Into the Bailout Buzz Saw

By GRETCHEN MORGENSON
nytimes.com

IT might seem remarkable that there’s more to say about our late Bailout Age. But there is more — a lot more.

Nearly four years after Washington began its huge rescues of banks with taxpayer dollars, an important player in this, one of the great financial dramas of all time, is offering a damning account of how the Bush and Obama administrations handled the whole episode. 
      

He is Neil Barofsky. Remember him — the man whose job it was to police the $700 billion Troubled Asset Relief Program? And his new account, a book titled “Bailout” (Free Press), to be published on Tuesday, is a must-read.

      

His story is illuminating, if deeply depressing. We tag along with Mr. Barofsky, a former federal prosecutor, as he walks into a political buzz saw as the special inspector general for TARP.

 

Government officials, he says, eagerly served Wall Street interests at the public’s expense, and regulators were captured by the very industry they were supposed to be regulating. He says he was warned about being too aggressive in his work, lest he jeopardize his future career.

      

And so Mr. Barofsky, who formerly prosecuted Colombian drug lords as an assistant United States attorney in New York City, is schooled in the ways of Washington. One telling vignette comes early on in his book, when he is advised by inspectors general in other agencies about how to do his job.

      

As Mr. Barofsky writes, he had assumed that his assignment to oversee TARP meant that he should be fiercely independent from the Treasury Department, and vigilant against waste, fraud and abuse. But after canvassing other inspector generals for guidance, he writes, he learned of different priorities: maintaining and possibly increasing budgets, appearing to be active — and not making enemies.

      

“The common refrain went like this,” Mr. Barofsky writes. “There are three different types of I.G.’s. You can be a lap dog, a watchdog or a junkyard dog.” A lap dog is seen as too timid, he was told. But being a junkyard dog was also ill-advised.

      

“What you want to be is a watchdog,” he continues. “The agency should perceive you as a constructive but independent partner, helping to make things better for the agency, so everyone is better off.” He also learned, he says, that success as an inspector general meant that investigations come second. Don’t second-guess the Treasury. Instead, “focus on process.”

      

Thus the collision course was set between Mr. Barofsky and a crew of complacent, bank-friendly Treasury officials. He soon discovered that the department’s natural stance of marching in lock step with the banks meant that he had to question its policies and programs repeatedly to ensure that taxpayers weren’t at risk for fraud and abuse.

      

“The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true,” Mr. Barofsky said in an interview last week. “It really happened. These suspicions are valid.”

       

To be sure, Mr. Barofsky and his team were up against a powerful status quo. And that meant that they ran into plenty of brick walls.

      

“Bailout” covers a lot of ground, running through attempts of the inspector general’s office to ensure that additional rescue programs suggested by the Treasury had safeguards in place to avoid conflicts of interest, collusion and fraud. One battle involved the Public-Private Investment Program, designed to get troubled mortgages off banks’ balance sheets by encouraging private investors to buy them using mostly taxpayer dollars. When the inspector general’s office recommended ways to protect against fraud and to fix other flaws in the program, Mr. Barofsky writes, the Treasury rejected the suggestions, maintaining that they would gut the programs and reduce participation.

      

Another skirmish involved the department’s ill-conceived loan modification plan, known as the Home Affordable Modification Program. When the Treasury began discussing the program’s outlines, Mr. Barofsky said he became concerned that it would open the door to fraudulent foreclosure rescue schemes, in which large upfront fees could be extracted from desperate borrowers eager to participate in what was supposed to be a free government program. When his office recommended fraud-prevention measures, several were ignored, he writes.

      

A few months after the modification plan was announced, his office began a preliminary audit of its rollout. “We soon verified what we had suspected,” Mr. Barofsky writes. “Treasury had failed to ensure that the servicers had the necessary infrastructure to support a massive mortgage modification program.” It barely got off the ground, and few homeowners have received the help they hoped for.

THIS was just one of many examples from Mr. Barofsky’s 16-month tenure, during which, he says, Washington abandoned Main Street while rescuing Wall Street. “There has to be wide-scale acknowledgment that regulatory capture exists, dominates our system and needs to be eradicated,”

 

Mr. Barofsky said in the interview. “It was my job to bring as much transparency to taxpayers so they knew what was going on. Writing the book, I tried to bring the same level of transparency so people understand how captured their government has become to the financial interests.”

      

I asked Mr. Barofsky, now a senior fellow at the N.Y.U. School of Law, what could be done to get regulators to man up, as it were.

      

“We need to re-educate our regulators that it’s O.K. to be adversarial, that it’s not going to hurt your career advancement to be more skeptical and more challenging,” he said. “It’s implicit in so much of the regulatory structure that if you don’t make too many waves there will be a job for you elsewhere. So we have to limit those job opportunities and develop a more professional path for regulators as a career. That way, they won’t always have that siren call of Wall Street.”

      

Mr. Barofsky’s assessment of his former regulatory brethren is crucial for taxpayers to understand, because Congress’s financial reform act — the Dodd-Frank legislation — left so much of the heavy lifting to the weak-kneed.

      

“So much of what’s wrong with Dodd-Frank is it trusts the regulators to be completely immune to the corrupting influences of the banks,” he said in the interview. “That’s so unrealistic. Congress has to take a meat cleaver to these banks and not trust regulators to do the job with a scalpel.”

      

Finally, Mr. Barofsky joins the ranks of those who believe that another crisis is likely because of the failed response to this one. “Incentives are baked into the system to take advantage of it for short-term profit,” he said. “The incentives are to cheat, and cheating is profitable because there are no consequences.”

      

Despite all of this, Mr. Barofsky ends on something of a positive note. Meaningful changes to our broken system may finally come about, he writes, if enough people get angry. His conclusion is this: “Only with this appropriate and justified rage can we sow the seeds for the types of reform that will one day break our system free from the corrupting grasp of the megabanks.”

      

That’s not much of a silver lining. But I guess it’s better than none.

Lenders Trying to Sell Loans Free and Clear

by Marc Dann

Once again a major lender, originator, servicer, and securitizers are attempting to sell loans free and clear and whitewash their liabilities. GMAC, RESCAP and affiliated entities are currently in over 1900 prepetition litigation cases nationwide, and it is too early to determine if they will abide by the nationwide settlement agreement.

There have been countless efforts since the subprime fiasco, to get a bankruptcy cram down bill passed. The effort has been defeated every time. Ironically, the lenders and servicers have gone bankrupt and in those Chapter 11 processes basic homeowner rights have been taken away.

One such protection that was added to the BACPA in 2005 is 363(o) which has been largely ignored in all these cases – a provision that seems to limit "free and clear" sales of assets that are consumer credit transactions subject to the Truth in Lending Act or consumer credit contracts. Although much fun has been poked at including the phrase "Consumer Protection" in BAPCPA, Congress may have anticipated the problems being raised by the bankruptcies of subprime lenders by adding 363(o) to the Bankruptcy Code.

Homeowners have earned the right to have a seat at the table in this matter.

This bankruptcy will affect the rights of homeowners and may also affect the nationwide settlement agreement that these entities agreed to participate in. Homeowners affected by this maneuver may have no avenue to be heard in this matter as they can’t attend the hearings or afford to hire representation in this venue.

Residential Capital/GMAC entities included in the bankruptcy: (1) Originated loans: GMAC Mortgage, Homecomings Financial, Residential Funding Corp., Ditech, (2)Securitized loans: Residential Asset Securities Corp. (RASC), Residential Accredit Loans Inc.(RALI), Residential Asset Mortgage Products Inc. (RAMP), Residential Funding Mortgage Securities, (3) Serviced loans: GMAC Mortgage LLC, RFC GSAP Mortgage Servicer Advance LLC., (4) Foreclosed on Loans: Executive Trustee Services, RFC REO, for example.

The majority of homeowners have no idea of what rights may be affected via this bankruptcy filing as the notices sent out simply ask the homeowners to keep paying their bills. Homeowners are spread out all over the Country and need a voice in this case.

Bankruptcy law allows for formation of Official Committees in a chapter 11 bankruptcy cases to represent various classes of claimants. In lender bankruptcies it is typical that Indenture Trustees, insurers and large bank claims dominate the committee for the unsecured creditors. In this case trustees on securitization trust which may be foreclosing on homeowners seated on the committee include: Wilmington Trust, N.A., Deutsche Bank, The Bank of New York Mellon Trust Company, N.A., and U.S. Bank National Association. Insurers which may have to pay claims on loans and which are assigned the right to seek deficiency judgments against homeowners seated on the committee include: MBIA Insurance Corporation, AIG Asset Management (U.S.), LLC, and Allstate Life Insurance Company. Understandably this creates conflicts of interest if the borrower claim is directly against not only the bankrupt entity, but may also be against a Trustee or insurer seated on the committee.

An official committee is necessary as the companies seated on the unsecured creditors committee are conflicted due to direct involvement with foreclosures via securitized trusts they represent. These committee members are in litigation and foreclosure against the homeowners, and against investors and insurers. Committee members seated include: American International Group Inc. (AIG), Allstate Corp. (ALL) and Financial Guaranty Insurance Corp., MBIA Inc. (MBI)., Wilmington Trust, Deutsche Bank AG (DBK), Bank of New York Mellon Corp. (BK) and U.S. Bancorp, according to the filing by the U.S. Trustee.

Who's Afraid of an Open Debate? The Truth About the Commission on Presidential Debates

Yes, Really, Truly, No Joke, That Schneiderman Mortgage Task Force is Gonna Get Someone….Soon!

