Capitalism Without Failure

Bill Black: Leaving Felons in Charge of our Largest Financial Institutions is Now United States Policy

2013-04-19T14:27:00.001-07:00

Bitcoin Arouses Passions: Why You Should Buy Now. And Why You Should Buy Never.

2013-04-06T18:46:00.001-07:00

March 23, 2013

Apparently I struck a nerve this morning when I asked Barry Ritholtz when he was going to write something about Bitcoin's recent activity. He lashed out at me for asking his opinion. In case you are not familiar with Barry Ritholtz, he writes The Big Picture blog. He covers macro trends. Rithotz is somewhat unique in the world of money and analysis in that he is honest, has integrity, and is incredibly even-handed in his approach to investments. He also does not pull his punches when it comes to calling out cronyism, corruption, and fraud.

So why is it that even-handed Ritholtz is reacting with scorn and vitriol when asked his opininion of Bitcoin? There are a few possibilities. One is that he is in the money-making-advice business and his clients are badgering him about why they are missing out on the parabolic rise of Bitcoin's value.

Another possibility is that he lumps Bitcoin with gold accumilation, tin hats, and conspiracy nuts. I'm guessing he started with the latter perspective and is now dealing with the former.

I understand BR's discomfort with these things. He is a quant. He is an excellent analyst when it comes to risk and income and assets and liabilities. He is also adept at overlaying the psychological component of investment behavior when it comes to traditional assets and markets. But things that do not produce income and are of questionable mainstream acceptance make him understandably nervous. He warns regularly against getting too caught up in narratives that confidently point investors to keep money on the sidelines or in non-traditional, faith-based vehicles.

My own opinion is that anyone who blogs about the economy and technology should be willing to address one of the most important money developments of the millenium... even if he or she does not consider it to be a currency. It is unquestionably global, it is currently a store of value, it is being used for transactions and speculation, and it is an outlet for people who lack confidence in the global economic system and in central bank management of currency.

Since BR is not taking on the challenge, here is my own take on purchasing Bitcoins:

Why buying Bitcoins is a terrible idea:

1. No legal entity = no accountability. What happens if your Bitcoins disappear? Whom do you sue? What law enforcement unit do you call? Answer: You may well be SOL.

2. No income, no assets, no P/E, no equity...

3. Governments must oppose Bitcoin because Bitcoins are designed to evade government. You can be sure that Bitcoin is in the crosshairs of the US, and other, governments. See this: On Monday, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released its first “guidance” as to how “de-centralized virtual currencies” should fit into the larger regulatory regime under which currencies of all kinds are required to operate.

4. The next crash may be worse than the last one. And governments have an interest in making this happen.

5. People are at this moment conspiring to manipulate and milk the Bitcoin market. How could they not be? Given the relatively small market cap, there are serious opportunities for manipulation. Given the anonymous nature of the market, it is attracting everyone who is interested in hiding assets and transactions. Guess what happens when you attract everyone who has a nefarious financial goal and everyone who knows how to manipulate financial markets? Those are the people on the other end of your transactions. Let us not underestimate what will be attempted with Bitcoin as the tool. Think of the Hunt Brothers without effective tools to bring them down. There will be hackers attacking the Bitcoin world in every possible way. Will its encryption hold?

6. The train has left the station. You missed the time to buy. Unfortunately no one knows where the next station is. It may be back at the first station (or it may be on the moon).

7. Someone created the Bitcoin formula. That person knows the back door. That person knows how to break the code. That person knows how to circumvent the mining process. After all, it is, at its core, just a series of ones and zeros. (Good point, Peter)

On the other hand, here is why you are a complete fool if you do not purchase Bitcoins immediately:

1. Compromised equity markets. Our laws are written by bankers for bankers. Corrupt politicians are the catalyst. If legislators were woking for citizens of America, we would have very simple legislation and we would have bankers behind bars. As it stands now, we have maintained a deeply compromised financial system and have maintained criminals in positions of influence and power.

2. Compromised central banks. Central bankers in the US and UK have no interest in cleaning up the fraud and corruption that permeates our financial world. Their answer is to paper over the problems, infuse ever more debt into the system, and to enrich the rich by keeping asset prices rising. There is an end-game to this cycle.

3. Compromised legislators and regulators. Legislators and regulators work primarily for the financial institutions now known as Too Big Too Fail. They are not in the business of protecting investors, savers, or the general public.

4. The United States crisis management team, made up of all the compromised parties named above, will be saving themselves and their benefactors when the next crisis hits.

5. The value of Bitcoins has gone from practically nothing to over $100 in a very short period of time. A Bitcoin could be worth $1000 soon. Or $10,000. No one knows.

6. Manipulation of Bitcoin will mean more parabolic moves relative to whatever crappy fiat currency you currently hold.

7. The credit rating agencies maintain their conflicted structure. While there is now some scrutiny on them, nothing has changed to make those ratings inherently more trustworthy. Those ratings form a foundation for much of our current financial system. Guess what happens when you layer trillions in derivatives and debt on top of a compromised financial foundation?

I don't know why Ritholtz is so testy about Bitcoins. He was inappropriately insulting when I brought it up. But there is no denying that Bitcoins are here today and are making some people very rich very quickly. Who knows where they will be tomorrow? Maybe they will disappear. Or maybe they will become a darling of central bankers once they figure out how to harness its power. Or maybe the inventor is right now in Shanghai selling the secret formula to the Chinese government. Lots of questions. Not a lot of real answers.

In the meantime, it is quite fascinating to watch Bitcoins as they vault into mainstream consciousness.

Bill Black: Pervasive Fraud by Our "Most Reputable" Banks

2013-02-28T08:52:00.002-08:00

A recent study confirmed that control fraud was endemic among our most elite financial institutions:Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market. Tomasz Piskorski, Amit Seru & James Witkin (February 2013) ("PSW 2013").

The key conclusion of the study is that control fraud was "pervasive."

[A]lthough there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions.

Finance scholars are not known for their sense of humor, but the irony of calling the world's largest and most harmful financial control frauds our "most reputable" banks is quite wondrous. The point the financial scholars make is one Edwin Sutherland emphasized from the beginning when he announced the concept of "white-collar" crime. It is the officers who control seemingly legitimate, elite business organizations that pose unique fraud risks because we are so loath to see them as frauds.

The PSW 2013 study confirmed one form of control fraud and provided suggestive evidence of two other forms that I will discuss in a future column. The definitive evidence of control fraud that PSW2013 identifies is by mortgage lenders who made, or purchased, mortgages and then resold them to "private label" (non-Fannie and Freddie) financial firms who were creating mortgage backed securities (MBS). The deceit they documented by the firms selling the mortgage loans consisted of claiming that the loans did not have second liens. The lenders knowingly sold mortgages they knew had second liens under the false representations (reps) and warranties that they did not have second liens. (The authors confirm the point many of us have been making for years -- the banks that fraudulently sold fraudulent mortgages did have "skin in the game" because of their reps and warranties. The key is that the officers who control the banks do not have skin in the game -- they can loot the banks they can control and walk away wealthy.) The PSW 2013 study documents that the officers controlling the home lenders knew the representations they made to the purchasers as to the lack of a second lien were often false (pp. 2, 5 n. 6), that such deceit was common (p. 3), that the deceit harmed the purchasers by causing them to suffer much higher default rates on loans with undisclosed second liens (pp. 20-21), and that each of the financial institutions they studied -- the nation's "most reputable" -- committed substantial amounts of this form of fraud (Figure 4, p. 59).

The most interesting reaction to the PSW 2013 study is that of a fraud denier, The Economist's "M.C.K." In his January 25, 2013 column, ("Just who should we be blaming anyway?") M.C.K. argued that we should blame the victims of the fraud ("the real wrongdoers were not those who sold risky products at inflated prices but the dupes who bought them....").

Only three weeks later, in his February 19, 2013 column discussing the PSW 2013 study, M.C.K. admitted that fraud by banks had played a prominent role in the crisis.

BUBBLES are conducive to fraud. Buyers become less careful about doing their due diligence when asset prices are soaring and financing for speculation is plentiful. Unscrupulous sellers exploit this incaution. The victims are none the wiser as long as the bubble continues to inflate.

I will explain in a later column why I believe this passage is badly flawed, but my point here is that the fraud denier and "blame the victim" columnist has recanted.

During America's housing bubble, mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth. Many argue that the banks that bundled those loans into securities deliberately and systematically misled investors and private insurers about the risks involved. It is easy to be unsympathetic in the absence of hard evidence. As I argued in a previous post , 'investors were not forced to take the losing side of so many trades.'
While I stand by that view, a new paper by Tomasz Piskorski, Amit Seru, and James Witkin convincingly argues that banks deliberately misrepresented the characteristics of mortgages in securities they pitched to investors and bond insurers. The misrepresented loans defaulted at much higher rates than ones that were not -- a result that would not be produced by random errors. Moreover, the share of loans that were misrepresented increased as the bubble inflated. The authors estimate that underwriters may be liable for about $60 billion in representation and warranty damages (emphasis in original).

These two paragraphs are worth savoring in some detail. The central point we have been arguing for years is now admitted -- and treated as a universally known fact: "mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth." The crisis was driven by liar's loans. By 2006, half of all the loans called "subprime" were also liar's loans -- the categories are not mutually exclusive (Credit Suisse 2007). As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar's loans.

The incidence of fraud in liar's loans was 90 percent (MARI 2006). Liar's loans are a superb "natural experiment" because no entity (and that includes Fannie and Freddie) was ever required to make or purchase liar's loans. Indeed, the government discouraged liar's loans (MARI 2006). By 2006, roughly 40% of all U.S. mortgages originated that year were liar's loans (45% in the U.K.). Liar's loans produce extreme "adverse selection" in home lending, which produces a "negative expected value" (in plain English -- making liar's home loans will produce severe losses). Only a firm engaged in control fraud would make liar's loans. The officers who control such a firm will walk away wealthy even as the lender fails. This dynamic was what led George Akerlof and Paul Romer to entitle their famous 1993 article -- "Looting: the Economic Underworld of Bankruptcy for Profit." Akerlof and Romer emphasized that accounting control fraud is a "sure thing" guaranteed to transfer wealth from the firm to the controlling officers.

M.C.K. now admits that liar's loans were endemically fraudulent and that it was lenders and their agents who "deliberately" put the lies in liar's loans. Given the massive number of liar's loans and the extraordinary growth of liar's loans (roughly 500% from 200-2006) it is clear that that they were the "marginal loans" that caused the housing markets to hyper-inflate and created the catastrophic losses (in the form of loans, MBS, and CDOs) that drove the financial crisis. The key fact that must be kept in mind is that once a fraudulent liar's loan begins with the loan officer or broker inflating the borrower's income and suborning the appraiser into inflating the home appraisal the subsequent sales of that mortgage (or derivatives "backed" by the mortgage) by private parties will be fraudulent.

The authors of the PSW 2013 study expressly cautioned that their data allowed them to examine only two of the varieties of fraud. Lenders' frauds in originating and selling liar's loans were far more common, and far more harmful, than the two forms of fraud the PSW study was able to study. The many forms of mortgage frauds by lenders and their agents, of course, were cumulative and the frauds interact to produce greatly increased defaults.

The greatest importance of the PSW 2013 study is that even the fraud deniers have to admit that our most prestigious banks were the world's largest and most destructive financial control frauds. Given this confirmation that the banks engaged in one form of control fraud in the sale of fraudulent mortgages (false representations about second liens), there is no reason to believe that their senior officers had moral qualms that prevented them from becoming even wealthier through the endemic frauds of liar's loans and inflated appraisals. Appraisal fraud is almost invariably induced by lenders and their agents. Given the "pervasive" willingness of the officers controlling our most prestigious banks to enrich themselves personally by lying about the presence of second liens, they certainly cannot have any moral restraints that would have prevented them from creating the perverse incentives that caused loan officers and brokers to put the lies in liar's loans and to induce appraisers to inflate appraisals -- two other control fraud schemes that were far more "pervasive" (and even likelier to produce severe losses) than the two forms of fraud studied by the PSW 2013 authors.

