea from a bank that commits thousands of felonies. To which one must begin by saying: “good.” We would be happy to learn that there is some level of endemic crime by elite foreign bankers, motivated by the worst motives, rising to the level of an important part of the CEO’s strategic plan, and producing staggering harm that even Holder will no longer allow to occur with total impunity. That would be progress. It is pathetic that DOJ admits to reporters that doing so will require them to adopt a “new strategy.” When I worked for DOJ if I had asked for a meeting with my boss to urge him to announce that we were adopting a “new strategy” of enforcing the law against fraudulent bankers and banks he would have referred me to a psychiatrist. No one at DOJ had ever heard of the concept that the rule of law did not apply to everyone.

Deal Book tries to turn this pathetic tale into a new legend of bold prosecutors and regulators. In this telling the OCC head, a leading apologist for Wall Street, is recast as “Thomas J. Curry, a frequent critic of Wall Street.” Hold on to your seats, Deal Book is veering into an alternative universe. I know it has been a very, very long time since the Nation has appointed a real banking regulator to lead an agency, but consider the implications (for regulation and journalism) of this passage in which Deal Book is trying to force Curry into the mold of a tough regulator. Here is the context of Deal Book’s remarks about Curry.
“At a meeting last September, a top federal regulator vowed not to interfere if Mr. Bharara obtained a guilty plea from JPMorgan Chase over its ties to Bernard L. Madoff, according to the lawyers and records of the meeting. But the regulator, Thomas J. Curry, a frequent critic of Wall Street, warned that federal law might require him to reconsider JPMorgan’s charter if the bank was convicted of a crime.
The discussions with regulators, recounted in interviews with the lawyers and in records obtained through a Freedom of Information Act request, offer a lens into the political and legal minefields that prosecutors navigate when investigating big banks. The interviews also demonstrate that defense lawyers continue to push prosecutors not to act without assurances that regulators will keep a bank in business.
In a recent speech to Wall Street lawyers, Mr. Bharara said this dynamic created a ‘gaping liability loophole that blameworthy companies are only too willing to exploit.’
He noted that regulators often possessed many of the same facts, including emails and documents, that underpin a criminal case. The prosecutors and regulators, he said, need to ‘work in concert.’”
Deal Book does not understand the true, revealing implications of these passages.
  • DOJ is now admitting that from 2009-2014 it operated under the old GBH “strategy” (aka its unilateral disarmament doctrine) of not prosecuting elite banks or bankers even when they committed massive frauds that endangered public safety (HSBC), national security (Standard Chartered), and the global economy (all the SDIs) – and failed even to recover the bankers’ fraud proceeds. Consider how damning DOJ’s assessment is of the costs of DOJ’s unilateral disarmament. “Mr. Bharara said this dynamic created a ‘gaping liability loophole that blameworthy companies are only too willing to exploit.’” I have only one friendly amendment to Bharara’s assessment – it should read “bankers exploit.” The bankers’ frauds will frequently involve looting the bank. Bharara’s prosecutions of insider trading largely involve frauds that made hedge funds more profitable, but I’m sure he would agree with my friendly amendment were he to consider the matter.
  • DOJ is blaming the GBH Doctrine on the (anti) regulators, with the unstated implication that it came from Geithner. Note that in prior articles Geithner and his fellow anti-regulators have pushed back on this conclusion by saying that DOJ makes the sole decision whether to prosecute. Both statements are almost certainly true – the anti-regulators warn of doom and say that they cannot promise that prosecuting would not cause a global catastrophe. DOJ, inevitably when run by the likes of Mukasey, Holder, and Breuer, decides not to prosecute given the anti-regulators’ (absurd) claims that prosecuting bankers would cause the world’s economy to collapse.
  • None of this explains why they don’t prosecute bankers (much less ex bankers)
  • Curry “vowed not to interfere” if DOJ prosecuted JPMorgan – “interfering” with a prosecution is normally a felony (“obstruction of justice”). This is what passes for toughness in a regulator today? To rephrase it in English: Curry: “I won’t try to prevent a successful prosecution of a bank that I know has engaged in over a dozen massive felonies.”