By Yves Smith
nakedcapitalism.com

I’m sure the banksters are quaking in their boots. Eric Schneiderman, the New York state attorney general whose joining a heretofore moribund mortgage fraud task force and withdrawing from opposition to the horrid mortgage settlement allowed the Administration to push the bank-friendy deal across the line, is now making noises that really, truly, he and his Federal best buddies are gonna nail some baddies really soon. From Reuters:

The mortgage task force formed by President Barack Obama to probe misconduct that contributed to the financial crisis will soon take legal action, New York Attorney General Eric Schneiderman said on Thursday.
Schneiderman, a co-chair of the task force, would not say whether cases would be brought against individuals or financial institutions. He also would not comment on whether criminal charges would be filed.
But he said his office would take action and that he expected his federal counterparts on the task force to do so as well.
“We’ll see actions being taken sooner rather than later,” said Schneiderman, speaking in an interview at his office in New York.
The Residential Mortgage-Backed Securities Working Group was formed in January, to probe the pooling and sale of risky mortgages in the runup to the 2008 financial crisis. Obama said he was creating the group to “hold accountable those who broke the law” and “help turn the page on an era of recklessness.”
Schneiderman said he believes it is still necessary to go after the “bad actors” to restore confidence in the financial markets.
“It’s important to convey the sense that no one is above the law. There’s a set of rules to which all will be held accountable, including big players on Wall Street,” Schneiderman said.

It might help if Reuters did reporting rather than took dictation. As we pointed out in older posts, this “task force” is merely a new unit in an interagency Financial Fraud Enforcement Task Force established in 2009 which looks to have done precisely nothing since its inception. And the New York Times, which had been solidly in Scheiderman’s camp when he looked to be taking on the big banks, issued a “show me” op ed and specified what Schneiderman and the Feds needed to do to be credible:

To win and retain public trust…The administration must ensure that the group has ample resources. The co-chairmen must hire a tough-as-nails prosecutor with a successful track record in financial fraud to drive the investigation forward. And the group must move quickly and vigorously, issuing subpoenas and filing cases. It is not starting from scratch; various agencies have all had separate investigations under way.

Neither of these things have happened. Schneiderman and his new allies have thrown out staff numbers that were way too low to be taken seriously even if these were new resources. And it was very clear they weren’t that the task force was simply taking all the people already working on various mortgage related investigations (which were clearly going nowhere, given how many years have elapsed since the toxic phase of mortgage origination) and redesignating them as mortgage task force members (yes, there were eventually some new hires, but again, too few to change this basic picture, and no high-profile, kick-ass prosecutor leading the charge).
And that’s before you get to the way the Administration went out of its way to humiliate Schneiderman. As we wrote in April:

It was pretty obvious Schneiderman had been had. Obama tellingly did not mention his name in the SOTU. Schneiderman was only a co-chairman of the effort and would still stay on in his day job as state AG, begging the question of how much time he would be able to spend on the task force. His co-chairman is Lanny Breuer from the missing-in-action Department of Justice. And most important, no one on the committee was head of an agency, again demonstrating that this wasn’t a top Administration priority.
The Administration started undercutting Schneiderman almost immediately. He announced that the task force would have “hundreds” of investigators. Breuer said it would have only 55, a simply pathetic number (the far less costly savings & loan crisis had over 1000 FBI agents assigned to it). And they taunted him publicly by exposing that he hadn’t gotten a tougher release as he has claimed to justify his sabotage….
This update comes from the New York Daily News (hat tip Matt Stoller):

On March 9 — 45 days after the speech and 30 days after the announcement — we met with Schneiderman in New York City and asked him for an update…As of that date, he had no office, no phones, no staff and no executive director. None of the 55 staff members promised by Holder had materialized. On April 2, we bumped into Schneiderman on a train leaving Washington for New York and learned that the situation was the same.
Tuesday, calls to the Justice Department’s switchboard requesting to be connected with the working group produced the answer, “I really don’t know where to send you.” After being transferred to the attorney general’s office and asking for a phone number for the working group, the answer was, “I’m not aware of one.”…
In fact, the new Residential Mortgage-Backed Securities Working Group was the sixth such entity formed since the start of the financial crisis in 2009. The grand total of staff working for all of the previous five groups was one, according to a surprised Schneiderman. In Washington, where staffs grow like cherry blossoms, this is a remarkable occurrence.
We are led to conclude that Donovan was right. The settlement and working group — taken together — were a coup: a public relations coup for the White House and the banks…
But for 12 million American homeowners, collectively $700 billion under water, this was just another in a long series of sham transactions.

Back to the current post. Remember, for this, Schneiderman betrayed the public and made it possible for the banks to get a settlement that had state and federal prosecutors sign away their ability to use the best legal theories for pursuing mortgage abuses, that of chain of title issues.
And his little sales pitch to Reuters is revealing. There are no typical prosecutor statements about bringing criminals to justice, rooting out bad conduct, busting up fraudulent operations. He’s not trying to pretend that the Task Force plans to get to the bottom of anything. Schneiderman knows that reporters and commentators on this beat know full well that the task force is an exercise in “all hat, no cattle” and he’s only willing to go so far in PR messaging. Look at what he said: the task force is not seeking to render justice. It’s out to restore confidence!
That means, above all, don’t rattle the banks. As Marcy Wheeler pointed out, not upsetting the financial services industry is now an excuse for not prosecuting big corporate miscreants. She introduces an excerpt from a speech by the DoJ’s Lanny Breuer, one of Schneiderman’s co-chairs on the task force:

But the real tell is when he confesses that he “sometimes–though … not always” let corporations off because a CEO or an economist scared him with threats of global markets failing if he held a corporation accountable by indicting it.

To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. [my emphasis]

None of this is surprising, of course. It has long been clear that Breuer’s Criminal Division often bows to the scare tactics of Breuer’s once and future client base.

So let’s go back to the Schneiderman statement:

It’s important to convey the sense that no one is above the law. There’s a set of rules to which all will be held accountable, including big players on Wall Street.

Notice the revealing word choice: “important to convey the sense”. Not “important to enforce the law.” This is (at most) about maintaining the appearance of being even handed about enforcement.
Schneiderman appears to be on track to living up to our low expectation of engaging in a Potemkin version of an investigation, bringing a few cases close to the election to generate deceptive and useful “tough on crime” headlines. As we wrote in April:

Schneiderman entered into an obvious Faustian pact. He’s not getting his soul or his reputation back.

The Black Financial and Fraud Report

Where does money come from?

Keiser Report: World Flash Clash Center

We discuss flash crashes, reputation woes on the U.S. exchanges and sheep screaming at all the fraud. Max also talks to one of the Queen’s sheep for its opinion on quantitative easing. In the second half of the show, Max Keiser talks to Jim Rickards, author of Currency Wars, about QE to infinity, the dollar, the euro and a gold standard.

Screwing The Taxpayer, 600,000 At A Time

by Karl Denninger
market-ticker.org

Oh.
My.
God.

Wall Street lobbyists are awesome. I’m beginning to develop a begrudging respect not just for their body of work as a whole, but also for their sense of humor. They always go right to the edge of outrageous, and then wittily take one baby-step beyond it. And they did so again last night, with the passage of a new House bill (HR 2827), which rolls back a portion of Dodd-Frank designed to protect cities and towns from the next Jefferson County disaster.

If you remember Jefferson County wasn't just about a bad deal. Oh no, it included bribery (for real) as well, and several people went to prison. None of them, of course, were banksters.
The people got butt-sexed too, to the tune of a 400% increase in their sewer bill, and even though criminal conduct was later proved in relationship to these deals the bills remain.
That is, the people continue to get hosed to this very day.
So it should not be surprising that on a bi-partisan basis Congress passed HR 2827 yesterday.
And, if you read it (the bill is mercifully short) you will find that it specifically exempts from fiduciary responsibility....

`(i) any broker, dealer, or municipal securities dealer (or person associated with such broker, dealer or municipal securities dealer);
`(ii) any investment adviser registered under the Investment Advisers Act of 1940 or with a State or territory of the United States (or person associated with such an investment adviser);
`(iii) any commodity trading advisor, swap dealer, major swap participant, futures commission merchant or introducing broker registered under the Commodity Exchange Act (or person associated with a commodity trading advisor, swap dealer, major swap participant, futures commission merchant or introducing broker) who is providing advice related to, engaging in, or arranging any swap;
`(iv) any security-based swap dealer or major security-based swap participant registered under the Securities Exchange Act of 1934 (or any person associated with a security-based swap dealer or major security-based swap participant) who is providing advice related to, engaging in, or arranging any security-based swap;
`(v) any attorney offering legal advice or providing services that are of a traditional legal nature;
`(vi) any engineer providing engineering advice;
`(vii) any financial institution or person associated with a financial institution; or
`(viii) any elected or appointed member of a governing body of a municipal entity, with respect to such member's role on the governing body;'.

Got it?
So if you're any of those people then you have no fiduciary responsibility to the governmental unit or the taxpayers who fund it for the advice you render, even though the entire reason they would otherwise contract with you in the first place is for your expertise and advice to keep from making a mistake!
In other words, the short version is that these so-called "advisors" can provide advice that has no relationship to protecting the best interest of the taxpayers at all, or could even provide advice intentionally adverse to the interest of those taxpayers -- like, for instance, to benefit their financial institution instead and intentionally hose you, the common man.
Yeah.
Why don't we just call this The Pigmen **** The Taxpayer Act of 2012?
Oh, and as for blaming either Democrat or Republican for this? It passed on a voice vote -- that is, by simple majority of both parties without a demand for a recorded, public vote count.
So in point of fact all 435 members of The House voted to allow banksters to screw you with impunity any time they'd like.
Now where, oh where, are the politicians, including the Libertarian Party, on this issue?
They support and in fact vote for banksters screwing you.

$200 billion in bonuses later, Wall Street banks still take big risks on the market

Dennis Kelleher, president and CEO of Better Markets Inc., explains why the too-big-to-fail banks aren’t really banks anymore, but trading houses willing to take bigger and bigger risks, despite the financial collapse of 2008.
“Between 2003 and 2011, the bonuses on Wall Street were over $200 billion. $200 billion — that’s what’s at stake here for them,” Kelleher says. “On the other hand, because it’s high-risk, because they’re ultimately backed by the taxpayers of the United States … it has cost the United States no less than $12.8 trillion.”

A Rare Look at Why The Government Won't Fight Wall Street

By Matt Taibbi

The great mystery story in American politics these days is why, over the course of two presidential administrations (one from each party), there’s been no serious federal criminal investigation of Wall Street during a period of what appears to be epic corruption. People on the outside have speculated and come up with dozens of possible reasons, some plausible, some tending toward the conspiratorial – but there have been very few who've come at the issue from the inside.