Once the fraud deniers have to admit that one form of control fraud involving mortgages was "pervasive" among our most prestigious banks, it becomes untenable to ignore the already compelling evidence that other forms of control fraud involved in the fraudulent origination and sale of mortgages and mortgage derivatives were even more pervasive at hundreds of financial institutions. The PSW 2013 study destroyed the myth of the Virgin Crisis. It also exposes the falsity of the ridiculous "definition" of mortgage fraud that the Mortgage Bankers Association (MBA) foisted on the FBI and the Department of Justice that implicitly defines control fraud out of existence for mortgage lenders. Attorney General Holder and President Obama have no excuse for their faith in the Virgin Crisis, conceived without fraud and should repudiate the MBA definition immediately and train the regulators and agents to spot and prosecute the epidemic of control frauds that drove this crisis (and the S&L debacle and Enron-era frauds).

Original Post: link

Jacob Lew: Poster Child for Revolving Door Disease

2013-02-22T05:52:00.000-08:00

Spotlight on Jounalist Amy Goodman

2013-02-22T05:34:00.001-08:00

What’s Wrong with the Financial Services Industry?

2013-02-22T05:17:00.003-08:00

By Barry Ritholtz - February 21st, 2013, 7:20AM

If you hang around these parts for any length of time, you will occasionally run across one of my jeremiads complaining about the Financial Services Industry.

I’ve been thinking about this more than usual lately. This has led to some correspondence with Helaine Olen, whose book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry is next up in my queue. (Her appearance on the TDS yesterday is here). It is similar to the deep dive my colleague Josh Brown took inBackstage Wall Street.
My criticism is somewhat different than Helaine’s (though I am sympatico with much of her view). I break down the problems as follows:

• Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute. And, it is difficult to charge excessive fees for these services.
• Confusion is not a bug, its a feature: Thus, the massive choice, the nonstop noise, confusing claims, contradictory experts all work to make this much a more complex exercise than it need be. This is by design.
• Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons.
There is a difference between normal greed (human nature) and outright criminality. This is why strong regulators and enforcement cops are required.
• Incentives are misaligned: As I’ve written previously, too many people lack the patience to get rich slowly. Hence, not only do the wrong people work in finance, and some of the right people exercise bad judgment.
• Too many people have a hand in your pocket: The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. Active mutual funds charge way too much for sub par performance. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have doen an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.
Guess what the net impact of all this is on your investments?
• The Financialized US Economy: The above list reflects nearly half a century of the financialization of the broader US economy. Instead of serving industry, finance has trumped it. This led in part directly to the financial crisis and economic collapse of 2007-09.
• Human Nature: Then there is your own behavioral issues. On top of everything else, you are governed by a brain that simply wasn’t built for this.

All of these add up to a system that is flawed, and often fails to do its job.
This sort of problem used to be cyclical — they run tot he point of excess, than a crisis causes the pendulum to swing the other way. The great tragedy of Obama/Geithner/Summers was that crisis moment to undo the damage was missed, and indeed, the concentration of power amongst the banks only made it worse.
I fear we have to wait until yet another crisis for this to be repaired . . .

PERMALINK
Category: Bailouts, Investing, UnGuru.