  • I guess it would sound odd to Curry, but as regulators we did everything possible to encourage, indeed demand, that DOJ prosecute fraudulent banks and bankers. We did so even when it might impair recovery under our civil suits.
  • And speaking of JPMorgan, Madoff, and obstruction of justice. Banks have a duty under the rules to make criminal referrals when they find “suspicious activities” indicative of likely fraud. JPMorgan found copious evidence that Madoff was running a Ponzi scheme – and reportedly refused to file a criminal referral. When the OCC examiners tried to access JPMorgan’s evidence about Madoff’s frauds JPMorgan reportedly refused to give the examiners access. The bank examiners have a right to access such information, and JPMorgan has a duty to provide that access. The OCC’s IG sought DOJ support to enforce a subpoena – and DOJ reportedly refused to enforce the subpoena to get the information. JPMorgan, DOJ, and the OCC (before and during Curry’s reign) have been interacting in a manner that has allowed Jamie Dimon and Madoff to become apex predators. Madoff’s frauds had nothing to do with causing the crisis. JPMorgan’s frauds were vastly larger and at the core of causing the crisis. Guess which one gets prosecuted.
  • The entire “I might be forced to pull JPMorgan’s charter if you prosecute” meme was a deliberately disingenuous threat of self-mutilation by Curry designed to prevent the prosecution of JPMorgan. There was zero chance that Curry would have pulled JPMorgan’s charter.
  • Let’s, solely for purpose of analysis in this bullet point, go with Deal Book’s tale of Curry the fierce critic of Wall Street eager to bring its controlling officers to justice. Put yourself in the place of Deal Book’s Curry the Conqueror. You are critical of Wall Street because its CEOs have led the three most destructive epidemics of financial fraud in world history and those fraud epidemics hyper-inflated the bubble, caused the financial crisis, and caused the Great Recession. You are determined to clean up Wall Street and you do not care about career repercussions. You detest the “too big to fail” concept and you know that JPMorgan poses a grave systemic danger, is vastly too large to be managed efficiently, and receives a massive (implicit) federal subsidy that makes “free market competition” impossible in banking. DOJ is willing to bring a criminal case against JPMorgan and many of its senior officers. You are overjoyed and fully supportive of the prosecution. Indeed, one of the grounds for placing JPMorgan in receivership is “violations of law.” You encourage the prosecution. You “detail” your best examiners to assist the FBI so that they can serve as their internal banking experts and have access to Grand Jury materials under Rule 6 (e). You prepare the receivership recommendation for JPMorgan and the civil suits and enforcement actions against its culpable leaders. Then you and DOJ have a “come to Jesus” meeting with JPMorgan’s board (which is controlled by Dimon rather than the other way around). And you become the man that restored the rule of law, the possibility of real competition, and demonstrated that the largest bank in the world and its leaders could no longer commit frauds with impunity. You end JPMorgan’s record of well over a decision massive frauds under Dimon’s rule.
The thing you would never do if you were the Curry gussied up for Deal Book’s rousing tale of tough regulation is whine “I might have to pull JPMorgan’s charter.” Deal Book’s fictional Curry was a bravely seasoned and spicy meal rich in garam masala. The real Curry is a pale imitation that fears to offend through any bold ingredients.
  • It is not our job as regulators to “keep a bank in business.” It is our paramount job as regulators to place banks that commit serious felonies led by the controlling officers in receivership. DOJ does not have to worry about creating some new means “to criminally punish banks without putting them out of business and damaging the economy.” A receivership does not have to “put [a bank] out of business.” What it does do is put the corrupt controlling officers out the business of looting the bank. That helps the economy. Indeed, it is the single most important thing we do as regulators that helps the economy.
  • There are no “political and legal minefields that prosecutors navigate when investigating big banks.” DOJ has ample legal authority to investigate banks. They cannot credibly claim that there is any “legal minefield.” The Swiss do sometimes seek to obstruct U.S. criminal investigations, but that is not a “legal minefield” and the U.S. wins these disputes if we are resolute.