We get one of those rare inside accounts in The Payoff: Why Wall Street Always Wins, a new book by Jeff Connaughton, the former aide to Senators Ted Kaufman and Joe Biden. Jeff is well known to reporters like me; during a period when most government officials double-talked or downplayed the Wall Street corruption problem, Jeff was one of the few voices on the Hill who always talked about the subject with appropriate alarm. He shared this quality with his boss Kaufman, the Delaware Senator who took over Biden's seat and instantly became an irritating (to Wall Street) political force by announcing he wasn’t going to run for re-election. "I later learned from reporters that Wall Street was frustrated that they couldn’t find a way to harness Ted or pull in his reins," Jeff writes. "There was no obvious way to pressure Ted because he wasn’t running for re-election."

Kaufman for some time was a go-to guy in the Senate for reform activists and reporters who wanted to find out what was really going on with corruption issues. He was a leader in a number of areas, attempting to push through (often simple) fixes to issues like high-frequency trading (his advocacy here looked prescient after the "flash crash" of 2010), naked short-selling, and, perhaps most importantly, the Too-Big-To-Fail issue. What’s fascinating about Connaughton’s book is that we now get to hear a behind-the-scenes account of who exactly was knocking down simple reform ideas, how they were knocked down, and in some cases we even find out why good ideas were rejected, although some element of mystery certainly remains here.

There are some damning revelations in this book, and overall it’s not a flattering portrait of key Obama administration officials like SEC enforcement chief Robert Khuzami, Department of Justice honchos Eric Holder (who once worked at the same law firm, Covington and Burling, as Connaughton) and Lanny Breuer, and Treasury Secretary Tim Geithner.

Most damningly, Connaughton writes about something he calls "The Blob," a kind of catchall term describing an oozy pile of Hill insiders who are all incestuously interconnected, sometimes by financial or political ties, sometimes by marriage, sometimes by all three. And what Connaughton and Kaufman found is that taking on Wall Street even with the aim of imposing simple, logical fixes often inspired immediate hostile responses from The Blob; you’d never know where it was coming from.

In one amazing example described in the book, Kaufman decided he wanted to try to re-instate the so-called "uptick rule," which had existed for seventy years before being rescinded by the SEC in 2007. The rule prevents investors from shorting a stock until the stock had ticked up in price. "Forcing short sellers to wait for the price to tick up before they sell more shares gives a breather to a stock in decline and helps prevent bear raids," Connaughton writes.

The uptick rule is controversial on Wall Street – I’ve had some people literally scream at me that it doesn’t do anything, while others have told me that it does help prevent bear attacks of the sort that appeared to help finally topple already-mortally-wounded companies like Bear Stearns and Lehman Brothers – but what’s inarguable is that Wall Street hates the rule. Hedge fund types or employees of really any company that engages in short-selling will tend to be most venomous in their opinions of the uptick rule.

Anyway, Connaughton and Kaufman were under the impression that new SEC chief Mary Schapiro would re-instate the uptick rule after taking office. When she didn’t, Kaufman wrote her a letter, asking her to take action. When that didn't do the trick, he co-sponsored (with Republican Johnny Isakson) a bill that would have required the SEC to take action.

Nothing happened, and months later, Kaufman gave a grumbling interview to Politico about the issue. One June 30, the paper’s headline read: "Ted Kaufman to SEC; Do Your Job."

The next day, the Blob bit back. Connaughton was in the basement of the Russell building when a Senate staffer whose wife worked for Shapiro shouted at him. From the book:

"Hey, Jeff, you’re in the doghouse." He meant: with his wife.
"Why?" I asked.
"That Politico piece by your boss."
I was taken aback but tried to downplay the matter. "We just want the SEC to get its work done."
"Remember," he said. "We all wear blue jerseys and play for the Blue Team. I just don’t think that helps."

When Connaughton told Kaufman over the phone what the staffer said, Kaufman exploded. "You call him back right now and tell him I said to go fuck himself in his ear," Kaufman said.

Similarly, when Kaufman tried to advocate for rules that would have prevented naked short-selling, Connaughton was warned by a lobbyist that it would be "bad for my career" if he went after the issue and that "Ted and I looked like deranged conspiracy theorists" for asking if naked short-selling had played a role in the final collapse of Lehman Brothers. Naked short-selling is another controversial practice. Essentially, when you short a stock, you're supposed to locate shares of that stock before you go out and sell it short. But what hedge funds and banks have discovered is that the rules provide "leeway" – you can go out and sell shares in a stock without actually having it, provided you have a "reasonable belief" that you can locate the shares.

This leads to the obvious possibility of companies creating false supply in a stock by selling shares they don't have. Without getting too much into the weeds here, there is an obvious solution to the problem, which essentially would be forcing companies to actually locate shares before selling them. In their attempt to change the system, Kaufman and Connaughton discovered that the Depository Trust Clearing Corporation, the massive quasi-private organization that clears most all stock trades in America, had come up with just such a fix on their own. Kaufman recruited some other senators to endorse the idea, and as late as 2009, Connaughton and Kaufman were convinced they were going to get the form. "I said to Ted, 'We’re going to change the way stocks are traded in this country.'"

But before the change could be made, Goldman, Sachs issued "data" showing that there was "no correlation" between naked short selling and price movements. When Connaughton asked an Isakson staffer what the data said, the staffer, intimidated by Goldman, replied, "The data proves we're full of shit." Connaughton looked at the data and realized instantly that it was a bunch of irrelevant gobbledygook, even firing off an angry letter to Goldman telling them the tactic was beneath even them.

But Goldman’s tactic worked. A roundtable to discuss the idea was scheduled by the SEC on September 24, 2009. Of the nine invited participants, "all but one" were for the status quo. Connaughton expected the DTCC representatives to unveil their reform idea, but they didn’t:

Afterwards, I went over to [the DTCC representatives] and asked, "What happened?" Sheepishly, and to their credit, they admitted: "We got pulled back." They meant: by their board, by the Wall Street powers-that-be.

Essentially the same thing happened in Kaufman’s biggest reform attempt, the amendment to the Dodd-Frank bill he co-sponsored with Ohio’s Sherrod Brown, which would have broken up the Too-Big-To-Fail banks. But the Brown-Kaufman amendment, which was really the meatiest thing in the original Dodd-Frank bill, the one reform that really would have made a difference if it had passed, just died in the suffocating mass of the Blob. The key Democrats one after another failed to line up behind it, and in the end it was defeated soundly, with Dick Durbin, the number two man in the Democratic leadership, giving it this epitaph: "a bridge too far."

Again, those interested in understanding the mindset of the people who should be leading the anti-corruption charge ought to read this book. It's the weird lack of concern that shines through, like Khuzami’s comment that he’s "not losing sleep" over judges reprimanding his soft-touch settlements with banks, or then Southern District of New York U.S. Attorney Ray Lohier’s comment that the thing that most concerned him – this is the period of 2008-2009, the middle of a historic crimewave on Wall Street – was "cyber crime."

On the outside we can only deduce the mindset from actions and non-actions, but Connaughton’s actually seen it, and with the book you get to see it too. It’s scary and definitely worth a read.

Pink Slime: What we have here is a failure to communicate

By William K. Black

BPI, the corporation that sold the “pink slime” that was secretly added to our hamburgers has now brought a $1.2+ billion tort suit against ABC News, individual ABC journalists, two former USDA scientists, and a former BPI employee. BPI claims that the defendants defamed it by, for example, calling its meat product, which it calls “lean finely textured beef” (LFTB), “pink slime.” It’s not clear from BPI’s complaint why the ABC defendants wanted to harm BPI. The only claim that even begins to suggest a motive for malice is that the ABC defendants wanted higher ratings – which is presumably true of all media at all times. The complaint suggests no reason why the USDA scientists would bear any malice against BPI. Indeed, because BPI denies that the USDA scientists are whistleblowers it refutes the usual theory that the government official blames the firm for the retaliation he suffered when he blew the whistle on the firm. The failure to present a basis for any malice on the part of the scientists is a serious weakness in BPI’s case because the ABC defendants relied on the USDA scientists’ expertise and if the plaintiffs cannot identify any basis for the scientists bearing malice against BPI then the ABC defendants had no reason to suspect them of malice. One of the USDA scientists appears to have dubbed BPI’s product “pink slime.”

BPI suffered a catastrophic loss of sales once the public learned from the media a series of facts about its product that BPI and the U.S. government had deliberately kept from the public. For the sake of neutrality let us call BPI’s product “X.” Unbeknownst to the consumer, X was made from meat scraps processed with a spritz of ammonia gas – and then secretly added to our hamburgers. The media reports were extremely critical of X. BPI mounted a massive PR response to the criticisms. The net result was that the public generally refused to eat hamburgers to which X was added.

The central irony is that BPI is reeling because its business plan for X violated, and continues to violate, its own corporate slogan: “communicate and cooperate.”

Prior to the media disclosures about X, BPI sought to prevent consumers from learning key facts about X – including its undisclosed addition to our hamburgers. After the media disclosures about X, BPI did not cooperate. It “went to the mattresses.” It pulled in its political allies and its lawyers and it brought a lawsuit that, were it to succeed, would cause a terrible loss of first amendment rights. It used its lawyers and economic power to try to destroy two scientists who cannot possibly afford to defend themselves against the BPI legal juggernaut. BPI makes no credible claim that the scientists bore any actual malice against it. Instead, it appears that the scientists were sincerely concerned for the consumers of X and the failure to inform the consumers about X. The Roth family, which owns BPI, is immensely wealthy and politically connected. The Roth family has suffered a serious loss of wealth and reputation due to the media disclosures to the public about X. On a human level it is understandable that they would seek to use their wealth and power to crush their media and scientific critics. But the use of great power requires great restraint if our first amendment rights are to remain real. If the Roths’ lawsuit prevails they will deal a body blow to the nation they say they love. It is precisely when the industry and the government agency agree to withhold information from the public that we most need to protect from this type of chilling lawsuit those few individuals willing to warn the public that the regulators have been captured by the industry.