Comments

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

26 Responses to “What’s Wrong with the Financial Services Industry?”

Moss Says:
February 21st, 2013 at 8:01 am
All of what u say is true, to wit.
http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-.html
call me ahab Says:
February 21st, 2013 at 8:06 am
“Instead of serving industry, finance has trumped it”
undoubtedly
“I fear we have to wait until yet another crisis for this to be repaired…”
unfortunately, elected officials are sympathetic and beholden to the behemoths of finance ( take corporate donations out of the picture and we probably wouldn’t be sitting here now wondering why nothing happened)
farmera1 Says:
February 21st, 2013 at 8:06 am
BR, not to ruin your day but the problem is much bigger than just the Financial Services Industry. Similar points made above can be made for American Capitalism in general.
John C. Bogle (founder of Vanguard) wrote a very good book: THE BATTLE FOR THE SOUL OF CAPITALISM in 2005 which covers many of the same points you made above but about all of American Capitalism. In general corporations are run to enrich the management not the owners/shareholders. Bogle calls this Managerial Capitalism vs traditional Ownership Capitalism.
So me thinks fixing the Financial Services Industry (very difficult, but maybe possible) is just the start. The very same problems infects all of American Capitalism.
If you haven’t read Bogle’s book, it is a worth while read.
____
BR: Thanks, on your rec I ordered it from Amazon
jnkowens Says:
February 21st, 2013 at 8:15 am
I read one of Bogle’s books a few years back where he talked about financial services historically contributing something like 3-4% to GDP, until it started spiking upward in (of course) the 1980′s, and that it now stands closer to 7-8% of GDP. And here’s the important part: It’s all money for nothing. It adds zero value to the economy. Just middlemen skimming efficiency from the US economy.
This is what passes for “God’s Work” these days.
Petey Wheatstraw Says:
February 21st, 2013 at 8:31 am
looks like the FIRE economy is now a peg-leg.
I wonder how far we can go on an ‘I’ economy.
faulkner Says:
February 21st, 2013 at 8:32 am
People wonder why they have such difficulty learning and mastering the craft of trading and investing. You clearly and succinctly state what that has to be cleared away even to begin.
contrabandista13 Says:
February 21st, 2013 at 8:34 am
“…I fear we have to wait until yet another crisis for this to be repaired . . .”
Really… just another…? I guess that it just depends on your point of view, but even more importantly on expectations, which are set by conditioning.
MidlifeNocrisis Says:
February 21st, 2013 at 9:18 am
For the average American, it does almost seem like the “perfect storm”, with the decline of pensions and the gradual shift to 401(k)s, along with deregulation and a myriad other developments over the last 40 years. Overall, I’m generally optimistic that we will turn this ship around. It will take time. People must be allowed to retire (eventually) and therefore there must be some type of system in place that allows a person to accumulate/save towards this goal without all of the gaming/skimming/stealing. That is my expectation anyway….
Cato Says:
February 21st, 2013 at 9:31 am
Pardon my ignorance as a non-US person, but why are 401ks dismissed as disastrous? I read some criticism before of them beign ‘investing on autopilot’; is that to say that there is no burden for the giving of investment advice etc? What other problems are there? I may have to move to the US some day so this would also be of some practical use!
~~~
BR: Too many fees, too little returns. Average 401k generates 3% per year vs 11% for SPX since 1974 . . .
donna Says:
February 21st, 2013 at 9:33 am
We invented finance to fuel productive investment. But now, it’s just a predator.
DSS10 Says:
February 21st, 2013 at 9:59 am
The financial services industries is a lot like the real estate industry, They survive on a fee model based on technology from the early 70′s supported by a lack of transperency and oversight.
A Says:
February 21st, 2013 at 10:11 am
The other sad reality: consumer ignorance is highly profitable.
streeteye Says:
February 21st, 2013 at 10:19 am
Separate problem, but TBTF bank subsidy pegged at $83b per year, more than their profits
http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-.html
And that’s just the value of the implicit TBTF guarantee and how it cuts their cost of capital… not interest on excess reserves at the Fed, not access to the discount window.
A big chunk of their business model is basically a franchise of the Fed… they create money backed by fractional reserves, and the Fed system backs them up in case of a run on deposits.
FNG Says:
February 21st, 2013 at 10:58 am
Bravo BR!
Your critique is spot on. Imagine for a moment creating a company that minimizes to the max those “death by a thousand cuts” costs. Imagine it run by a dedicated team of individuals who believe in “treat your neighbor as yourself” and are content with fair and reasonable compensation. A company that caters to a broad economic strata not just HNW. Led by a man who understands that the system lasts only as long as a majority of people believe in it and that the specter of millions of retirees living in poverty is bad.
Might be time to reinvent the Financial Services Industry. Might be your time Barry!
_____
BR: I have been thinking about the following model:
The HNW investor (hi touch, hi minimum) pays the rent, and a sister flat fee Asset Allocation Model gives the masses the same investment model & strategy but all online,, they get good management (w/o expensive wealth planning part) for smaller accounts
hankest Says:
February 21st, 2013 at 10:59 am
I’m a scientist by trade. I have no interest in finance or investment, i want nothing to do with it. I know this will be shocking to most of you, but I don’t want to be rich, i just want to make sure i have enough to keep myself and my wife comfortable (housed and fed) during our retirement years.
What i resent is that i’m i cannot do that anymore by simply saving my money in a security with a decent interest rate, or even better, have some sort of viable pension plan from my job (used to have it here, but those days are long gone). Rather, i’m forced to try and unravel the illogical nonsense, and blatant scamming that is Wall St, or trust someone to do it for me. And, as far as i can tell, the only ones who have the patience and brains to understand the industry charge more for their advice than I could ever hope to afford. Meaning, i don’t have enough investment $ for them to even look at me.
It’s a game for and by the rich. To many of the 1 percenters, we middle class should feel lucky that we’re still allowed to get some medicare and social security.
James Cameron Says:
February 21st, 2013 at 11:49 am
I’m a scientist by trade. I have no interest in finance or investment, i want nothing to do with it. I know this will be shocking to most of you, but I don’t want to be rich, i just want to make sure i have enough to keep myself and my wife comfortable (housed and fed) during our retirement years
.
—
I suspect this is how the great majority of people feel . . . many simply don’t have enough money to even make it a need, and of those who do they have neither the interest nor time to devote to the subject. This will not change, and it’s the reason pensions, at least when they are being properly funded and managed, serve such a vital need.
S Brennan Says:
February 21st, 2013 at 12:06 pm
What Hankest said speaks for me…and the overwhelming majority of Americans. Clearly, we no longer have a democratic [or representative] form of government.
jnkowens Says:
February 21st, 2013 at 12:40 pm
FNG: That company already exists, and it’s name is Vanguard.
“Some of the wrong people work in finance” - Says:
February 21st, 2013 at 12:41 pm
[...] Ritholz asks himself “What is wrong with the financial services industry?” and comes up with this pretty good shortlist for an answer. • Simplicity does not pay well: [...]
thomas hudson Says:
February 21st, 2013 at 2:36 pm
BR, I can’t really disagree with any of these points here, but I would add, depending on what type of services a financial advisor offers in conjunction with their investment advice, that there are two trends that have made the delivery of said advice more difficult.
1. compliance – I think we could effectively argue that regulatory bodies are lax in their prosecution of the bad eggs. However, the good eggs are forced to do a lot more paperwork and training to be in compliance of the ever increasing laws and disclosure documents required to do the same work I did twenty years ago. I am not saying it is a bad thing, it is what it is. But I either pay some staff person to help me do the extra paperwork, or I work longer hours, or I service less clients. None of those increase my bottom line, but there is no way I am going to work in today’s litigious society without that model. It is a cost I choose to bear.
2. taxes – It has become increasingly clear to me over the last ten years that it almost matters more how your dollars are taxed, than what they are invested in. The complexity of the US tax code is beyond ridiculous, with no end in sight. I just spent 30 minutes explaining to a 71 year old woman with a net worth of under 250k what the various laws were regarding taking required minimum distributions out of her IRA and 401k. I would roughly guess that 50% of the time we spend giving advice to clients is about tax planning, helping them keep as much of their money as possible while still being compliant with Mr. IRS. I am not an accountant, so I don’t get paid for preparing their return, but it is expected (or should be) in the industry that I am knowledgable enough about the tax code that they can rely on me for that advice. Again, a cost I choose to bear.
I can only absorb so much of these costs in order to justify continuing to do what I do, so some must be passed on to the client. If they think it is too much, then they move on, and I am OK with that.
_____
BR: My expeirence is different from yours. When I was on the sell side (Broker dealer) the compliance dept potentially could lose its mind over anything I said or wrote.
On the Buyside (RIA) where there is no FINRA — a SRO/scam we’ve addressed in the past — the compliance is more reasonable. Regardless, thats all outsourced these days.
Cant address the tax issue — clients are mostly concerned (wrongly) about estate tax.
Frilton Miedman Says:
February 21st, 2013 at 2:50 pm
These two topics bring to mind the recent decades’ changes in financials, specifically the effects TBTF’s and large fund managers have on price discovery/EMH …a return to the “bucket shop” era of 100 years ago -
~~~
“• Incentives are misaligned: As I’ve written previously, too many people lack the patience to get rich slowly. Hence, not only do the wrong people work in finance, and some of the right people exercise bad judgment.
• Too many people have a hand in your pocket: The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, …”
~~~
The move to self regulation that started with Clinton signing off on Gramm-Leach-Bliley and the CFMA has created an environment where massive entities with access to huge leverage are able to manipulate undisclosed quantities of futures & derivatives below public radar, which then effects input cost & margins for any sector linked to the specific material, commodity or energy future in play.
BR knows his stuff, he’s spot on on everything he points to, but I think this problem is much more massive than most let on in the open.
I think MS & GS played a major role in the 08 crisis by cornering oil futures, which then triggered the onslaught of sub-prime defaults to their benefit. (undisclosed, thanks to the CFMA, later “leaked” by Senator Sanders)
The ongoing battle between the CFTC and the TBTF’s over position limits is much more important that the media attentions it’s been getting.
tpadilla Says:
February 21st, 2013 at 7:57 pm
1. This is why strong regulators and enforcement cops are required.
2. The Regulators have been captured.
Mark E Hoffer Says:
February 21st, 2013 at 9:03 pm
BR,
she did a BookTV spot, as well..
http://www.booktv.org/Program/14166/After+Words+Helaine+Olen+quotPound+Foolish+Exposing+the+Dark+Side+of+the+Personal+Finance+Industryquot+hosted+by+Russell++++Wild+Saturday+Evening+Post+Fin.aspx
for the ‘readers’ who may care for a different view..
Mark E Hoffer Says:
February 21st, 2013 at 9:06 pm
also, w..
BR: Thanks, on your rec I ordered it from Amazon
Good Choice. Good Book. All, too, True..
Mwalsh11 Says:
February 21st, 2013 at 9:29 pm
BR,
2nd comment in 4-5 years. I know your considering abolishing comments, but its dialogue like this that I find so worth while. I read the comments with every post. I hope you can find a way to make it work.
I’ll still read everyday regardless…….
kaleberg Says:
February 22nd, 2013 at 12:44 am
A secondary, but very serious effect, is the sector’s rank inefficiency. The financial industry requires a huge level of financial activity to provide relatively little capital. It’s almost as bad as hospitals charging $10 to provide a 5 cent aspirin to a patient. It’s bad for investors, but it has also been bad for the economy.
I agree that we lost a great opportunity to do something after the crash, but we’ve been having a perfect storm of political corruption lately.

Original post at TBP: http://www.ritholtz.com/blog/2013/02/whats-wrong-with-the-financial-services-industry/

Frederic Bastiat: When Plunder Becomes a Way of Life for a Group of Men...

2013-02-11T20:24:00.001-08:00

“When plunder becomes a way of life for a group of men living in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.”

Frederic Bastiat, French writer and economist

Bill Black: Judge Rakoff Rules in Favor of Insurer against Lender in Important Decision

2013-02-10T21:47:00.001-08:00

Flagstar, mortgage lender and user of liars loans (which are pervasively fraudulent) has lost a lawsuit brought by monoline insurer Assured Guaranty. Assured Guaranty specializes in guaranteeing the quality of such loans, once packaged.

This is the same methodology being used in a case against BoA. Judge Rakoff ruled that lender lied 75% of the time to the company that was insuring the quality of their loans.

This is important because BoA could face tens of billions of dollars in liability from other parties if the same methodology is applied.

The insurance companies are relatively modest plaintiffs. If Fannie and Freddie go after lenders, the potential liability is enormous.

Tom Ferguson's Investment Theory of Politics

2013-02-10T08:10:00.003-08:00

"Elections are occasions when groups of investors coalesce to invest to buy the state."

Tom Ferguson

Excellent Daily Show and Bloomberg Neil Barofsky Interviews

2013-02-09T05:01:00.003-08:00

Great Bloomberg segment: http://www.bloomberg.com/video/neil-barofsky-on-u-s-lawsuit-against-s-p-hic2xOmuTZ2oH5bhNHylxw.html

Neil Barovsky discusses Bailout on Bloomberg and the Daily Show:

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Part 2

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Leaving Felons in Charge of our Banks is Good Policy and Will Lead to Financial Stability

2013-02-04T18:52:00.005-08:00

This is another excellent Bill Black commentary on the insanity that defines our (in)justice system and mainstream media when it comes to addressing financial sector misdeeds.

Bill Black Must Look More Like A Prosecutor

Bill Black is a brilliant guy, with an encyclopedic knowledge of fraud and crony capitalism and banker misdeeds. He is extremely articulate. And he is hilarious.

I am not suggesting that he do as Lanny Breuer does - dress up like a banker every time he goes on TV. But he should trim the beard. He should wear somewhat business-like attire. He cannot be holding a phone up to his head like it's 1982. And he should clear away the pile of books that's behind him in every video.