What is the “political … minefield” that prosecutors today feel must be “navigate[d]” if they wish to investigate “big banks?” That would be a fascinating subject for Deal Book to explain, though it would have the danger of pushing them to discuss ethics. (Yes, this Deal Book story is again an ethics-free zone.) I know people will consider me naïve when I say this, but I believe there are no “political minefields” that DOJ must “navigate” “when investigating big banks.” I think it is all an excuse. I doubt seriously that during this crisis DOJ or Curry has ever been called in by the Speaker of the House and yelled at and cursed for moving to remove a fraudulent CEO controlling Vernon (aka Vermin) Savings or had five U.S. Senators try to pressure them not to take an action against Lincoln Savings. My colleagues and I are actually not naïve about real political minefields. We took our advice from that popularly (and almost certainly inaccurately) attributed to Rear Admiral Daniel Farragut at the battle of Mobile: “Damn the torpedoes! Full speed ahead! (The torpedoes he was referring to were naval mines.)
The most destructive “political … minefields” restricting the action of regulators, prosecutors, and members of the armed services are often those that exist only in our own imaginations and fears. Bold action against those that imagine they are immune from accountability is essential. The SAS motto captures this quality: “Who Dares Wins.” (Yes, “bold” and “daring” are not sufficient, you also have to plan and do excellent investigations.)
  • Bharara’s final comment is the most depressing evidence of the abject failure of the Bush and Obama administrations. They have refused to even do the most basic things, which are not even controversial, that are essential to success in prosecuting epidemics of bank fraud.
“[Bharara] noted that regulators often possessed many of the same facts, including emails and documents, that underpin a criminal case. The prosecutors and regulators, he said, need to ‘work in concert.’”
My readers know at what length I have made the point that criminal referrals by the regulators are the absolute requisite to success against substantial fraud by elite bankers and that the referral only begins the vital transfer of expertise form regulators to prosecutors. Bharara has put in print that the regulators possessed the facts “that underpin a criminal case” but are failing to “work in concert” with the prosecutors. In short, they are not making the criminal referrals and they are not making agency support of criminal investigations and prosecutions a top priority. Instead, they are still discouraging prosecutions (e.g., Curry’s silly claim about having to pull JPMorgan’s charter).


Deal Book has written another article praising a moral and policy travesty. Read beyond the article’s propaganda and you will find that it actually contains admissions by senior DOJ officials confirming that our description of the disgraceful policies that we charged that DOJ and the anti-regulators were following was correct and confirming that our conclusion that such policies were deeply criminogenic had proved correct. Bharara admitted that the GBH Doctrine created a “gaping liability loophole that blameworthy [controlling bank officers] are only too willing to exploit.” Until we appoint regulators with the spines, integrity, brains, and courage to realize that our paramount function is to place banks led by frauds into receivership and end the CEO’s ability to lead a control fraud we will fail to have a sound banking system and we will fail to restore the rule of law.

America Is Declining at the Same Warp Speed That's Minting Billionaires and Destroying the Middle Class

By CJ Werleman

Not a single U.S. city ranks among the world’s most livable cities.

“The game is rigged,” writes Senator Elizabeth Warren in her new book  A Fighting Chance . It’s rigged because the rich and their lobbyists have rigged the rules of the game to their favor. The rules are reflected in a tax code and bankruptcy laws that have seen the greatest transfer of wealth from the middle class to the rich in U.S. history. 
The result?
America has the most billionaires in the world, but not a single U.S. city ranks among the world’s most livable cities. Not a single U.S. airport is among the top 100 airports in the world. Our bridges, road and rail are falling apart, and our middle class is being guttered out thanks to three decades of stagnant wages, while the top 1 percent enjoys 95 percent of all economic gains.