The Roths went desperately wrong when they shaped their business strategy for selling X on the goal of keeping facts from the consumers that Mr. Roth thought were unimportant, but which most consumers showed that they considered decisive once they began to learn about X. BPI has a second slogan: “we know how to do things because we do things.” Because BPI’s strategy was that it and its purchasers not do certain things (disclose certain facts of X to the consumer, including its addition to our hamburgers) they did not know how to do the disclosures that consumers wanted once they began to learn that X was being added to their hamburgers without disclosure.

Max Keiser: Ultimate QE3 Meltdown

Time to Rebel! Five Ways We Can Break the Big Banks' Death Grip on the Economy

By Stephen Lerner, AlterNet

Wall Street’s incredible greed and arrogance may have finally handed us the tools and leverage we need.

Let’s be honest. Many people are feeling a little hopeless and cynical about whether anything can change how Wall Street banks run roughshod over the economy and our democracy. We’ve marched, rallied, sat-in and thousands have been arrested--and yet bankers have remained unrepentant, unpunished, unindicted and seemingly untouchable. But the wheels of history are turning and Wall Street’s incredible greed and arrogance may have finally handed us the tools and leverage we need to challenge and break the death grip Wall Street has on struggling people and communities around the country.

Two critical tools--the LIBOR fraud scandal and the potential to start exercising eminent domain to seize bank-owned properties--can supercharge the ongoing campaigns focused on Wall Street. For the first time we can align moral and legal arguments with real leverage to demand that banks renegotiate the debt that is bankrupting communities and drowning homeowners around the country. The single most important step we can take to address local budget deficits is to force banks to renegotiate toxic deals held by local government and to rewrite mortgages for underwater homeowners. Combined, this would pump hundreds of billions into local economies.

First some definitions:

The LIBOR fraud scandal may seem confusing, but it is really pretty simple. Over $800 trillion in loans, derivatives and other financial deals are based on LIBOR (the London Interbank Offered Rate). The banks fixed the rate to increase their profits at our expense and now everyone all over the world is trying to figure out how much it has cost the rest of us.

Whatever the ultimate number is (there are estimates of hundreds of billions in damages), this scandal has permanently torpedoed the notion that there is “moral hazard” in debt relief for regular folks. We can now prove what we’ve always suspected--that the big banks have rigged the game in their favor and that our deals with them are inherently unfair and should be renegotiated. Oakland, California has taken a first step by demanding Goldman Sachs renegotiate a toxic swap the city is trapped in, saying it will boycott Goldman Sachs in the future if the bank won’t renegotiate.

Eminent Domain. Government has long seized property to create room to build shopping malls and stadiums. Those same laws can be used to seize underwater mortgages from banks and then rewrite them at their real value so homeowners can stay in their homes at greatly reduced mortgage costs. If banks are unwilling to reset mortgages at fair market value, then local governments can lawfully seize their property for the common economic good. They would merely have to pay the banks fair market value for the mortgages, which would force the banks to take significant writedowns. San Bernardino County and Berkeley, California have already started down this road.

It is time to REBEL, against Wall Street and the big banks and to start fixing the economy and reclaim our democracy. There are five steps to this:

1. Renegotiate public and housing debt. We need to lift up the demand loud and clear that we want to renegotiate public debt and that it is unfair and illegal to hold local governments and public services hostage to Wall Street’s toxic loans. It is estimated that banks have already sucked more than $50 billion out of local communities through toxic loans, fees and tricky deals that cities are locked into.

2. Exercise eminent domain. There are 16 million underwater homes, worth $2.8 trillion, that are $1.2 trillion underwater. Resetting those mortgages to fair market value would save the average underwater homeowner $543 per month, pumping $104 billion into the national economy every year. This would create 1.5 million jobs nationally.* If just five of the most severely underwater cities used eminent domain they could seize $140 billion worth of underwater homes from banks, forcing banks to take a $30 billion haircut on underwater loans.

3. Boycott big banks and move public money. One of the key profit centers for banks is their government business. And it isn’t just LIBOR they cheated on. There are investigations and growing scandals around price fixing on municipal bonds as well. Furthermore, banks are holding cities hostage on Letters of Credit (LOC’s) by ratcheting up the cost knowing if cities refuse to pay they may be forced to pay huge termination fees. If increasing numbers of cities, pension funds and other holders of public capital chose to boycott certain big banks and moved money out of those banks, it could be a huge financial hit for them.

4. Enact resolutions at local governments and pension funds. There is a simple way to get started that will send chills down Wall Street banks’ spines. Let’s start moving resolutions in cities and counties big and small around the country, demanding that local government and pension funds explore suing banks over LIBOR and prepare to use eminent domain to seize underwater mortgages from banks if they won’t renegotiate debt. This sample resolution is a first step in raising the issue locally and starting to build a campaign to force local governments to hold Wall Street accountable.

5. Litigate and legislate. But it isn’t enough just to pass resolutions--that is only a first step. If the banks refuse to renegotiate the debt than we need to litigate and legislate in our local communities. Our pension funds need to sue to recoup their losses. Local government needs to sue to get out of bad deals and claw back money banks unfairly made off of local taxpayers. And we need to follow the lead of Oakland, Los Angeles and other cities that have passed laws saying they will divest from banks that engage in unfair banking practices.

Since the financial crisis hit in 2008, community groups like National People’s Action, ACCE, New York Communities for Change, the New Bottom Line, the Alliance for a Just Society and Right to the City, to name a few, have joined with unions, Occupy Wall Street, Occupy Our Homes and hundreds of thousands of people who have stood up to Wall Street greed. Wall Street and banking royalty are no longer untouchable. We have the tools and we have the leverage--let's start using them to start winning for our communities and families. It is our responsibility to REBEL. All of our futures depend on it!

*These figures represent updated estimates from last year's report, The Win-Win Solution, from the New Bottom Line, which investigated the effects on the economy of writing down all underwater mortgages to current market value.

 

Bernanke, The Blind Archer

Via Sean Corrigan of Diapason Commodities

Finally, the great day has come and gone when the Fed would once again ride to the action, not daring to be left behind by the ECB’s perverse vaunting of its new ‘unlimited’ programme of bond purchases and too impatient to attend the continually postponed policy shifts so long expected from both the PBOC and the BOJ. A few months of less-than-stellar macro numbers, coupled with a lull in the rise of the price indices which was helped along by the last cyclical downturn of commodity prices (alas, for the ordinary American housewife, long since reversed) and the Mighty Oz was free to rummage deep into his carpetbag of gewgaws and conjuror’s props, once more.

 The rationale for this latest enormity is, frankly, hard to determine lest it be Bernanke’s eagerness to present whoever might replace him under an incoming Republican administration with a fait accompli and so to ensure his legacy as the worst economic ‘experimenter’ to be empowered since the dark days of Roosevelt himself (he of the breakfast egg gold price fixing; the alphabet soup price and wage dictatorship; and the enforced famine of mandated crop and livestock destruction).

 So, when we received a little insight into the fevered mind of the Chairman – coming in the form of what he told an interlocutor from Reuters, when asked to explain how exactly he envisaged that his new, open-ended, $45-billion a month QEII programme would work - our first urge was to utter the obsecration: "Spare us, Lord, from the scheming of idiot savants!"

 Apart from the fact that Blackhawk Ben here seemed to hew to a particularly crude version of the Phillips curve largely disavowed by even the most unreconstructed mainstreamers (one which imagines that extra jobs can be bought if only prices can be made to rise fast enough), after five years of ever more desperate flailing to restore false, Boom-time levels of activity, he appeared to have staked his all on bursting the piñata of the labour market by smacking it with the rough-hewn pole of the so-called ‘wealth effect.’

 As he told the journalist in Thursdays’ post-FOMC Q&A:

”The tools we have involve affecting financial asset prices… Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other interest rates, corporate bond rates. Also the prices of various assets….”

“For example, the prices of homes. To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase. So house prices is [sic] one vehicle…”

“Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend…”

“One of the main concerns that firms have is that there is not enough demand… if people feel their financial position is better… they’ll be more likely to spend, and that’s going to provide the demand firms need in order to be willing to hire and to invest…”

These few, brief sentences contain such a miasma of error that it is hard to know where to begin if we are to restore a fresh breeze of economic rationale to this swamp of non sequiturs and wilful misunderstandings. It is not enough that crude, Krugmanite Keynesianism clings to the cheap parlour trick of using money illusion to fool unemployed wage-earners into lowering the reservation price of their labour, but now we must battle against banal, Bernankite Bubble-blowing – the hope that money illusion will fool cash-constrained asset owners instead.

 To show what we mean, indulge us while we parse the Chairman’s words:

“If we can artificially suppress interest rates to a low enough level, lots of people will forget that they got themselves into the current mess by borrowing too much the last time we did this and so they will begin to do so again – especially the would-be home-owners and condo-flippers.”

“If the price of homes begins to rise, those who have already borrowed to buy one will feel better off even though: (a) they will earn not one red cent in extra income because of that appreciation and (b) if they do manage to register a one-off capital gain, it can only come at the expense of the purchaser, whose acquisition of a durable store of shelter services will therefore involve a much greater, zero-sum call on his resources than otherwise would have been the case”

“The stock market should also rise just because there’s more easy money chasing after a parking place. Naturally, we at the Fed could care less about the quaint notion that equities should represent a sensibly valued claim on a company’s estimated stream of residual earnings, or that capital markets need genuine prices if they are to serve any useful social function by allocating scarce savings to the prospectively best investment projects.”

“To the contrary, from our perspective, if Joe Soap wants to splash out to celebrate the entirely notional, potentially only nominal, and probably ephemeral gains on his 401k which we can bring about – without wondering whether the increase represents any lasting contribution to the aimed-for security of his retirement – well, in the long run, we’re all dead, aren’t we?”

“Companies don’t have enough ‘demand’, don’t you know, so if we can only get people to wave their cheque books at them, they will be so sure of being able to profit from this that they will offer every one of their new customers a job, on the spot!”