Prof. Black, I know you don't want to waste time on such foolishness when you could be skewering and lampooning some bank-defender's ludicrous assertions in prose, but we have to think about who needs to hear your message. Anyone uncompromised who listens to you gets it. But they have to actually listen to you. And in the YouTube age... listening is accompanied by visuals.

Americans are inundated with talking heads in 2013. It is not enough to just be unbelievably smart and articulate. Part of your audience is dismissing you because you look like Paul Jay unexpectedly called you and caught you while you were painting the garage.

You did get cleaned up when you went before the House Financial Services Committee in 2010. And they basically told you to take a hike. I am guessing that you are somewhat incensed that they are too captured to have immediately enlisted your service. You should be. I am. They are a bunch of corrupt asses. If they were serious about justice, rule-of-law, and/or the health of our democracy, they would have begged you to help sort out the mess.

But they want the Lanny Breuers of the world to handle "litigation" now.. for obvious reasons. We have to fight that. The People must know the name Bill Black. The People must demand Bill Black. But Bill Black has to look like Bill Black sounds. The People need to visually associate you with being the hard-assed and brilliant prosecutor that you are. For that to happen, you should look a little more like you are heading into court to take on the elite criminals of our generation.

Let us consider what you are up against: Republicans, Democrats, Congress, the Executive Branch, the financial sector, most of K Street, mainstream media, the PR industry, and the most powerful crony capitalists in the world. That's the bad news.

The good news is that we are at a watershed in terms of information dissemination. We have the tools and the platforms to get you out there in spite of mainstream resistance and obstacles. But you still have to clear the stuff off the table behind you. And you need a good microphone and some decent lighting. For $150 you could transform how you are presenting.

Your message is important for this country. If there is even a small chance that we can rally enough of a groundswell to get you appointed, we have to go for it. Fighting crony capitalism is a crazy fight to take on, given the resources and the ruthlessness on the other side. But you are already taking it on. Why make it any harder than necessary?

Lanny Breuer on Whistleblowers and Prosecuting Bankers (Liar Liar version)

2013-01-29T12:47:00.002-08:00

Note: This is satire.

I received some complaints when links to this were posted elsewhere. Some people think I am tying to pass this off as what Lanny Breuer actually said in The Untouchables. To me that seems ludicrous. But just to clarify, this is satire. The spoken words are not what Mr. Breuer actually said. Listen carefully and ask yourself if this could be anything but satire.

President of Iceland: Preventing Bank Failure Kills Competitiveness and Harms the Economy

2013-01-28T11:07:00.001-08:00

h/t Zero Hedge

Tyler Durden's comment: "Why do we consider banks to be like holy churches?" is the rhetorical question that Iceland's President Olafur Ragnar Grimson asks (and answers) in this truly epic three minutes of truthiness from the farce that is the World Economic Forum in Davos. Amid a week of back-slapping and self-congratulatory party-outdoing, as John Aziz notes, the Icelandic President explains why his nation is growing strongly, why unemployment is negligible, and how they moved from the world's poster-child for banking crisis 5 years ago to a thriving nation once again. Simply put, he says, "we didn't follow the prevailing orthodoxies of the last 30 years in the Western world." There are lessons here for everyone - as Grimson explains the process of creative destruction that remains much needed in Western economies - though we suspect his holographic pass for next year's Swiss fun will be reneged...

The OCC's Tragic Response to the Frontline Expose: The Untouchables

2013-01-26T07:13:00.002-08:00

William K. Black

On January 25, 2013, I made this comment onFrontline's web site discussing its documentary: "The Untouchables" and an accompanying (January 22, 2013) article by Jason Breslow entitled: "Were Bankers Jailed In Past Financial Crises?

I addressed two statements in that article. The first statement reads:

Equally important in the S&L crisis was a much tougher framework of banking laws, according to Black, who is critical of the deregulation that began during the Clinton administration.
'Deregulation was bound to produce widespread fraud,' he said. 'We know better. If we learn the lessons from this, we need not have these fraud epidemics.'

I responded in my comment that:

The quotation at the end that the reporter attributes to me was actually me quoting the famous concluding paragraph of George Akerlof and Paul Romer's 1993 article entitled 'Looting: the Economic Underworld of Bankruptcy for Profit.'

Here is the full quotation from Akerlof & Romer.

"Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself" (George Akerlof & Paul Romer.1993: 60.

The second statement in the Frontline article that I commented reads:

One key tool used during the S&L crisis was criminal referrals from regulators to government prosecutors, explained William Black, who served as the government's point man for litigation in the S&L crisis. Such referrals 'are absolutely essential,' said Black, because they provide a road map for a Justice Department already short-staffed in the area of white-collar crime. According to Black, criminal referrals have been missing in the response to the 2008 crisis.
Black, now a professor of law at the University of Missouri at Kansas City, said the Federal Home Loan Bank Board -- the predecessor to the Office of Thrift Supervision (OTS) -- passed along thousands of referrals to prosecutors. 'Flash forward in the current crisis, the same agency made zero,' he said.
In a statement, a spokesman for the Office of the Comptroller of the Currency, which merged with OTS in 2011, said that referrals are a 'poor indicator of the quality of supervision' because they ignore the Suspicious Activity Report process, in which banks are required to report known or suspected criminal offenses.
The statement said that 'using the number of referrals to compare the crisis of the 1980s to the most recent economic crisis is comparing apples to oranges.' It continued: 'A significant number of thrifts failed in the 1980s because of fraud and insider abuse. That has not been the major factor behind the most recent crisis.'

[I actually told the reporter that we made over 30,000 criminal referrals as an agency during the S&L debacle. The remainder of this document is the comment I posted on the Frontline web site discussing the OCC claims in their statement to Frontline.]

The OCC statement about SARs (the technical jargon for "criminal referrals"), is sad. Banks virtually never make criminal referrals against their senior officers, so the number of SARs filed by banks is not relevant to the subject being discussed. The OTS made over 30,000 criminal referrals during the peak years of the S&L debacle. It made zero in this crisis -- a crisis in which the losses and the frauds by senior managers were roughly 70 times larger than during the debacle. Apparently, the OTS and the OCC are trying to excuse their failure to examine, supervise, regulate, and investigate, much less make referrals on the claim that this is the first Virgin Crisis.

Readers are invited to read my testimony before the FCIC and the Senate. The ultra brief version is (1) by 2006 roughly 40 percent of total mortgage loans originated were "liar's loans," (fyi, roughly half of all loans called "subprime" were also liar's loans -- the categories are not mutually exclusive, (2) the incidence of fraud among liar's loans is 90 percent, (3) an honest real estate lender would not make pervasively fraudulent loans because doing so would inevitably cause the firm to fail (absent a bailout), (4) liar's loans, however, are optimal "ammunition" for "accounting control fraud", (5) investigations (and logic) have confirmed that it was overwhelmingly lenders and their agents who put the lies in liar's loans, (6) no lender was ever required or encouraged by the government to make or purchase liar's loans -- the opposite was true, the government discouraged such loans and industry documents confirm this fact, (7) liar's loans make an excellent "natural experiment" because even Fannie and Freddie were not encouraged to make these loans -- because they did not aid them in meeting the "affordable housing goals", (8) Fannie and Freddie, eventually, purchased enormous amounts of liar's loans for the same reason that the investment banks (not subject to the CRA or any affordable housing goals did) they created massive (albeit fictional) short-term accounting income, which flowed through to the bonuses of many Fannie and Freddie executives. Let me put these data in another format -- by 2006, lenders were making over two million fraudulent liar's loans annually. Fraudulent liar's loans grew massively because lenders (and purchasers) created perverse incentives to make and purchase massive amounts of these fraudulent loans.

This level of fraud is massively greater than during the S&L debacle, where accounting control fraud never became a dominant national lending strategy. Liar's loans grew so rapidly, and became such a large share of the market that they constituted the loans "on the margin" that hyper-inflated the financial bubble, which drove the Great Recession.

The S&L debacle was halted by vigorous reregulation that was successful precisely because we targeted the accounting control frauds as our top priority to shut down, remove their senior managers, and prosecute those managers. The liar's loans "crisis" of 1990-1992 in Orange County, California was stopped in its tracks without any expensive failures because we (the OTS West Region) realized that such loans inherently would lead to endemic fraud and losses. We drove entities like Long Beach out of the industry (it became a mortgage banker, and gave up its federal depositi insurance) for the sole purpose of escaping OTS jurisdiction). The OCC and the OTS not only failed to regulate the accounting control frauds they had jurisdiction over -- they engaged in a vigorous "competition in laxity" with each other that included a heavy focus on which agency could most aggressively "preempt" state efforts to stop the fraudulent lenders.

Beginning with Federal Home Loan Bank Board Chairman Gray in 1984 (through 1993), the S&L regulatory agency made one of its top priorities the prosecution of fraudulent senior officers who led the accounting control frauds. The agency did so because it understood that criminal prosecutions were the only remedy that CEOs really fear. The OCC's head, Mr. Curry, has a very different view:

Curry said bank regulators were more focused on getting problems corrected rather than criminal penalties. 'From our standpoint, as a bank regulatory agency, our job is to, one, identify the problems and then mandate that they get fixed,' he said. 'I don't think it's our role to avenge or to punish per se.'

We secured over 1,000 felony convictions in cases designated as "major" by the Justice Department. We worked with the FBI and DOJ to prioritize the 100 worst fraud schemes. Those schemes involved roughly 300 S&Ls and over 600 elite targets for prosecution. Virtually all of them were prosecuted. We secured over a 90% conviction rate -- against the best criminal defense lawyers in the world.

One of our mantras in white-collar criminology is: "if you don't look, you won't find." The Frontlinedocumentary begins the process of explaining what those of us who are aware of what a real investigation is and what it requires have been saying for years -- neither the Bush nor the Obama administration has been willing to conduct a real investigation of the elite banksters whose frauds made them wealthy and drove the financial crisis and the Great Recession. This is one of the hallmarks of crony capitalism. It cripples our economy, our democracy, and our integrity. The statue of Lady Justice is blindfolded to symbolize that justice is blind to power. No one is above the law. The Department of Justice is now, officially, an oxymoron given its senior officials' admissions that they deliberately refuse to hold accountable (or even investigate) the systemically dangerous institutions (SDIs) and their senior officers because of fears of causing a global financial crisis. As a former senior regulator, an effective regulator, I am astounded that anyone believes that the route to financial stability is leaving elite frauds in charge of many of our banks. Any bank that is too big to fail and to prosecute is a clear and present danger that should be promptly shrunk to the point that it can no longer hold the global economy hostage in order to extort immunity from the criminal laws for the controlling officers who became wealthy by being what Akerlof and Romer aptly described as "looters."

Congratulations to everyone at Frontline involved in producing the documentary. I urge Frontline to revisit this issue because it is one of defining matters that will decide whether our Nation will restore the rule of law and return to greatness.

The Untouchables

2013-01-23T10:32:00.003-08:00

Watch The Untouchables on PBS. See more from FRONTLINE.

Jaime Falcon vs. Frontline: Why Wall Street's Leaders Have Escaped Prosecution

2013-01-21T15:32:00.001-08:00

Below is a promo video for Frontline's series, beginning January 22, 2013. I have not seen any of it. It may be terrible. Or perhaps excellent. We will know they are taking the issue seriously if Bill Black is featured prominently. Here is Jaime Falcon's view of why Wall Street leaders have avoided prosecution:

Wall Street decides who is electable and who is appointable. Eric Holder? Tim Geithner? Jack Lew? Ben Bernanke? Barack Obama? George W. Bush? Hank Paulson? Alberto Gonzales? Lanny Breuer? This is a who's who of Americans not interested in pursuing high-level white-collar criminals.

Too big to fail, too big to jail... is all BS. Republicans are not interested in capitalism if it means free markets. Democrats are not "the party of the people" if it means challenging financial sector elites. Democrats and Republicans are not interested in justice when it comes to their benefactors' misdeads. "Disgusting" is putting it mildly; it is an abomination. It undermines the fundamental values upon which this democracy was created.

Why have they escaped prosecution? There is one simple reason that underlies all other reasons: money. Wealth and power are wielded as weapons against the public. All it takes is vast sums of money to ensure that private risk and losses are socialized. It is a gamed system. Money in this country has been weaponized.

Unfortunately, we have had very tragic leadership in office since the crisis. Each has failed to have an epiphany of morality. They have all continued down the road of compromised ethics in order to protect themselves at the expense of all of us.

The only thing that the Bush and Obama save-their-benefactors response to the crisis has guaranteed, is that we will one day face another crisis... a much larger crisis. That, of course, could be many years, and many bubbles, away.

Let's see how close Fontline gets to the core issue.

Charles Ferguson: Reforms Necessary to Fix the Financial Sector

2013-01-20T08:21:00.001-08:00