A rigged tax code and a bloated military budget are starving the federal and state governments of the revenue it needs to invest in infrastructure, which means today America looks increasingly like a Third World nation, and now new data shows America’s intellectual resources are also in decline.
For the past three decades, the Republican Party has waged a dangerous assault on the very idea of public education. Tax cuts for the rich have been balanced with spending cuts to education. During the New Deal era of the 1940s to 1970s, public schools were the great leveler of America. They were our great achievement. It was universal education for all, but today it’s education for those fortunate enough to be born into wealthy families or live in wealthy school districts. The right’s strategy of defunding public education leaves parents with the option of sending their kids to a for-profit school or a theological school that teaches kids our ancestors kept dinosaurs as pets.
“What kind of future society the defectors from the public school rolls envision I cannot say. However, having spent some time in the Democratic Republic of Congo—a war-torn hellhole with one of those much coveted limited central governments, and, not coincidentally, a country in which fewer than half the school-age population goes to public school—I can say with certainty that I don’t want to live there,” writes Chuck Thompson in  Better off Without Em.
Comparisons with the Democratic Republic of Congo are not that far-fetched given the results of a recent report by  Organization for Economic Co-operation and Development (OECD), which is the first comprehensive survey of the skills adults need to work in today’s world, in literacy, numeracy and technology proficiency. The results are terrifying. According to the report, 36 million American adults have low skills. 
It gets worse. In two of the three categories tested, numeracy and technological proficiency, young Americans who are on the cusp of entering the workforce—ages 16 to 24—rank dead last, and is third from the bottom in numeracy for 16- to 65-year-olds.
The United States has a wide gap between its best performers and its worst performers. And it had the widest gap in scores between people with rich, educated parents and poor, undereducated parents, which is exactly what Third World countries look like, i.e. a highly educated super class at the top and a highly undereducated underclass at the bottom, with very little in the middle.
The report shows a relationship between inequalities in skills and inequality in income. “How literacy skills are distributed across a population also has significant implications on how economic and social outcomes are distributed within the society. If large proportions of adults have low reading and numeracy skills, introducing and disseminating productivity-improving technologies and work-organization practices can be hampered; that, in turn, will stall improvements in living standards,” write the authors of the report.
There is a defined correlation between literacy, numeracy and technology skills with jobs, rising wages and productivity, good health, and even civic participation and political engagement. Inequality of skills is closely correlated to inequality of income. In short, our education system is not meeting the demands of the new global environment, and the outlook is grim, given the Right’s solution is to further defund public education while ushering kids into private schools and Christian academies aka “segregation academies.”  The Republican-controlled South is where you see the Right’s education strategy in action. “Inspired by home-school superstars such as Creation Museum founder Ken Ham, tens of thousands of other southern families have fled their public-school systems in order to soak their children in the anti-intellectual sitz bath of religious denial.” In other words, we’re dumb and getting dumber.
While charter schools aren’t unique to the South, conservative states tend to respond most enthusiastically to their message, which makes Republican-controlled states ground zero for the further degradation of public education. The U.S. will likely continue to poll like countries like Indonesia and Tanzania, rather than Japan and Sweden when it comes to meeting the demands of a global economy.
Despite their hype and profits, study after study show that kids in charter schools perform no better on achievement tests than kids in public schools. But the correlation between a strong public education system and social mobility is demonstrated clearly in the OECD report. A 2006 report by Michael A. McDaniel of Virginia Commonwealth University showed that states with higher estimated collective IQ have greater gross state product, citizens with better health, more effective state governments, and less violent crime. In other words, were we to invest more in public education, we’d be instantly more intelligent, healthy, safe, and financially sound.
“The principal force for convergence [of wealth] — the diffusion of knowledge — is only partly natural and spontaneous. It also depends in large part on educational policies,” writes Thomas Piketty in his 700-page bestseller  Capital in the Twenty-First Century . In other words, if we really want to reduce inequality, and if we really want to be a global leader in the 21st  century, we need to invest more into our education system, which requires the federal government to ensure the rich and the mega-corporations pay their share. But we need to act now.