“Incidentally, we Keynesians are big on portraying consumer demand as being the driver of the economy, even though we’ve never quite been able to explain why it is that the ‘demand’ inherent in the existence of millions of hungry people in the world – all pathetically eager for an extra morsel of food – has not automatically brought about the necessary increase in agricultural output, investment, and employment in precisely the same manner that we are now presuming will be the case for, say, WalMart once we start buying in its customers’ mortgages.”

Like most macromancers, what our esteemed Chairman is missing here is any concept of how a business actually functions, of how it and its peers interrelate in the overall structure of the economy, and of the critical role played by capital and time in the division of labour and the provision of goods. He is also prey to the superficial fallacy – a kind of inverted Say’s Law - that consumption somehow dictates the amount (rather than merely the composition) of production, something that has not been the case ever since Adam was condemned to earn his daily bread in the sweat of his brow and to till the ground from when he was taken.

 Thus, rather than being fooled by the mantra that ‘(personal) consumption is two-thirds of the economy’, one should be clear about the distinction that its (imputation-boosted) count is actually only two-thirds of the highly-subjective statistical shorthand which is GDP – and that this is not the same thing at all! Gloves may well comprise 100% of the clothing I put on my hands in winter, but if they are all I don when I go out snow-shoeing, I’m not likely to get very far before some Good Samaritan of the Alps finds my half-frozen form and has to send forthwith for the nearest brandy-carrying St. Bernard so as to revive me.

 This is a matter to which we have already devoted a great deal of time, but a brief synopsis here is probably in order.

 Take, for example, the four years from 2006-9 inclusive which saw US GDP average just under $14 trillion while cash PCE came in at a mean $8.5 trillion (ergo, validating the shibboleth that the latter number equates to 60% or so of the first). Mainstream thinking may stop short here, smugly satisfied with this trivial – and circular - QED, but this is not even half the story.

 We say this because, over the period in question, aggregate business revenues – i.e., the best representation of the overall circulation of goods and services throughout the economy - amounted to no less than $33 trillion a year (the vast bulk of which receipts were subsequently disbursed again, whether as above-the-line costs, below-the-line outlays, interest, dividends, or taxes).

Thus, not only was the ‘economy’ almost 2 ½ times as large as the GDP count, but every $1 of that supposedly crucial personal outlay was matched by $3 of business-to-business spending.

 So, if Mr, Bernanke really wants to get ‘demand’ going, the foregoing drops a heavy hint that he would be three times as effective as he has been if he and his masters in Washington could manage to do something (or, conversely, to stop doing much of what they counterproductively have been doing) which ends up promoting greater managerial/entrepreneurial belief that not only can profits be made, but that, once made, more of them will be retained by their rightful owners.

 It should also be recognised that the vast bulk of that $25 trillion in B2B expenditures is every bit as discretionary as the outlays of the most finicky of shoppers: no businessman can be compelled to keep his store open, or his factory running, if he finds the game not worth the candle, even though mundane economic analysis tends to assume without question that, far from being an adaptive, calculating, he is an unthinking automaton who can very much be relied upon to do just that, irrespective of his estimated remuneration.

 More fundamentally still, it is the relationship (strictly, the ratio) between his receipts and his disbursements wherein the lies the difference between our hero’s commercial success – and so, his role in hiring, commissioning and the onward generation of orders for his suppliers – and his failure – hence, his sad duty to undertake lay-offs, cut-backs, and cancellations. Even absent net, new investment to improve and deepen the capital stocks and so raise real incomes, the overwhelming preponderance of that $25 trillion (in fact, all of it less an average $1.5 trillion before – and only $250 billion after – depreciation) represents a voluntary sacrifice of the enjoyment of present goods, undertaken merely to keep things running as they are.

 The idea that such a delicate network of relative prices and differential cash-flows can be not only maintained, but enhanced, by the clumsy process of artificially forcing arbitrary quantities of money and credit into the system is at best naïve and at worst astrological in its pseudo-rationality. At root, such gross interventions as these, no matter how greatly they excite the raptures of the mainstream inflationists, ensure nothing more than the confusion of those critical accounting algorithms which help ensure that capital and labour are not being squandered. This is so because, not having the noble pedigree of the free, unhampered market, the infusions – being nothing more than the bastard offspring of the central planners’ hubristic conception - bear no definitive relationship to the generation and subsequent movement of the real goods and services whose value-giving exchange it is the sole purpose of these media to facilitate, both across space and through time.

 To see this, take the simple – if extreme – example of the post-Lehman crisis itself. The Fed, we are told, by the newly-respectable brotherhood of NGDP targeters, ‘only’ had to ensure that the gross flow of money out of the funnel at the end of the economy (the $14 trillion per annum, principally in the form of final, exhaustive spending) remained unaltered and all would have been well. [We shall here ignore the fact that this would have been an impossible task to have undertaken in real time even if all the various rivalrous sects and sub-sects of NGDPers had managed to agree upon what means should have been employed, upon whether levels or growth rates of the aggregate should have been controlled, and over what horizon this was to be brought about].

 But look at the facts of what did happen that year as the economy swirled around the ragged edges of a maelstrom of total collapse. Total domestic, non-MFI credit rose a modest 2.9% as the private component of this fell 2.5% while Leviathan’s appetite grew by a monster 13.7% (counting GSEs in with government itself). Meanwhile, M1 jumped 18.1%, ‘Austrian’ Money Supply (M1+, if you will) rose 25%, and M2 added a more modest 9.1%. Confusion confounded, you might say, since we are being exhorted to act to control one or more of these aggregates, depending upon which particular ‘new’ monetary school you choose to believe. But the difficulties do not end there, for worse was to come in the ‘real’ economy.

 Here, the hallowed NGDP measure fell 3.7%, implying the Fed should have added X, or maybe Y, or Z in order to offset the switch in emphasis from credit to money and the concurrent slowdown in the immediate use or ‘velocity’ of that money.

 But this was not the end of it, for private-sector NGDP (the important bit) fell a greater 5.7%, while the total business revenue measure which we have argued above is the real key variable, slumped to a crushing 11.5% loss. Within this the disparities were even more marked. Revenues among the extractive industries plunged 50.6% at one end of the spectrum as those accruing to health & social care rose 4.4% at the other. For profits – and hence, for both the means and the incentive to expand output and employment - the spread was even more extreme for the trailing four quarters to our two end-dates, ranging from a 73% contraction for the extractive sector to a 68% gain for the utilities (which, in part, benefited from the formers’ woes in the shape of cheaper energy inputs, again underlining the point that it is relative costs and prices which count, not absolute ones).

 Again, we have to ask the targeters and reflationists: how, where, and when was the central authority supposed to have intervened in order to lessen the economic pain; and how do we know that same pain was not either intensified or prolonged, rather than mitigated, by the actions which were taken since these could not have done other than to have interfered with the market’s attempts to find proper clearing prices, to excise dead capital stock, and to marshal its combined entrepreneurial abilities for the task of laying down new capital where the evaporation of the prior bubble had revealed it to be truly useful (and, by extension, profitable) to do so?

 If the Bernanke Fed had any answers then – or, indeed if it has since achieved sufficient enlightenment to justify its present burst of activism – we should be delighted to hear them. Our breath is not being held.

 As a practical matter, it should be noted that the final data which we use to plot these changes have only just begun to be made available on a delayed quarterly basis and, even then, a full check on their validity awaits the glacial progress of the statisticians at the IRS, whose findings can be up to four years in arrears!

 Though we must always exercise caution regarding any use of aggregates, a reasonable proxy is therefore what we need if we are to monitor developments, albeit using the broadest of brushes. For us the widely-ignored business sales data fits the bill for overall activity, while the ratio of its sub-components—retail sales versus those made in the manufacturing and wholesale sectors gives us an idea of gross saving/investment v end-consumption. Another way of showing this is to plot the monthly personal consumption estimates against those for business revenues. As the plot shows, this latter is highly variable and has been in decline ever since the financialization of the economy began in earnest in the early-1980s.

A falling ratio implies, to an Austrian, that a greater degree of time preference appears to be developing and hence, a higher natural rate of interest (the ratio of intertemporal prices) has come to prevail.



In contrast, an examination of the path of BAA bond yields shows that market rates (after subtracting consumer price changes) have been steadily falling over time, due to a toxic mix of loose money and abundant speculative leverage. The gap between what should be and what is, is therefore a widening one, suggesting that a mix of overconsumption and malinvestment, fuelled by increased non-productive indebtedness, is to be expected.

Chronic and often highly elevated current account deficits (not to mention the dire fiscal situation) testify to the overconsumption element, while the series of ever-more violent booms and busts, coupled with lacklustre real net investment and stagnant real wages, are symptomatic of the second, while the level of debt itself should itself need no further comment.

 Given this malign constellation of factors, the Fed’s eagerness to suppress all interest returns for at least the next three years and for as far out the curve as its tainted grasp can extend is not likely to do anything to restore a much-needed touch of balance to the world’s largest (and formerly most vibrant) economy.

 Bond yields have already been forced far too low, making stocks seem relatively well-valued, even as the underlying conditions deteriorate and the fatal dependency on the sweet neurotoxin of stimulus deepens its grip on the patient. By progressively suppressing the economy’s intrinsically-generated price signals in this fashion, a wholesale paralysis of the system may one day result.

 What Bernanke’s intellect cannot seem to encompass is the thought that if a man has lost weight through an illness related to his previously poor dietary regime, it will simply not do to try to fill out his now-baggy suit by tempting him back into over-indulgence. Some glimmerings of this idea do surface in the occasional expression of doubt about just how large such shadowy entities as the ‘output gap’ or the ‘structural growth rate’ may still be in the aftermath of 2008’s debacle, but none of these misgivings ever seem to penetrate the cranium of a man who thinks he can meaningfully reduce unemployment by stimulating junk finance in all its many forms.

 It is not only that Bernanke’s policies will inevitably assist the zombie companies and the obsolescent industries to absorb scarce resources (not least on bank balance sheets) to a much greater degree than is justified, thereby denying greater returns both to their better-positioned rivals and to those nascent endeavours which could better reflect unalloyed consumer preferences and whose growth could come to replace yesterday’s failures as tomorrows’ providers of income. There is also the danger that lax money misleads even today’s supramarginal businesses into over-estimating the depth and duration of demand for their products, ultimately undermining many otherwise sound undertakings and reducing these, too, when the cycle next turns, to the ranks of the Living Dead.