Charles Ferguson addresses needed reforms in the financial sector. I would suggest he use the term "skin in the game." Americans bristle when anyone says "regulation" because regulation is so awful in this country (it's written by lobbyists to benefit their special interests). But everyone understands that "skin in the game" is necessary for every party in a capitalist economy. And the financial sector has gamed the system to such an extent that they have exempted themselves from normal risk/reward analysis. They gain, everyone else takes on their risk. They get the upside, everyone else gets their downside.

Lawrence Lessig on Aaron Swartz

2013-01-15T07:13:00.001-08:00

"In a world where the architects of the financial crisis dine regularly at the White House, it is ridiculous to consider Aaron Swartz a felon."

Source: Democracy Now

Charles Ferguson, Bill Black, and Matt Taibbi on Jack Lew's Appointment: Fail

2013-01-13T10:03:00.001-08:00

Article by Charles Ferguson. Democracy Now video embedded below text.

The long-anticipated departure of Tim Geithner and the appointment of his successor, Jacob Lew, has brought much discussion of Geithner's record, his legacy, and the likely trajectory of the Obama administrationtreasury department under Lew. In considering this question, I found inspiration in our most profound political philosophers. I refer, of course, to The Who, in the finale of their immortal and highly relevant Won't Get Fooled Again:

"Meet the new boss
Same as the old boss"

Consider first Geithner's legacy, first as president of the New YorkFederal Reserve, then as treasury secretary. (Actually, his tendencies were evident even earlier, when he was carrying Larry Summers' water during the Asian financial crisis of the late 1990s.) As head of the New York Fed during the bubble, Geithner did – well, not much of anything: no regulation, no warnings, no protests about abuses or excesses, nada, zilch. Geithner was in the audience at Jackson Hole in 2005 whenRaghuram Rajan, then the IMF's chief economist, delivered his now-famous warning about systemically dangerous incentives and risk-taking in the financial sector – a warning that Larry Summers slapped down publicly, and about which Geithner never uttered a public word, then or later.

Then came 2008, when, so far as we can determine, Geithner basically did everything that Hank Paulson told him to, and not much else. In fairness, one must concede that Paulson, Ben Bernanke, and Geithner were effective in preventing utter systemic collapse – albeit a collapse caused in large measure by their own earlier actions and inactions. Geithner continued that pattern, and then firmly established it as his legacy, after he took over at treasury.

But what, precisely, is that pattern?

In sum, it was to be intelligently pragmatic, in preventing acute systemic collapse and then returning the financial system, the political system, and the economy to their status quo. So, on the plus side, the Obama administration did not embrace the suicidal austerity path and laissez-faire preached by some, and practiced in some now-devastated European nations.

Banks and financial markets were propped up by the treasury department and by Federal Reserve purchases of over $2tn in securities; the auto industry was saved (or at least General Motors was); and a second Great Depression was avoided. Not to be assumed – and worthy of serious praise.

But what wasn't done, and Geithner never even tried to do, is equally telling.

No purge of the senior managements and boards of directors of the financial sector, not even those, such as Citigroup and Bank of America, which were totally dependent on federal support for their existence (Citigroup was nearly 40% owned by Geithner's department). No curtailment of bonuses, no attempt even to tax them. No breaking up of too-big-to-fail institutions, some of which were and remain so complex that they are, as my colleague Charles Morris has said, too big tosucceed. No attempt to curtail the toxic lobbying and revolving-door hiring of those same institutions – once again, including several that would not exist except for federal aid. No attempt to develop an evidentiary record to support criminal prosecution for the massive criminality that accompanied the bubble. No attempt to develop an evidentiary record for asset seizures under Rico, the law routinely usedto seize the assets of criminal organizations. No serious attempt to rescue millions of homeowners facing foreclosure, or imprisoned in houses that they will never be able to sell for as much as they owe. No attempt to rein in the deeply entrenched culture and incentives that produce toxic financial "innovations" and increasingly frequent crises. A pattern of hiring truly dreadful people, ranging from Goldman Sachslobbyists to private equity executives who worked with banks to bet against their own securities.

And so, now we have, indeed, "succeeded" in returning to something roughly like the status quo. What is that status quo?

We have an even more dangerously concentrated, politically even more powerful, still highly corrupt, unproductive financial sector; a clear message sent that even a horrific crisis caused by massive criminalityyields no punishment whatsoever; insufficient, weak regulatory laws and institutions; an administration largely managed by people who were, and remain, part of the problem; a massively corrupt political system in which opaque, uncontrolled contributions yielded a $3bn presidential election; and even greater economic inequality than when Obama and Geithner took office.

Tim Geithner, upon returning to private life, will surely be rewarded in the typical ways. Perhaps, he will become a banker. If not, president of a university or thinktank, with consulting arrangements, board memberships, and speechmaking to the financial sector bringing him a living wage of five or ten million a year.

And now we will have Jack Lew. What can we expect of him?

I refer you to The Who's lyrics. For three years before entering the Obama administration, Lew was a Citigroup executive, and for the last year he was the chief operating officer of Citigroup Alternative Investments, which made some money by betting against mortgage securities, but which lost many billions more when the crisis came. That crisis and those losses did not prevent Lew from receiving a handsome bonus, paid after he had been appointed to his first Obama administration job.

But that isn't his main problem. His main problem is that he has already demonstrated that he's willing to be a typical political hack, and to give bankers what they want. In congressional testimony, he actually said, with a straight face, that deregulation had not contributed to the financial crisis.

As The Who have warned us …

Matt Taibbi and Bill Black on Jack Lew:

This Shaolin Rebel Intruder Wishes a Superb 2013 to All*

2012-12-24T10:29:00.003-08:00

CapitalismWithoutFailure.com has been named Shaolin Rebel Intruder by Josh Brown of thereformedbroker.com: http://www.thereformedbroker.com/2012/12/24/enter-the-financial-blogosphere/.

It is a great compliment to be included in this category along with such luminaries as:

Jr Deputy Accountant
Zero Hedge
re: The Auditors
The Altucher Confidential
William Banzai7
Keiser Report

and The Reformed Broker himself.

* May 2013 be a wonderful year for almost everyone. May it be less than wonderful for the fraudsters, charlatans, thieves, and felons, who have thus far avoided prosecution for their massive crimes against society. With Lanny Breuer, Tim Giethner, and an army of enablers still protecting the biggest criminals among us, they will likely continue to enjoy their unbelievably privileged lives.

Jaime Falcon

2012 - The Year of Bank Fraud

2012-12-20T06:39:00.004-08:00

By Ben Walsh

DECEMBER 19, 2012

It’s been a relatively decent year for financial stocks: they’ve had their best performance since 2003. It’s truly been a boom year, though, in investigations, lawsuits, fines, and settlements at the world’s biggest and most important banks. There are 28 banks on the FSB’s list of systemically important financial institutions, and as Felix writes, “pretty much the whole financial sector is still trading at less than book value”.

What follows is a list of notable accusations, admissions and settlements in 2012 alone.

Bank of America: the US Justice Department is seeking $1 billion in fines for troubled loans sold to Fannie and Freddie; MBIA’s lawsuit against Countrywide, which was disastrously acquired by BofA, rolls on; BofA is one of five banks participating in the $25 billion national mortgage settlement. (Price to book: 0.56, here and throughout via Yahoo Finance)

Bank of China: the families of Israeli students killed in a 2008 terrorist attack are suing the BOC for $1 billion “intentionally and recklessly” handling money for terrorist groups.

Bank of New York Mellon: a subsidiary paid $210 million to settle claims it advised clients to invest in Bernie Madoff’s ponzi scheme; the DOJ continues to investigate possible overcharges for currency trades that it says generated $1.5 billion in revenue. (Price to book: 0.86)

Barclays: $450 million settlement in the Libor scandal; also fined by the FSA for mis-sold interest rate hedges. (Price to book: 0.72)

BBVA: settled overdraft suit for $11.5 million. (Price to book: 0.83)

Citigroup: settled CDO lawsuit for $590 million; one of five banks participating in the $25 billionnational mortgage settlement; paid $158 million to settle charges it “defaulted the government into insuring” risky mortgages. (Price to book: 0.62)

Credit Suisse: sued by NY state for allegedly deceiving investor in the sale of MBS. (Price to book: 0.85)

Deutsche Bank: settled a DOJ mortgage suit for $202 million; FHFA fraud case is ongoing. (Price to book: 0.56)

Goldman Sachs: FHFA fraud case is ongoing; after a ruling by federal appeals court, a class action lawsuit over MBS will go forward. (Price to book: 0.91)

Crédit Agricole: sued by CDO investors two times. (Price to book: 0.35)

HSBC: settled money laundering charges for $1.9 billion; set aside $1 billion for future settlements related to mis-selling loan insurance and interest rate hedges in the UK; Libor settlement still to be reached. (Price to book: 1.17)

ING: settled charges that it violated sanctions against Iran, Cuba, etc. for $619 million. (Price to book: 0.5)

JP Morgan Chase: being sued by NY state for MBS issued by Bear Stearns; class action lawsuitand criminal probe over failed derivatives trades in its Chief Investment Office; one of five banks participating in the $25 billion national mortgage settlement. (Price to book:0.87)

Mitsubishi UFJ: paid an $8.6 million fine for violating US sanctions on Iran, Sudan, Myanmar and Cuba. (Price to book: 0.54)

Morgan Stanley: fined $5 million for improper investment banking influence over research during Facebook’s IPO. (Price to book: 0.63)

Royal Bank of Scotland: $5.37 billion shareholder lawsuit related to 2008 rights issuance; set aside $650 million to cover claims it mis-sold payment protection products; also fined by the FSA for mis-sold interest rate hedges. (Price to book: 0.28)

Santander: fined by the FSA for mis-sold interest rate hedges. (Price to book: 0.77)

Société Générale: rogue trader Jerome Kerviel loses appeal his appeal 3-year sentence for trades that generated $6.5 billion in losses. (Price to book: 0.45)

Standard Chartered: $340 million fine paid to NY state department of financial services for allegedly hiding the identity of customers in transactions with Iran and drug cartels; $327 millionpaid to the Federal Reserve and US Treasury’s anti-money laundering unit.

State Street: fined $5 million for lack of CDO disclosure. (Price to book: 1.09)

UBS: $1.5 billion Libor fine and two traders criminally charged; rogue trader responsible for $2.3 billion loss found guilty of false accounting. (Price to book: 1.12)

Wells Fargo: Federal lawsuit over mortgage foreclosure practices ongoing; paid $175 million over mortgage bias claims; one of five banks participating in the $25 billion national mortgage settlement. (Price to book: 1.29) — Ben Walsh

Glenn Greenwald: Woman Imprisoned for Life for Minor Drug Offense; Banking Giant Immune to Justice for Massive Drug Laundering

2012-12-18T06:35:00.001-08:00

Justice is dead in America.

December 17, 2012 |

Asia-focused bank HSBC said on Tuesday it would pay US authorities a record $1.92 billion to settle allegations of money laundering that were said to have helped Mexican drug cartels, terrorists and Iran.

The US is the world's largest prison state, imprisoning more of its citizens than any nation on earth, both in absolute numbers andproportionally. It imprisons people for longer periods of time, more mercilessly, and for more trivial transgressions than any nation in the west. This sprawling penal state has been constructed over decades, by both political parties, and it punishes the poor and racial minorities at overwhelmingly disproportionate rates.

But not everyone is subjected to that system of penal harshness. It all changes radically when the nation's most powerful actors are caught breaking the law. With few exceptions, they are gifted not merely with leniency, but full-scale immunity from criminal punishment. Thus have the most egregious crimes of the last decade been fully shielded from prosecution when committed by those with the greatest political and economic power: the construction of a worldwide torture regime, spying on Americans' communications without the warrants required by criminal law by government agencies and the telecom industry, an aggressive war launched on false pretenses, and massive, systemic financial fraud in the banking and credit industry that triggered the 2008 financial crisis.

This two-tiered justice system was the subject of my last book, "With Liberty and Justice for Some", and what was most striking to me as I traced the recent history of this phenomenon is how explicit it has become. Obviously, those with money and power always enjoyed substantial advantages in the US justice system, but lip service was at least always paid to the core precept of the rule of law: that - regardless of power, position and prestige - all stand equal before the blindness of Lady Justice.

It really is the case that this principle is now not only routinely violated, as was always true, but explicitly repudiated, right out in the open. It is commonplace to hear US elites unblinkingly insisting that those who become sufficiently important and influential are - and should be - immunized from the system of criminal punishment to which everyone else is subjected.

Worse, we are constantly told that immunizing those with the greatest power is not for their good, but for our good, for our collective good: because it's better for all of us if society is free of the disruptions that come from trying to punish the most powerful, if we're free of the deprivations that we would collectively experience if we lose their extraordinary value and contributions by prosecuting them.

This rationale was popularized in 1974 when Gerald Ford explained why Richard Nixon - who built his career as a "law-and-order" politician demanding harsh punishments and unforgiving prosecutions for ordinary criminals - would never see the inside of a courtroom after being caught committing multiple felonies; his pardon was for the good not of Nixon, but of all of us. That was the same reasoning hauled out to justify immunity for officials of the National Security State who tortured and telecom giants who illegally spied on Americans (we need them to keep us safe and can't disrupt them with prosecutions), as well as the refusal to prosecute any Wall Street criminals for their fraud (prosecutions for these financial crimes would disrupt our collective economic recovery).

A new episode unveiled on Tuesday is one of the most vivid examples yet of this mentality. Over the last year, federal investigators found that one of the world's largest banks, HSBC, spent years committing serious crimes, involving money laundering for terrorists; "facilitat[ing] money laundering by Mexican drug cartels"; and "mov[ing] tainted money for Saudi banks tied to terrorist groups". Those investigations uncovered substantial evidence "that senior bank officials were complicit in the illegal activity." As but one example, "an HSBC executive at one point argued that the bank should continue working with the Saudi Al Rajhi bank, which has supported Al Qaeda."