Gather ye rosebuds will ye may, for the bloom on this Fed rally, too, will eventually wither and fall.  

Where Have I Seen Multiple Pledges Before?

by Karl Denninger
market-ticker.org

Oh this is rich....

(Reuters) - Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.
China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.
As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.

So let's see....

We pledge the same mortgage more than once, we in fact get paid for it more than once, we then basically steal the other instances of the money (other than one of them of course) and then when the entire pyramid scheme we constructed threatens to collapse (because there is no collateral behind what we did and our bets have gone bad) by cry poor-mouth and armageddon and threaten to blow up the financial world unless the Federal Government and Fed borrow, spend and QE to the moon to cover up the gaping hole in our balance sheet.

This sort of abject, outrageous fraud leads to zero indictments, zero prosecutions and zero incarcerations.

So then it's done again, this time in China with a bunch of pledged steel that allegedly is there to cover loans written against that. Except just as in the case of mortgages the steel never exists either as it was pledged more than once or simply was invented out of whole cloth (instead of being invented out of iron ore and chromium!)

I'm impressed. No matter where I look, all I find is a Ponzi scheme complete with falsified documents (E.g. PFG Best, et.al.) whether it be warehouse receipts, allegedly-good "bonds" that are printed on toilet paper and are abject frauds, mortgages that are pledged, diced and sliced more than once effectively "multiplying" them (although there is in fact only one debt) and now we have steel that never really existed but there is a warehouse receipt for the illusory, invented, magical coil.

And we wonder why China is trying to gin up a war with Japan?

Maybe it's because they're teetering on the edge of financial collapse as virtually everything in their economic system is a fraud.......

Now there's something to to think about, and it should be quite-sobering when you realize that we're only marginally better in this regard than they are.

Fannie Mae paid BofA premium to transfer soured loans-regulator

By Rick Rothacker
.reuters.com

Watchdog urges more scrutiny of Fannie Mae payments
* Members of Congress asked watchdog to review loan deal

* Inspector general has concerns about controls on program.

Fannie Mae agreed to pay Bank of America Corp about 20 percent more than it was contractually obligated to last year in order to transfer the servicing of troubled loans to another firm, a report by a watchdog found.
In a report to be issued on Tuesday, the inspector general for the Federal Housing Finance Agency urges the regulator to ensure Fannie Mae applies more scrutiny to the pricing of such transactions and possibly revise its contracts with mortgage servicers.

"FHFA should ensure that Fannie Mae does not have to pay a premium to transfer inadequately performing portfolios," the report says, referring to the regulator of Fannie Mae and sibling Freddie Mac.

The watchdog, however, called the effort to shift troubled loans to companies more skilled at working with borrowers a "promising initiative" that could reduce loan losses for government-controlled Fannie Mae and taxpayers. It could also reduce foreclosures.

The FHFA inspector general scrutinized the $512 million payment Fannie Mae agreed to make to Bank of America in August 2011 after members of Congress asked for a review. Some critics viewed the deal as a back-door bailout that allowed the second-largest U.S. bank to shed poor-performing mortgage loans - and get paid for it.

At issue is a program in which Fannie Mae sought to reduce losses on troubled loans by bringing in specialized firms to handle payment collection and loan modifications.

Banks make mortgages and sell them to Fannie Mae and Freddie Mac, which package them into securities for investors. Mortgage servicers such as Bank of America, however, continue to administer payments sent in by borrowers. Fannie Mae can shift loans handled by one servicer to another, but has to pay a termination fee to do so if the move is deemed "without cause."

In January 2011, Fannie Mae started discussions with Bank of America about buying the mortgage servicing rights to 384,000 loans with an unpaid principal balance of about $74 billion, according to the report.

Fannie Mae had projected losses of about $11 billion on the loans, but determined it could get savings of up to $2.7 billion by transferring them to another servicer. Fannie Mae concluded that the bank's overall service was below average compared with its peers, but it had not determined the bank to be in breach of its contract, according to the report.

Eventually, Fannie Mae agreed to pay a termination fee of $512 million to Bank of America, about $85 million more than it had to under its contract, according to the report. The bank had balked at a lower price and would have been allowed to delay the sale for up to three months as it sought another buyer.

At the time, the FHFA reviewed the deal and was concerned about the premium, according to the report. The regulator had previously raised concerns about similar transactions, determining Fannie Mae "routinely paid more than the contractually specified fee for terminations without cause."

In a July 2011 email, one FHFA official wondered whether Fannie Mae squeezed Bank of America hard enough on price considering the bank was benefiting by "getting this stuff off their books." In an email to FHFA, Fannie Mae argued it agreed to pay the premium for a number of reasons, including avoiding possible lawsuits with the bank, according to the report.

Ultimately, the regulator did not object to the sale after Bank of America agreed to refund about $70 million of the purchase price if Fannie Mae did not realize sufficient savings from the deal. When all transfers were completed, Fannie Mae ended up paying a total of $421 million to the bank because of a reduction of the number of loans in the portfolio.

FHFA WILL REVIEW

In its report, the inspector general found that the concept behind the program - to reduce credit losses - was "essentially sound." But it agreed with an internal Fannie Mae audit that raised questions about controls on the program. For example, Fannie Mae relied on a single contractor to come up with prices for most of the transactions.

The amount paid to the bank was similar to earlier deals, which carried an average premium of about 15 percent, according to the report. Since the Bank of America transaction, Fannie Mae has not made any more payments to transfer mortgage servicing rights, the inspector general found.

In a response included with the report, FHFA agreed that Fannie Mae should not pay excessive premiums to transfer poorly performing portfolios. The regulator said its supervision of Fannie Mae has and will continue to include reviews of the process for determining the price of "significant portfolio transfers."

The FHFA inspector general issued a report last week that also stemmed from a Bank of America agreement with one of the U.S. mortgage finance companies.

The watchdog found that Freddie Mac will recover up to $3.4 billion more from banks after it began to better scrutinize soured loans for defects that could require banks to buy back the mortgages. The stepped-up loan reviews came after the inspector general raised questions last year about a settlement Freddie Mac reached with Bank of America to resolve mortgage repurchase claims.

The Charlotte, North Carolina-based bank has struggled with mortgage losses after buying subprime lender Countrywide Financial in 2008.

Quantitative Easing 3: The Biggest, Baddest Bank Bailout Ever

By George Mantor

Excuse me, did I miss something? Did I hear Bernanke say that the solution to reversing the depression would be to dilute the value of the dollar by buying unlimited toxic assets from the banks?

 

In my humble country boy ignorance, I feel like that fella is all vine and no tater.

 

But when looked at from behind the veil, it is the logical next step in The Wealth Transfer Initiative.

 

As all but the least informed know by now, the big banks have been teetering near collapse because what they are showing on their books as assets are actually Mortgaged Backed Securities with no mortgages backing them except for those that are already in default.

 

One of my favorite pieces of the MBS Ponzi scheme is that mortgages would only be assigned to the pools after they defaulted in direct contravention of the very rules that govern mortgage backed securities. This is one of the amusing little sidebars that, like “robo-signing”, has yet to be comprehended by many people.

 

In the case of robo-signing, it wasn’t that minimum wage workers were fabricating and forging documentation necessary to prove ownership of the obligation, it was why they were even needed in the first place. The answer is because the documentation had been destroyed so that references to the same loan could be made in multiple pools.

 

The execution of an assignment of the deed of trust, along with the note years after the trust closed is evidence of massive fraud. The trust by its own rules must receive the documentation within ninety days of closing and the loan must not be in default.

 

The practice of lobbing the defaulted mortgages back over the fence into the pools is proof of the above. Are there any real prosecutors left out there?

 

The trustee would be failing in his duty to protect the investor if he accepted defaulted mortgages into a performing pool. It’s all part of the MBS shuffle and it is so prima facie criminal that the only explanation why nothing is happening is because everybody is in on it.

 

Targeting Pensions: The Real Motivation for Mortgage Backed Securities

There are so many dots left unconnected by media that it looks like a map of towns with no roads connecting them.

 

One of the things getting little attention is the real “why?” behind MBS in the first place.

The problem in explaining the collapsing global economy is the massive size and mind-boggling complexity underlying a crime wave so vast and so entrenched in governments that corruption now taints everything.

 

The reason no one gets prosecuted except the tiniest fish is that they are all on the same side. Most lawyers work on that side, not our side. The judges, the sheriffs, the bankstas, the corporations, the regulators, the media and the politicians are mostly on their side.

 

For convenience in sucking in even more money for their side, collection agencies are working right out of district attorneys’ offices and splitting whatever they can squeeze out of a terrified public. Your tax dollars really at work.

 

You want to know why no real financial criminals are being prosecuted by DAs? They are too busy extorting money from poor people. Tell me the system isn’t fucked.

 

I hate to tell you what’s happening next, but even as we speak, tax returns are being compared to loan applications. They are going after mortgage fraud alright, but only the borrowers. If you have a stated income loan, you can expect a knock on the door.

 

Those who walked away from upside down properties are also being scrutinized.

 

The journalists who still speak the truth are marginalized, fired or arrested. The lawyers who take the wrong clients are disbarred.

 

They are coming for us next, mark my words. Three years ago I wrote that when everything was understood and tallied up, it would prove to be the biggest transfer of wealth in history. I’m not sure what worse than that would look like, but now I’m wondering if looting wasn’t just the first step. Just because I’m paranoid doesn’t mean they aren’t out to get us.

 

Insatiable greed is the “Why?” behind MBS creation.

 

A certain type of person wonders, “Where is there a lot of money and how can I get it?”

It’s called Willie Sutton’s Law. Willie Sutton was a famous bank robber who, when asked why he kept robbing banks answered, “Because that’s where the money is.”

 

Thirty years ago the money was piling up in pension funds as the “greatest generation” concluded a life time of work. Those bloated funds had long been lusted over by financiers who jealously saw the money as doing nothing.

 

It had to be safe. The principal could not be put at risk. But, that need for absolute preservation of the principal, limited the ability of the fund to grow at more than a one to two percent annual return.

That made pension fund managers ripened fruit to be plucked, and pluck them they did. A whole lotta plucking still goin’ on.

 

Pension fund managers are paid two percent of the fund and 20% of growth. See the moral hazard here? The big money is in generating astronomical returns, not babysitting the fund.

By now, you can guess what’s going to happen next. Here comes Wall Street with a line of bullshit that only a greed mongering, resentful pension fund manager would ever believe.

 

A zero risk proposition they say. Nothing safer than Triple A rated American home mortgages with a historical default rate of three tenths of one percent.

 

But, the pension fund doesn’t own the actual mortgages, just a right to a blend of revenue streams purported to be the monthly payments from the borrowers.

 

At this point, the pension fund takes an enormous pile of pensioner money and gives it over to Wall Street in exchange for monthly payments and the return of the principal when the mortgages are paid off.

 

This would work if there were real borrowers making real payments. Instead, Wall Street just kept all of the money and would cut a check to the pension fund supposedly representing payments from the borrowers. For show, a few loans got made but there were never enough borrowers relative to the amount of cash wanting in to the game.

 

There are four ways to get more loans: change underwriting, create equity (false appraisal), pledge a loan multiple times to multiple pools, or make up borrowers. The latter is by far the easiest and was the preferred method in areas of low appreciation.

 

Or, as the convicted Chairman of Taylor, Bean and Whitaker, Lee Farkas, once remarked. “I could rob a bank with a pencil.”

 

Here’s what he said, “It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist.”

 

The automation of loan underwriting allowed lenders to simply reverse engineer a loan application to determine what information would need to be supplied by the borrower to obtain underwriting approval.

 

Real borrowers often signed blank loan applications or signed an application where all of the information had already been filled in.

 

Creating equity creates more loans through refinancing and stimulating construction of more homes needing loans.

 

Pledging loans to multiple pools is an easy way to leverage a single loan. But, in each of these scenarios, the pools were limited by the finite number of borrowers.

 

The made up borrower frees Wall Street from the messy business of actually making loans and lets them keep all the money for their bonuses.

 

As evidence, there is a separate category of mortgage defaults called, “First Payment Defaults.” Who defaults on the first payment? Dead people and Wall Street.

 

Wall Street wanted the pools to default so they could collect on the insurance of multiple times the loan amount and avoid ever having to pay the money back to the pension fund.

 

The only problem is that a lot of those mortgage pools don’t really have any assets.

So to bailout the banks, from having to account for the missing money, Bernanke will buy these bags of air and call it asset buying.

 

None of this puts any real money in circulation and no more mortgages or jobs are going to be created as a result of this, but the bankstas will be back in bonus heaven.

 

Somebody, please explain this to me in terms I can understand.

 

I almost liked it better when I didn’t know anything. Everybody told me to “just follow Buffett”, “do what Buffett does; you can’t go wrong with the Buffett strategy”, so that was all I did.

 

Now, I find out that there’s a Warren Buffett. So I guess there’s no point in giving up Margaritas this late in the game.

~

Fiat Justitia? Breuer fires blanks on elite financial frauds

By William K. Black
neweconomicperspectives.org

Beurre blanc is the classic white butter sauce of France. Americans who hate the French claim that they became adept at saucing to cover up the rot in their meat in earlier times. A beurre blanc does not remove the rot. It masks the bad taste and the bad color of bad meat. Indeed, the sauce makes the dish even less healthy. If the rotten meat doesn’t get you, the sauce’s cholesterol will.

“Breuer blanc” is the classic white butter sauce served by the increasingly oxymoronic Justice Department to cover up the rot in elite American banksters. Lanny Breuer runs the Criminal Division during the continuing cover up of the greatest and most destructive epidemic of elite white-collar crime in our history. The ingredients of “Breuer blanc” consist of a generous portion of inaction and a large dollop of hypocrisy all emulsified with esters of excuse.

The last three administrations have found the bouquet of the financial industry’s political contributions so delectable that they have allowed elite financial firms and their senior officers to commit fraud with near impunity. Prosecutions, even serious investigations employing grand juries, of the elite bankers who became wealthy by causing the ongoing crisis have become so rare that Breuer is firing “blancs” at the most elite frauds. The results of Breuer blanc have been catastrophic.

  The Clinton, Bush, and Obama administrations (and Congress) catered to elite bankers so unctuously that they created the most criminogenic environment for financial fraud in history. The fin de siècle feast that the Clinton and Bush administration served up to produce the crisis exemplified the elite degeneracy that the French have always ascribed to the end of an era. The element of hope, however, that the French also ascribe to the new era was quickly betrayed by the Obama administration. The audacity of hope soon curdled into a spoiled and broken Breuer blanc slathered over the rot of the elite banksters to cover up their frauds.

Breuer is the very model of the modern chef de cover up so he has deconstructed the criminal justice system to the point that it no longer applies to the banksters who caused the crisis. Breuer and Attorney General Holder specialize in serving the American people tripe and confit de canard. Breuer blanc has been slathered on so many of Holder’s hors d’œuvre that the Justice Department has been rendered hors de combat when it comes to the banksters. 
 
It was a travesty and a national tragedy that Holder and Breuer (and their predecessors) have failed to do their duty to hold the banksters accountable. It is beyond comprehension that Breuer is bragging about his failure to prosecute elite corporate frauds. On September 13, 2012, Breuer spoke to an audience of New York City attorneys who function primarily to maximize the wealth and political power of corporate CEOs – even when they do so at the corporation’s expense. See Looting: the Economic Underworld of Bankruptcy for Profit (George Akerlof and Paul Romer, 1993). The CEO, not the “corporation,” hires and fires big law firms and the CEO’s interests are frequently hostile to the interests of the corporation’s shareholders and creditors. Breuer was at his most obsequious in front of his NYC peers.

Holder and Breuer became wealthy by doing the bidding of the world’s wealthiest and most powerful CEOs when they were at Covington & Burling. The CEOs deploy them as apex predators – and they are famously vicious or charming, whatever is required, in their role as counsel representing the CEO’s interests. Holder and Breuer will soon return formally to that status. It is an odd role, for the lawyer must be reliably tame in serving the CEO’s interests and willing to be reliably vicious if necessary when attacking anyone that stands between the CEO and wealth, ego, and power maximization. It is an extremely lucrative role and such lawyers are considered to be the profession’s elite by their peers.

I started my professional career in the typical large law firm. It was pure luck that I began representing the Federal Home Loan Bank Board (one of the larger clients of our Washington, D.C. office) and was asked by the agency to join them as their Litigation Director. This, indirectly, led to me eventual working for a very fine chief agency counsel, Harris Weinstein – who came from and returned to Covington & Burling. It is not inevitable that lawyers from large firms who often served as defense counsel for CEOs will be weak in enforcing the law. OTS Director Tim Ryan chose Weinstein as his chief agency counsel because he knew that Weinstein was tough and competent. Unfortunately, Holder and Breuer have proved to be nothing like Weinstein.

Breuer was likely more candid than usual in his speech given his specialization in canards because he was delivering such a safe message to such safe audience of lawyers so much like him. He decided to serve them as a lagniappe an amuse-bouche perfectly crafted to his audience’s taste. He explained to them how to give him an excuse to refuse to bring meritorious prosecutions of their clients’ elite corporate crimes.
     
First, however, he served more canards and tripe.

“Since 2009, my team and I have changed the [Criminal] Division in significant ways – bringing in new, energetic leadership in virtually all of our sections, and prosecuting the highest-impact cases in the country.
In particular, and relevant to the subject of my remarks tonight, we have dramatically ramped up our white collar criminal enforcement efforts – an aspect of our work that I care deeply about, and that is now more important than ever.”

The reality is that prosecutions of financial fraud fell dramatically under Bush and declined further under Obama. Breuer has not indicted a single elite Wall Street bankster whose frauds drove the crisis. I have been unable to find evidence that he has even conducted grand jury investigations of the elite banksters who drove the crisis. (Grand juries are secret, but they generally become public because the witnesses can disclose their existence.) Even if a few grand jury investigations of the Wall Street banksters have occurred, there cannot have been more than a handful of investigations worthy of the name. I know of none, and that includes Countrywide, WaMu, IndyMac, Lehman, Merrill Lynch, Goldman, the huge mortgage banks, and Citicorp.

The best that Breuer could come up with was Lee Farkas, the “mastermind” of a crude fraud discovered by Fannie Mae a decade ago shortly after it began. Farkas was not prosecuted for the frauds he committed that contributed to the crisis, but for unsuccessfully trying to rip off TARP. The prosecution occurred because SIGTARP discovered the fraud and made the criminal referral. Breuer knows that criminal referrals have virtually ceased from the banking regulatory agencies because their leadership was selected to lead a competition in regulatory laxity. Breuer knows that mortgage fraud, led by our most elite financial institutions, drove the crisis. Breuer has done nothing to reestablish the banking regulators’ criminal referral process as a national priority. Breuer did not even put the banking regulatory agencies on the task force he created and appointed Mr. Schneiderman to lead – a task force that has leaked its intention not to prosecute.

“I have said before that the strongest deterrent against corporate crime is the prospect of prison time for individual employees – and we do not hesitate to seek long sentences when circumstances warrant. Lee Bentley Farkas, the former chairman of Taylor Bean & Whitaker, which was one of the largest private mortgage lending companies in the country, is serving a 30-year prison sentence for having masterminded a nearly $3 billion bank and securities fraud.”

We can agree that prosecuting the CEOs who grew wealthy by leading the accounting control frauds that drove the crisis would be “the strongest deterrent” and that the last three administrations have failed to prosecute the CEOs leading our financial accounting control frauds. It was the lenders and their agents who overwhelmingly put the lies in liar’s loans. No honest lender would make liar’s loans. By his own standard, Breuer (and his predecessors) failed utterly to employ “the strongest deterrent” against the largest and most destructive fraud in history.