Needless to say, these are the kinds of crimes for which ordinary and powerless people are prosecuted and imprisoned with the greatest aggression possible. If you're Muslim and your conduct gets anywhere near helping a terrorist group, even by accident, you're going to prison for a long, long time. In fact, powerless, obscure, low-level employees are routinely sentenced to long prison terms for engaging in relatively petty money laundering schemes, unrelated to terrorism, and on a scale that is a tiny fraction of what HSBC and its senior officials are alleged to have done.

But not HSBC. On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions. In other words, shielding them from the system of criminal sanction to which the rest of us are subject is not for their good, but for our common good. We should not be angry, but grateful, for the extraordinary gift bestowed on the global banking giant:

"US authorities defended their decision not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the 'collateral consequences' of taking the bank to court. . . .
"Announcing the record fine at a press conference in New York, assistant attorney general Lanny Breuer said that despite HSBC"s 'blatant failure' to implement anti-money laundering controls and its wilful flouting of US sanctions, the consequences of a criminal prosecution would have been dire.
"Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.
"HSBC, Britain's biggest bank, said it was 'profoundly sorry' for what it called 'past mistakes' that allowed terrorists and narcotics traffickers to move billions around the financial system and circumvent US banking laws. . . .
"As part of the deal, HSBC has undertaken a five-year agreement with the US department of justice under which it will install an independent monitor to assess reformed internal controls. The bank's top executives will defer part of their bonuses for the whole of the five-year period, while bonuses have been clawed back from a number of former and current executives, including those in the US directly involved at the time.
"John Coffee, a professor of law at Columbia Law School in New York, said the fine was consistent with how US regulators have been treating bank infractions in recent years. 'These days they rarely sue individuals in any meaningful way when the entity will settle. This is largely a function of resource constraints, but also risk aversion, and a willingness to take the course of least resistance,' he said."

DOJ officials touted the $1.9 billion fine HSBC would pay, the largest ever for such a case. As the Guardian's Nils Pratley noted, "the sum represents about four weeks' earnings given the bank's pre-tax profits of $21.9bn last year." Unsurprisingly, "the steady upward progress of HSBC's share price since the scandal exploded in July was unaffected on Tuesday morning."

The New York Times Editors this morning announced: "It is a dark day for the rule of law." There is, said the NYT editors, "no doubt that the wrongdoing at HSBC was serious and pervasive." But the bank is simply too big, too powerful, too important to prosecute.

That's not merely a dark day for the rule of law. It's a wholesale repudiation of it. The US government is expressly saying that banking giants reside outside of - above - the rule of law, that they will not be punished when they get caught red-handed committing criminal offenses for which ordinary people are imprisoned for decades. Aside from the grotesque injustice, the signal it sends is as clear as it is destructive: you are free to commit whatever crimes you want without fear of prosecution. And obviously, if the US government would not prosecute these banks on the ground that they're too big and important, it would - yet again, or rather still - never let them fail.

But this case is the opposite of an anomaly. That the most powerful actors should be immunized from the rule of law - not merely treated better, but fully immunized - is a constant, widely affirmed precept in US justice. It's applied to powerful political and private sector actors alike. Over the past four years, the CIA and NSA have received the same gift, as have top Executive Branch officials, as has the telecom industry, as has most of the banking industry. This is how I described it in "With Liberty and Justice for Some":

"To hear our politicians and our press tell it, the conclusion is inescapable: we're far better off when political and financial elites - and they alone - are shielded from criminal accountability.
"It has become a virtual consensus among the elites that their members are so indispensable to the running of American society that vesting them with immunity from prosecution - even for the most egregious crimes - is not only in their interest but in our interest, too. Prosecutions, courtrooms, and prisons, it's hinted - and sometimes even explicitly stated - are for the rabble, like the street-side drug peddlers we occasionally glimpse from our car windows, not for the political and financial leaders who manage our nation and fuel our prosperity.
"It is simply too disruptive, distracting, and unjust, we are told, to subject them to the burden of legal consequences."

That is precisely the rationale explicitly invoked by DOJ officials to justify their decision to protect HSBC from criminal accountability. These are the same officials who previously immunized Bush-era torturers and warrantless eavesdroppers, telecom giants, and Wall Street executives, even as they continue to persecute whistleblowers at record rates and prosecute ordinary citizens - particularly poor and minorities - with extreme harshness even for trivial offenses. The administration that now offers the excuse that HSBC is too big to prosecute is the same one that quite consciously refused to attempt to break up these banks in the aftermath of the "too-big-to-fail" crisis of 2008, as former TARP overseer Neil Barofsky, among others, has spent years arguing.

And, of course, these HSBC-protectors in the Obama DOJ are the same officials responsible for maintaining and expanding what NYT Editorial Page editor Andrew Rosenthal has accurately described as "essentially a separate justice system for Muslims," one in which "the principle of due process is twisted and selectively applied, if it is applied at all." What has been created is not so much a "two-tiered justice system" as a multi-tiered one, entirely dependent on the identity of the alleged offender rather than the crimes of which they are accused.

Having different "justice systems" for citizens based on their status, wealth, power and prestige is exactly what the US founders argued most strenuously had to be avoided (even as they themselves maintained exactly such a system). But here we have in undeniable clarity not merely proof of exactly how this system functions, but also the rotted and fundamentally corrupt precept on which it's based: that some actors are simply too important and too powerful to punish criminally. As the Nobel Prize-winning economist Joseph Stiglitz warned in 2010, exempting the largest banks from criminal prosecution has meant that lawlessness and "venality" is now "at a higher level" in the US even than that which prevailed in the pervasively corrupt and lawless privatizing era in Russia.

Having the US government act specially to protect the most powerful factions, particularly banks, was a major impetus that sent people into the streets protesting both as part of the early Tea Party movement as well as the Occupy movement. As well as it should: it is truly difficult to imagine corruption and lawlessness more extreme than having the government explicitly place the most powerful factions above the rule of law even as it continues to subject everyone else to disgracefully harsh "justice". If this HSBC gift makes more manifest this radical corruption, then it will at least have achieved some good.

UPDATE

By coincidence, on the very same day that the DOJ announced that HSBC would not be indicted for its multiple money-laundering felonies,the New York Times published a story featuring the harrowing story of an African-American single mother of three who was sentenced to life imprisonment at the age of 27 for a minor drug offense:

"Stephanie George and Judge Roger Vinson had quite different opinions about the lockbox seized by the police from her home in Pensacola. She insisted she had no idea that a former boyfriend had hidden it in her attic. Judge Vinson considered the lockbox, containing a half-kilogram of cocaine, to be evidence of her guilt.
"But the defendant and the judge fully agreed about the fairness of the sentence he imposed in federal court.
"'Even though you have been involved in drugs and drug dealing,' Judge Vinson told Ms. George, 'your role has basically been as a girlfriend and bag holder and money holder but not actively involved in the drug dealing, so certainly in my judgment it does not warrant a life sentence.'
"Yet the judge had no other option on that morning 15 years ago. As her stunned family watched, Ms. George, then 27, who had never been accused of violence, was led from the courtroom to serve a sentence of life without parole.
"'I remember my mom crying out and asking the Lord why,' said Ms. George, now 42, in an interview at the Federal Correctional Institution in Tallahassee. 'Sometimes I still can't believe myself it could happen in America.'"

As the NYT notes - and read her whole story to get the full flavor of it - this is commonplace for the poor and for minorities in the US justice system. Contrast that deeply oppressive, merciless punishment system with the full-scale immunity bestowed on HSBC - along with virtually every powerful and rich lawbreaking faction in America over the last decade - and that is the living, breathing two-tiered US justice system. How this glaringly disparate, and explicitly status-based, treatment under the criminal law does not produce serious social unrest is mystifying.

Glenn Greenwald is a constitutional law attorney and writes for the Guardian. He is the author of four books, most recently "With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful."

The Second Great Betrayal: Obama and Cameron Decide that Banks are above the Law

2012-12-17T14:50:00.000-08:00

By William K. Black

One of the “tells” that reveals how embarrassed Lanny Breuer (head of the Criminal Division) and Eric Holder (AG) are by the disgraceful refusal to prosecute HSBC and its officers for their tens of thousands of felonies are the false and misleading statements made by the Department of Justice (DOJ) about the settlement. The same pattern has been demonstrated by other writers in the case of the false and disingenuous statistics DOJ has trumpeted to attempt to disguise the abject failure of their efforts to prosecute the elite officers who directed the “epidemic” (FBI 2004) of mortgage fraud.

HSBC was one of the largest originators of fraudulent mortgage loans through its acquisition of Household Finance.

Three recent books by “insiders” have confirmed earlier articles revealing the decisive role that Treasury Secretary Geithner has played in opposing criminal prosecutions of the elite banksters and banks whose frauds drove the financial crisis and the Great Recession.

Bair, Sheila, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself” (2012); Barofsky, Neil, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street(2012); Connaughton, Jeff, The Payoff: Why Wall Street Always Wins (2012).

Geithner’s fear is that the vigorous enforcement of the law against the systemically dangerous institutions (SDIs) that caused the crisis could destabilize the system and cause a renewed global crisis. I have often expressed my view that the theory that leaving felons in power over our largest financial institutions is essential to producing financial stability is insane. Geithner, it turns out, is very sensitive to that criticism. I will return to that subject after setting the stage.

The UK authorities admit openly the arrival of “too big to prosecute”

The title of the article in The Daily Telegraph says it all: “Banks are ‘too big to prosecute’, says FSA’s Andrew Bailey.”

The FSA was the U.K.’s faux financial regulator during the run-up to the crisis. The U.K. “won” the regulatory “race to the bottom” that destroyed effective regulation and supervision in the U.K. and Europe and helped degrade to near impotence in the U.S. The FSA’s goal was to attract the world largest financial firms to relocate much of their operations to the City of London. The FSA offered “light touch” (non) regulation and (non) supervision to firms operating in the City of London. The results were the typical result – the City of London attracted the worst of the worst. The “control frauds” produced a “Gresham’s” dynamic (Akerlof 1970) because the frauds gained a crippling competitive advantage over honest competitors and dishonest and unethical officers became wealthy through fraud and modern executive compensation’s perverse incentives. “Control fraud” refers to criminal enterprises in which the people that control a seemingly legitimate enterprise use it as a “weapon” to defraud. Control frauds can create a Gresham’s dynamic causes markets to become so perverse that bad ethics drive good ethics out of the marketplace. The result was that the City of London became an intensely criminogenic environment and many of the largest financial firms in the world became criminal enterprises.

The newly designated head of the FSA decided to endorse the concept of “too big to prosecute.”

Mr Bailey told The Daily Telegraph that some banks had grown too large to prosecute. “It would be a very destabilising issue. It’s another version of too important to fail,” he said,
“Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment,” he said.
His comments come days after HSBC’s record $1.9bn (£1.2bn) settlement with the US authorities over money-laundering linked to drug-trafficking. US assistant attorney general Lanny Breuer said of the decision not to prosecute: “In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision.”

The U.S. and U.K. have made noise lately about how they had ended the pernicious doctrine of “too big to fail.” As I explained in a prior column, this pretense lasted about four hours before both nations’ true preferences were revealed. The systemically dangerous institutions (SDIs) already had crippling competitive advantages because the government bailed out their general creditors. Conservative economists agreed that this advantage was so large that it made “free markets” a farce. The doctrine “too big to prosecute” grants SDIs that are control frauds two additional advantages over their smaller, honest competitors. First, fraud pays enormously for the controlling officers. It is a “sure thing.” (Akerlof & Romer 1993.) The HSBC compliance officers (the minnows) may lose, but the controlling officers were made very wealthy by HSBC’s manifold frauds.

Second, over time the best people at a control fraud leave in disgust. The worst people stay or take promotions at other fraudulent firms. As ethics degrade and the SDI’s fraudulent profits (whether reported or real) surge the controlling officers will use the bank’s seeming respectability and wealth to secure greater political power, favors, and protection (“rent seeking” behavior in economics jargon). Crony capitalism can produce additional advantages that smaller, honest banks cannot match. The fraudulent SDIs’ advantages are cumulative. They have all the massive advantages of honest SDIs plus the far greater competitive advantages that come from control fraud. Remember that their controlling officers can become wealthy from these advantages even if the bank suffers losses.

Keep these words of the Nobel Laureate in Economics (2001), George Akerlof, in mind from his most famous article on markets for “lemons” (1970) when evaluating Breuer’s claim that selling indulgences to SDIs – and their officers – is essential to protect “innocent” people. The quotation is part of his explanation of how business frauds produce a Gresham’s dynamic and the injury that dynamic causes.

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.” George Akerlof (1970).

Akerlof was not the first perceptive observer to describe this dynamic. Jonathan Swift described it in Gulliver’s Travels.

“The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man’s goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage.”

Breuer’s argument is facially absurd. Prosecuting HSBC’s fraudulent controlling managers would not harm anyone innocent other than their families – and virtually all prosecutions hurt some family members. Breuer claims that virtually all of HSBC’s senior officers have been removed, so his argument is doubly absurd. Mostly, however, Breuer ignores all of the innocents harmed by the control frauds. SDIs that are control frauds are weapons of mass economic destruction that drive global crises and are the greatest enemy of “free” markets. They are also the greatest threat to democracy, for they create crony capitalism. We are all innocent victims of these control frauds – and the Obama and Cameron governments are allowing them to commit their frauds with impunity from criminal prosecutions. The controlling officers get wealthy without fear of prosecution. The SDIs controlled by fraudulent officers have to purchase an indulgence, but the price of the indulgence is capped by the “too big to prosecute” doctrine at a level that will not cause it any real distress. Breuer’s and Bailey’s embrace of too big to prosecute should have led to their immediate dismissals. Obama and Cameron should either fire them or announce that they stand with the criminal enterprises and their fraudulent controlling officers against their citizens.

Breuer: Apologist in Chief for Elite Felons

Breuer gives banksters the game plan to avoid prosecution for their frauds

Breuer has been a fount of excuses for why he has made elite banksters and banks immune from criminal prosecution. I have explained the infamous speech that Breuer gave on September 13, 2012 to (mostly) attorneys for banks and corporations providing them with the roadmap they should follow to argue that their clients’ felonies should not be prosecuted.

Fiat Justitia? Breuer fires blanks on elite financial frauds

The great thing about Breuer’s provision of a road map to defense counsel on how to avoid prosecution of their corporate clients’ crimes is that it was available only to large corporations. Breuer explained to defense counsel how they should hire economists to conduct studies that would give Breuer an excuse not to prosecute. The key was having lots of employees – and holding their jobs hostage. The corporation had to claim that being prosecuted for its crimes would cause large numbers of people to lose their jobs.

Breuer announces the lawyer loophole

One month after his infamous roadmap to immunity speech, Breuer doubled down on the reasons why he refused to prosecute the frauds by elite banks and banksters that caused the crisis.

“The securitisation cases at the corporate level are challenging because the things that are so disheartening and contributed to the financial crisis are not activities that violated criminal law,” says Lanny Breuer, US assistant attorney-general for the criminal division. “There were lawyers involved on both sides of transactions … That doesn’t mean that we like those transactions or that we condone them, but criminal law is not the way to resolve them.”
Instead, the DoJ has filed lawsuits against several banks, with the latest – a $1bn civil case against Bank of America for allegedly selling defective loans to Fannie Mae and Freddie Mac – filed last week.

The levels of dishonesty in Lanny Breuer’s statements are impressive. Why were “the things that … contributed to the financial crisis” “not activities that violated the criminal law”? “There were lawyers involved on both sides of transactions….” When corporations hire lawyers “criminal” prosecutions are not kosher.

Before beginning to dissect Lanny’s “logic” I wish to make an admission. I never cashed in. I had lots of opportunities to do so, but I’m an old fashioned mid-westerner. But under Lanny’s License to Loot via Lawyers (4L) I’m sorely tempted to cash in for one giant score. I figure with my reputation I should be able to bless ten thousand fraudulent bank transactions and help get an SDI off with no prosecution of the bank or the officers and a fine representing a week’s worth of profits. That’s worth several billion dollars to the banksters, so I should be able to command a fee of at least $100 million. I figure I’ll give $99 million to charity to salve my conscience and retire on the remaining $1 million. Even mid-westerners can fantasize.

Attempting to return from fantasy to Lanny’s logic forces one back into multiple levels of fantasy. Let us count the ways. First, why would the fact that “both sides of transactions” have lawyers make fraudulent transactions immune from prosecution? I have been active in or studying these matters for four decades and I never heard of the 4L doctrine until I read the Financial Times’ October 29, 2012 article announcing Lanny’s invention of the doctrine.

To be kind, there is no logic to Lanny’s logic. Lawyers are frequently on both sides of fraudulent transactions that are successfully prosecuted. There are multiple scenarios. The lawyer(s) can be aware of the fraud, in which case the corporation, officers and lawyers who knew of the fraud and aided it can all be prosecuted. The lawyers can be unaware of the fraud, in which case the officers and the corporation can be prosecuted. Lawyers are not some magic vaccine that prevents a corporation from being defrauded or from committing fraud.

In fairness to Lanny, he doesn’t really believe something so absurd as his 4L doctrine. What he really believes is his last line: “criminal law is not the way to resolve” frauds by elites represented by lawyers. As white-collar criminologists we frequently see this reaction from elite lawyers like Breuer and Holder. It’s all about elites protecting their social class and their guild (lawyers). Times are tough for the legal profession and 4L doctrine would instantly bring full employment for lawyers.

Consider the counter-factual – assume for purposes of analysis that the head of the Criminal Division is seriously signaling to bank CEOs that:

They can achieve total immunity from criminal prosecution if they involve a lawyer in their transactions even if those
“Disheartening” transactions “contributed” to the financial crisis
Because anytime both parties to a transaction have lawyers the resulting transaction is inherently incapable of “violat[ing] the criminal law.”

If those three facts were true, then corporations could freely become control frauds with absolute impunity from prosecution. The resultant “Gresham’s” dynamic would drive ethical firms from the marketplace because the fraudulent firms would gain a crippling competitive advantage (Akerlof 1970). Control frauds cause greater economic losses than all other forms of property crime – combined. Epidemics of accounting control fraud drive our recurrent, intensifying financial crises. The L4 doctrine would condemn the world to catastrophe. If Breuer were seriously proposing that we were helpless to prosecute even the most destructive fraud epidemics than surely he would be warning America of the critical need to adopt emergency legislation ending this existential risk to our nation. Breuer has made no such warning or plea for emergency legislation. Even more obviously, Breuer, Holder, Geithner, and President Obama would have made such emergency legislation their highest priority when drafting the Dodd-Frank Act. Instead, the administration treated us to the sounds of silence with regard to ending the grave danger posed by Lanny’s license to loot.

To this point I have only been discussing frauds that cause property losses, but white-collar crime also kills and maims enormous numbers of people. Lawyers are commonly involved in both sides of the transactions that maim and kill people. Is Breuer so depraved that he would apply his L4 doctrine to give immunity to those who maim and kill through transactions in which a lawyer is present on both sides? Will any reporter ask him tough questions like this?

There’s an important technical reason why announcing the L4 doctrine makes no sense for the head of the Criminal Division. It’s one thing to say “some” of the acts that cause losses were not criminal or that it is “difficult” to bring criminal cases against elite banks and banksters. It is a very different thing for the head of the Criminal Division to state that if there “are lawyers involved on both sides of transactions” the transaction cannot “violate criminal law.” That statement could be used by defense counsel to defeat prosecutions should Breuer ever be replaced by a prosecutor instead of another apologist for the banksters. Breuer’s statements could become a self-fulfilling prophecy – they could make it impossible to convict the banksters. Breuer’s statements are not only false but also grossly irresponsible and harmful. They may harm the nation for decades.

The incoherence of Breuer’s position is illustrated the example he provided to the Financial Times reporter when he announced his invention of the L4 doctrine.

That doesn’t mean that we like those transactions or that we condone them, but criminal law is not the way to resolve them.”
Instead, the DoJ has filed lawsuits against several banks, with the latest – a $1bn civil case against Bank of America for allegedly selling defective loans to Fannie Mae and Freddie Mac – filed last week.

It was DOJ that described Bank of America’s (B of A) control fraud as “brazen.” It was DOJ that filed a complaint alleging that senior officers were warned in advance that the incentive system for loan officers’ compensation would lead to widespread fraud, warned once the program began operating that it was causing widespread fraudulent loans, responded to these warnings by covering up the evidence of fraud and increasing the perversity of the incentives for the loan officers, made false representations to Fannie and Freddie about loan quality, and then stonewalled them on the obligation to repurchase the fraudulent loans. The actions described in the complaint were criminal frauds. The case could and should have been brought as a criminal prosecution rather than a civil case. But B of A is an SDI and the senior officers who led the fraud are elites so Breuer failed, as always, to prosecute the banksters who caused the crisis. The example that Breuer cited to the reporter, the B of A fraud case, falsifies Breuer’s claim that he cannot prosecute the securitization frauds. His own example demonstrates that the problem is that he lacks the will to enforce the rule of law against SDIs and elite banksters. I discussed the B of A case in detail in a prior article.

Lanny’s concern for HSBC’s employees

NPR broadcast a program on the HSBC settlement that contained comments from interviews with Breuer and me.

HSBC is a classic example of a series of massive white-collar crimes that continued for over a decade and could maim and kill hundreds of thousands of people. Multiple U.S. government investigations concluded that HSBC:

Laundered billions of dollars for some of the most murderous drug gangs in the world. These gangs have murdered many thousands of Mexicans and devastated much of the nation.
Aided Iranian entities to evade U.S. financial sanctions on Iran. If Iran is actually developing a nuclear weapon and if it uses such a weapon to attack it could kill tens of thousands of people and HSBC and Standard Chartered will likely have proven useful to Iran in developing the weapon..
Aided Hamas, Hezbollah, and al Qaeda to evade U.S. financial sanctions. These U.S. considers them terrorist organizations.

Breuer’s great concern, however, is that HSBC employees not be harmed by a criminal prosecution of HSBC’s massive, long-running, and murderous frauds. NPR summarized his position.

“But Lanny Breuer from the Justice Department says the government didn’t want to punish all of the innocent people who worked for the bank who would lose their jobs. He said when he announced the settlement this week that HSBC had cleaned house, was promising to have more oversight and was cooperating.”

This statement is false or misleading on multiple levels. First, there were plenty of choices other than causing employees to “lose their jobs.” DOJ could have prosecuted HSBC’s officers who committed the felonies. No “innocent people” would “lose their jobs.” If HSBC had indeed “cleaned house” and already fired the officers and employees who committed the frauds no one would lose their job – innocent or otherwise. DOJ could announce that all the officers and employees who committed the frauds or knowingly permitted them to occur had already been fired when HSBC “cleaned house.” If HSBC was really “cooperating” with DOJ and its regulators its house cleaning would have already removed the thousands of HSBC employees and officers who committed the frauds or knowingly permitted the frauds to continue. After all, DOJ and regulators should not have had to take any action. HSBC should have wanted on its own initiative for its own purposes to fire all the frauds and all the officers who knew of the frauds and did not act to end the frauds.

HSBC was a profoundly and pervasively criminal enterprise for at least 15 years. Many of its fraudsters doubtless moved to other banks, often with promotions. DOJ and the regulators have not indicated any intention to prosecute them or remove them from office. The great length of HSBC’s frauds demonstrates that there are limits to the “innocence” of HSBC employees. People who continued to work for a pervasively fraudulent firm for many years have self-selected. They were willing to stay at a criminal enterprise even when the job market was hot and they could have left.

Contrast HSBC’s employees’ situation with that of the typical blue collar defendant. Prosecutors routinely prosecute those who use illegal drugs without a thought to the injury caused to their innocent children or spouses.

Breuer didn’t mention the HSBC employees who are the real innocent victims of HSBC’s frauds. These are the former HSBC employees who left in disgust and are unemployed or took salary cuts. These are the current HSBC employees who were demoted or had their careers derailed because they objected to the frauds. If Breuer understood banking or justice these are the people to whom he would have required HSBC to provide immediate redress and promotions. Of course, if HSBC were an honest bank Breuer would not have had to require such redress and promotions for HSBC would have recognized that it was the employees who showed integrity in the midst of a criminal enterprise that should be running HSBC and scouring its Stygian stables. If Breuer, HSBC’s regulators, or Geithner understood honest banks and banking they would have realized that HSBC’s failure to provide on their own initiative the redress and promotions demonstrated that HSBC’s controlling officers were not competent to understand how to run a bank based on integrity.

Breuer also failed to mention what should have been the U.S. and U.K. response to HSBC’s crimes. I explained whyPresident Obama and Prime Minister Cameron should have used their leverage to compel HSBC to shrink to the point that it no longer posed a systemic risk of global financial crisis. There did not have to be any firing of innocent employees.