Private counsel for homeowners, at very small firms, produced the admissions under oath, demonstrating that several of the largest mortgage servicers routinely filed false affidavits – roughly one hundred thousand times annually. The Obama administration led the effort to give the banks effective immunity from prosecution for these felonies – all without admissions of guilt in the settlements.

The Criminal Division has never been confronted with so many and so destructive elite white collar frauds. The Division has never failed so utterly to prosecute such elite frauds. It is true that Bush’s Department of Justice was also a disaster, but that is no defense of Breuer blanc.
Breuer’s next served up the canard that was the focus of his speech.

“Tonight, I want to focus on one aspect of our white collar criminal enforcement in particular: the use of deferred prosecution agreements, or DPAs. Over the past three-and-a-half years, the Department of Justice has entered into dozens of DPAs, and non-prosecution agreements, or NPAs. I’ve heard people criticize them and I’ve heard people praise them. What I’m here to tell you, is that, along with the other tools we have, DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.
Prosecutors faced a stark choice when they encountered a corporation that had engaged in misconduct – either indict, or walk away. [O]ver the last decade, DPAs have become a mainstay of white collar criminal law enforcement.
The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts.”

Breuer’s claim is preposterous. Here are key facts that show he is serving us tripe. First, he is correct that we have just run an experiment for over a decade – we no longer typically prosecute elite U.S. corporations that commit felonies. We have dramatically reduced financial fraud prosecutions and in the cases where the Criminal Division still troubles a felonious corporation it typically negotiates a DPA, or more pathetic still, a NPA. A DPA rarely leads to a prosecution of the corporation, so it too is really an agreement not to prosecute. DPAs and NPAs are primarily used for non-elite corporations, so when Breuer claims “dozens of DPAs” one should not assume that his Criminal Division is taking on vigorously fraudulent elite corporations, particularly elite U.S. corporations that commit felonies.

Far from proving that DPAs caused a “sea change in corporate compliance,” a December 2009 GAO study found that the Justice Department did not collect data on DPAs until 2009, had no performance measures for “corporate compliance,” and had no reliable information on purported improvements in corporate compliance.

Studies by the Big 4 audit firms and Transparency International have documented increased corporate illegality and corruption in the U.S. during this century.

Breuer’s claim that “DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe” may have been conclusively proven. As he admits, DPAs have been the Justice Department’s “mainstay” response to elite corporate crime for over a decade. During that period, we have suffered repeated, intensifying control fraud epidemics by our most elite corporations, as have many nations. There has been a “transformati[on] … [in] corporate culture” – for the worse. I do not believe that DPAs are the primary cause of that transformation, but by greatly reducing the risk of real prosecutions they have made the world more criminogenic and encouraged the continuing degradation of corporate culture.

The scary aspect of this quotation is that Breuer may believe it. He may actually believe that over the course of this new century there has been a positive “transformati[on] … [in] corporate culture” and that not prosecuting elite U.S. corporations that commit felonies caused the transformation that produced this Golden era of corporate integrity we now enjoy. If he believes that the global corporate culture has improved dramatically over the course of this century Breuer is delusional and his delusions make it impossible for him to avoid abject failure as head of the Criminal Division.

Solely in the interest of reducing length I will not explain why Breuer’s claim that non-prosecution through a DPA is really equivalent to prosecution is a tasteless canard and move instead to Breuer’s amuse-bouche. Breuer served up a roadmap for defense counsel to follow in order to excuse corporate felons from prosecutions that Breuer knows to be meritorious.

“To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets [is] a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”

I’ll limit my response to four points. First, the head of the Criminal Division feels the need to “stress” that he will not “always” refuse to prosecute corporations that commit felonies. He is giving defense counsel a roadmap on how to shape their arguments to allow corporate felons to escape indictment. Breuer and Holder need to resign forthwith and be replaced by prosecutors.

Second, Breuer has “heard … predictions that a … bank might fail if we indict.” Since he has failed to indict banks this means that he failed to prosecute banks that committed felonies because the defense predicted the bank “might fail if we indict.” We put thousands of banks and S&Ls through receiverships in the 1980s and early 1990s and made the industry far healthier. If the bank is insolvent or cannot raise the minimum required capital it should be put into receivership because it is in an unsafe and unsound condition. Very few receiverships result in liquidation. We typically sell, with federal financial assistance, the failed bank to an acquirer. Banks have deposit insurance. They virtually never fail due to runs, particularly irrational runs on healthy banks. So the “sober” “prediction” that the bank would (1) fail if indicted and (2) that the bank is actually healthy and should not be placed in receivership would be rejected by any competent financial regulator. Breuer fell for the “prediction” – hook, line, sinker, rod, reel, and the boat he rowed in on.

Third, “innocent” employees are a red herring. There are often collateral effects of criminal prosecutions, including blue collar crimes. The blue collar felon’s family is typically innocent and the consequences of prosecuting the felon are often severe for the family. Prosecutors routinely indict blue collar felons in such circumstances.

Blue collar defendants never hire economists and elite lawyers, Breuer never personally listens to their pleas not to indict, and their pleas not to indict do not “literally keep [Breuer] up at night.” The statue symbolizing the Justice Department wears a blindfold to indicate that justice is given to all regardless of class, but surely no one expects Holder and Breuer to take that symbol seriously, particularly in Breuer’s sleep-deprived state. Breuer’s solicitude for elite corporate felons “literally keep[s] [him] up at night.” (Besides, Ashcroft hid the Justice Department statue behind a screen because he was offended that by the Lady Justice’s exposed breast.)

Breuer’s argument allows large corporations that commit felonies to escape indictment by holding their innocent employees hostage. Note that his argument greatly favors the largest corporations, making them too big to indict. A similar argument is made against corporate income taxes. We dare not tax corporations lest they move elsewhere, which would harm the innocent poor who wash dishes in the Manhattan restaurants frequented by the wealthy.

Fourth, note that Breuer says that he may refuse to bring prosecutions he knows to be meritorious because he fears the impact on “the health of an industry or the markets.” This is grotesquely improper, particularly since Breuer admits that he relies on “economists’” (and Geithner’s?) claims about such alleged impacts. One of the most common reasons that an industry becomes “[un]health[y]” is because control fraud triggered a Gresham’s dynamic in which bad ethics drove good ethics out of industries and professions. The control frauds deliberately created Gresham’s dynamics in order to produce “echo” fraud epidemics in other industries and professions (such as mortgage brokers and appraisers).

Vigorous prosecution is essential to break a Gresham’s dynamic, but when an industry suffers catastrophic losses due to an epidemic of accounting control fraud the widespread industry losses produce precisely the circumstances that Breuer has been convinced should not lead to indictments of elite corporate felons lest we harm the industry. It is even more bizarre that the economists that Breuer listens to about fraud often believe in a bizarre dogma that purports that markets automatically self-correct, making serious fraud impossible.

Neo-classical and Austrian economists are the professionals who have shown that they are the most ignorant of corporate fraud. Economists have consistently advanced the most criminogenic policies and displayed the greatest inability to identify fraud or understand how much damage it causes. Breuer has chosen to rely on the worst possible “experts.” Economists have no models or expertise as to the impact of indictments on industries. Breuer’s notion that we can protect the “health” of an industry by not prosecuting corporate felons is the opposite of the truth. It is essential that we prosecute the felons to break the Gresham’s dynamic and restore the industry’s health.

Breuer’s invitation to defense counsel to give him an excuse not to indict based on concerns about the impact on “the markets” is equally dangerous and shameful. Again, this excuse for committing fraud with impunity applies only to the largest corporations. (Even the most dishonest economist would have difficulty claiming with a straight face that indicting any but a handful of the largest firms would cause some devastating crisis for the stock markets.) The economists making these absurd arguments to Breuer are all strong believers in Schumpeter’s theory that the dynamic that makes capitalism great is “creative destruction.” In every other context, they would agree that committing felonies was an excellent reason for the markets destroying a corporation and that the destruction was essential to strengthen the U.S. economy. It is the markets’ reaction to learning of the corporation’s felonies that leads the markets to put the firm out of business. The fines the Criminal Division imposes in DPAs have never been more than a minor “cost of doing [fraudulent] business” for the largest U.S. corporate felons. But there is no one in these “sober” meetings who points out the hypocrisy of the economists arguing against bringing meritorious prosecutions of elite corporate felons. I doubt that Breuer has ever consulted a white-collar criminologist not working for the admitted felons in deciding whether to indict a major corporation.

Economists do not know whether it is a good thing or a bad thing if the stock price of a corporate felon falls. They do not know whether such a fall would cause a serious drop in overall stock market prices. They do not know whether such a fall in overall stock market prices would be a good thing or a bad thing. But it is obvious that Breuer thinks that economists know these things and that Breuer has drunk the Kool-Aid and believes that indictments are likely to reduce stock prices and that such a reduction is a bad thing.

Under the efficient market hypothesis, the indictment would convey new information to investors demonstrating that the corporation’s stock was a much riskier investment. The markets would react by reducing the corporation’s stock price – which would make the markets more efficient. That would be a good thing. I’m not a big believer in the efficient market hypothesis, but the economists employed by corporate felons to bolster their sober sob stories to Breuer overwhelmingly believe in the hypothesis – except when it is inconvenient to their fees. Again, it is clear that no one has ever pointed out this contradiction to Breuer.

Breuer is a lawyer, not an economist. A lawyer should know better. We have known for millennia that the way to provide justice is to follow the maxim: Fiat Justitia; Ruat Caelum (let justice be done, though the heavens fall). The maxim may sound impractical, but long experience has demonstrated that the best way to prevent the heavens from falling is to always provide justice and ignore the claims that the elites should be given special favors lest the heavens fall. Breuer, Holder, and Obama are all lawyers who were taught that the temptation to create a special, favorable set of rules for the elites is not simply unjust but also the surest means of destroying a democracy, an economy, and a society. Politics, of course, teaches the opposite lesson and Breuer, Holder, and Obama became politicians a long time ago. Politics is raw, serving up crudités variées.

Breuer’s speech coaching defense counsel on how to provide him with the excuse to avoid prosecuting elite corporate felons was crude and unworthy of any representative of the Department of Justice.