Breuer’s faux ode to HSBC and the refusal to prosecute

“Lanny Breuer, an assistant attorney general who oversees the Justice Department’s criminal division, called the settlement historic and criticized the bank’s ‘stunning failures of oversight.’
‘The record of dysfunction that prevailed at HSBC for many years was simply astonishing,’ Breuer told reporters at the U.S. attorney’s office in Brooklyn.
Breuer defended the settlement, saying HSBC did not get a pass and will pay a heavy price. The bank has clawed back bonuses awarded to its compliance officials and agreed to partially defer senior executives’ bonuses, Breuer noted.”
“Our goal is not to bring HSBC down,” Breuer said. “It’s not to cause a systemic effect on the economy.”

Breuer’s comments are disingenuous. “Dysfunction” – does Breuer think he is a family psychologist? The facts show that HSBC functioned as it was designed by its senior managers – as a criminal enterprise. HSBC’s senior managers shaped incentive compensation systems that were intensely criminogenic. The compensation and promotion system rewarded managers who increased profits through fraud. Violating U.S. financial sanctions and serving clients that are brutal, murderous, and terrorists is exceptionally lucrative for fraudulent banks like HSBC. It produced a huge competitive advantage over honest competitor. Fraud increased HSBC’s revenues and cut its expenses (it was not necessary to hire an adequate compliance staff when the goal was not eto comply with the law but rather to violate it). By increasing HSBC’s revenues all of HSBC’s senior officers were made much wealthier. The failure of “oversight” was not “stunning” – HSBC’s perverse executive compensation system produced the normal result, an abject failure to prevent frauds over at least a 15 year period.

The only “claw back” is of unidentified “compliance officials.” Reporters need to demand the specifics: how many compliance officers (there were hundreds engaged in HSBC’s crimes) had what percentage of their bonuses clawed back? What about their promotions? Were they clawed back? Why were only some compliance officers’ bonuses clawed back? Why not the “C suite” and operational officers who bear the principal culpability? The DOJ press conference provided this clue as to how few “compliance officials” are likely to be involved and how low-level they are likely to be.

“HSBC’s compliance employees were vastly outnumbered, according to prosecutors. Less than a handful of bank employees, for example, were charged with reviewing 13,000 to 15,000 suspicious alerts generated monthly, they said.”

Why would HSBC – a criminal enterprise for at least 15 years that has been involved in three scandals that are the subject of the settlement and at least five other scandals in which it defrauded customers and its regulators, and an institution that covered up its frauds to deceive the regulators – be permitted to pay any bonuses to “senior executives”? Their prior salaries, promotions, and bonuses should have been largely clawed back, their future bonuses cancelled, and the entire HSBC compensation system fixed so that it no longer creates perverse incentives. Breuer is ballyhooing minor compensation bandages that we would have routinely slapped on a poorly managed S&L that violated no laws. HSBC has been a massive, criminal operation for at least 15 years according to a series of U.S. government investigations. HSBC’s crimes cost people their lives, aided terrorists, and funded brutal nations, some of which may pose grave risks to the U.S.

Breuer explained why the criminal enterprise known as HSBC was not really that bad.

“Later, [Breuer] said that while HSBC permitted itself to be an essential element in money laundering, it was not the mastermind. ‘They are not the Sinaloa cartel,’ he said.”

Well, great, the largest bank in Europe, knowingly serviced the Sinaloa cartel’s money laundering needs in order to make greater profits – but HSBC wasn’t “the mastermind” so there’s no reason to prosecute them. As all readers know, we only prosecute criminally the “mastermind” of drug cartels – never the people that manufacture, transport, sell, or consume drugs or launder funds. That is why our prisons have virtually no prisoners. Remember, this is the head of the Criminal Division spouting this nonsense at a press conference – with a “stern face.”

And then, finally, Breuer let slip the truth. The administration’s overriding goal was to avoid a “systemic” financial crisis being triggered by “bring[ing] HSBC down.” But Breuer and Holder have no expertise in evaluating what penalty could “bring HSBC down” and cause a “systemic” crisis. That (purported) expertise would have to come from Geithner.

And what was the stock market reaction to this supposedly powerful DOJ action against HSBC?

“HSBC shares closed up 0.6 percent in London on Tuesday, and its Hong Kong-listed shares were up about 0.25 percent by late morning on Wednesday.”

Contrast that fact from the NYT article about the HSBC with the title of the article.

“HSBC Became Bank to Drug Cartels, Pays Big for Lapses.”

“Lapses” – seriously? HSBC violates the law for 15 years to make money by illegally aiding the worst and most dangerous entities in the world escape vital financial safeguards and it gets trivialized as “lapses.” This is precisely what happens when DOJ fails to prosecute because of fears that if the SDIs are held accountable for their crimes there will be a global systemic crisis. What was the market reaction to this supposedly huge penalty? Hot damn, they got off cheap, let’s buy HSBC shares. What a powerful message of deterrence.

The text of the NYT article does eventually (many paragraphs in, where few readers venture) note:

“Drug cartels earn an estimated $60 billion a year from trafficking in the United States, according to the United Nations. Half of that money is routed back to Mexico to pay off politicians, fund private arsenals and fuel violence that killed more than 60,000 people over the past six years.”

As a criminologist, I urge the legalization of these drugs to ruin the cartels and terrorists that finance their violence through sales of drugs (not because I have any romantic notion that the drugs are benign). The devastation that the U.S. drug war has caused in many Latin American nations is obscene. But that is not the world we live in. We live in a world where the most elite banks in the world move massive amounts of money for murderous drug gangs and terrorists and when they are caught red-handed the head of the Criminal Division says: of course we won’t prosecute them – the banks aren’t the “masterminds” of the Sinaloa cartel. No, the elite banks and banksters simply help the cartels and the terrorists get the laundered funds that help them murder their victims. No harm; no foul.

Breuer then hatched another example of our family rule that it is impossible to compete with unintentional self-parody. You see, HSBC was really the victim, not the perpetrator. Indeed, Breuer seems to think that HSBC is an innocent 15 year old American girl plied with liquor by an older Mexican guy intent on “taking advantage” of her.

“Breuer defended the government’s agreement with HSBC. He said that U.S. employees in particular seemed duped by criminal enterprises taking advantage of HSBC oversight policies that over decades became increasingly lax.
Court documents showed that the bank let over $200 trillion between 2006 and 2009 slip through relatively unmonitored, including more than $670 billion in wire transfers from HSBC Mexico, making it a favorite of drug cartels and money launderers. HSBC Bank USA at the time rated Mexico in its lowest risk category.
Top executives who felt “the pressure of the bottom line” continually cut staff that might have discovered how criminal enterprises were taking advantage of the bank, Breuer said.”

Breuer is, of course, incapable of providing a coherent logical argument supporting his self-parody. “Top executives” designed perverse executive compensation systems that made them exceptionally wealthy if they improved “the bottom line” by “continually cut[ting compliance] staff” to ensure that they did not “discover how criminal enterprises were taking advantage of the bank.” If they gutted the compliance staff the “top executives” ensured a five wins that were guaranteed to make them wealthy.

Their branches and operations would increase their revenues enormously by laundering billions of dollars for drug cartels and terrorists
Their costs would be dramatically be reduced by not hiring compliance people, and
Their reported profits and executive bonuses would surge, while the destruction of compliance would
Ensure deniability by failing to identify their rampant crimes, and lead a
Breuer of very little brain to say that their crimes should not be prosecuted because the banks and bankers were “tak[en] advantage of” by the cartels and terrorists

Note that this five-part scenario can be followed easily by any bank and provide immunity from criminal prosecution to the banksters and the bank engaged in “control fraud.” Breuer has created another road map to elite fraud with impunity.

How completely did HSBC’s “top executives” deliberately destroy compliance?

“Before the government stepped in, HSBC used only one or two compliance officers to monitor its banknotes business – the wholesale buying and selling of bulk cash around the world – even though the business is highly vulnerable to money launderers.
Despite the high risk, discrepancies and suspicious activity in banknotes transactions were not reported from July 2006 to July 2009, when the banks’ compliance staffing was at its worst.
In March 2008, when 13,000 to 15,000 suspicious wire alerts were generated per month by such transactions, only four employees were around to review them, according to court papers. HSBC Bank USA now has 430 employees reviewing suspicious wire alerts.”

It’s hard to believe that DOJ will ever get a clearer case of a massive bank’s “top management” deliberately designing a compliance system to fail so that they could maximize their bonuses through massive money laundering. The pass that Breuer gave to HSBC – and its officers – demonstrates the ability of SDIs to commit fraud with impunity from the criminal laws. Breuer’s effort to deny this point actually proved it.

“‘I think it’s a disservice to suggest that anyone’s getting a pass here,’ Breuer said.
Asked repeatedly why no bank executives were being prosecuted, Breuer said, ‘I’m not here to defend HSBC.’ Yet, he added: ‘Our goal is not to bring HSBC down.’
He said to do so would affect the economy and cost thousands of people their jobs. He said no criminal charges would be brought unless it could be proved that executives purposely tried to let criminal organizations launder money.”

Breuer’s logic again collapses. He did give a pass to HSBC and it appears that he gave it to HSBC’s officers and employees. If the Obama administration takes the position that large corporations cannot be prosecuted because doing so would harm “the economy,” then “deferred” prosecution agreements are non-prosecution agreements. I have explained previously why Breuer provided no basis for refusing to prosecute the “bank executives” who broke the law because doing so would help, not harm HSBC. Indeed, under Breuer’s logic there is every reason to prosecute them because Breuer is claiming that all the executives involved in HSBC’s frauds have already been fired. The last sentence constitutes yet another example of Breuer refusing to prosecute elite white-collar criminals. The government investigations demonstrated that HSBC employees and officers violated multiple laws including 18 U.S.C. § 1956(a)(2).

Breuer confirmed that DOJ had evidence that HSBC knowingly aided clients in violating U.S. law. “HSBC even instructed an Iranian bank in one instance how to format messages so that its financial transactions would not be blocked, Breuer said at a news conference announcing the settlement.” AP reported that Breuer viewed HSBC as too big to prosecute.

“The U.S. stopped short of charging executives, citing the bank’s immediate, full cooperation and the damage that an assault on the company might cause on economies and people, including thousands who would lose jobs if the bank collapsed.
Outside experts said it was evidence that a doctrine of “too big to fail,” or at least “too big to prosecute,” was alive and well four years after the financial crisis.
The settlement avoided a legal battle that could have further savaged the bank’s reputation and undermined confidence in the banking system.”

If prosecuting SDIs “undermined confidence in the banking system” and risks causing a systemic global crisis then SDIs are too dangerous to exist because they can never be held to account for their crimes. Prosecuting a bank that has become a criminal enterprise is not “an assault on the company.” It is ludicrous to claim that “charging executives” of an SDI would cause a global crisis, and if the claim were true it would prove that our highest priority would have to be shrinking the SDIs to a size that they no longer posed a systemic risk and we could prosecute their executives when they committed crimes without endangering the global economy.

The new, great lie in the AP story is that HSBC provided “immediate, full cooperation.” The government investigations document that HSBC was told many times that it was committing enormous violations of the law that put the world at risk – and frequently responded by making the problem worse, e.g., further cutting the already pathetically inadequate compliance staff. HSBC repeatedly made false representations to U.S. regulators and U.S. bankers.

“Despite a chorus of warnings from federal banking regulators about the vulnerability of HSBC’s operations throughout the world, the bank didn’t fortify its controls, the Senate report found.”

HSBC went so far as to create systems explicitly designed to deceive U.S. regulators, including training HSBC staff on how to instruct Iranian clients to make false entries on documents so that they could evade U.S. financial sanctions. HSBC ran a criminal enterprise for at least 15 years and HSBC was a serial violator of laws and ethics that have produced at least eight major scandals in recent years.

The DOJ document on HSBC released at the press conference on the settlement admits that the purported immediate and full cooperation actually constituted at least 15 years of evasions, lies, and cover ups. Breuer’s claim of cooperationisn’t simply false. It’s an insult to our intelligence.

“According to court documents, from the mid-1990s through September 2006, HSBC Group allowed approximately $660 million in OFAC-prohibited transactions to be processed through U.S. financial institutions, including HSBC Bank USA. HSBC Group followed instructions from sanctioned entities such as Iran, Cuba, Sudan, Libya and Burma, to omit their names from U.S. dollar payment messages sent to HSBC Bank USA and other financial institutions located in the United States. The bank also removed information identifying the countries from U.S. dollar payment messages; deliberately used less-transparent payment messages, known as cover payments; and worked with at least one sanctioned entity to format payment messages, which prevented the bank’s filters from blocking prohibited payments.
Specifically, beginning in the 1990s, HSBC Group affiliates worked with sanctioned entities to insert cautionary notes in payment messages including “care sanctioned country,” “do not mention our name in NY,” or “do not mention Iran.” HSBC Group became aware of this improper practice in 2000. In 2003, HSBC Group’s head of compliance acknowledged that amending payment messages “could provide the basis for an action against [HSBC] Group for breach of sanctions.” Notwithstanding instructions from HSBC Group Compliance to terminate this practice, HSBC Group affiliates were permitted to engage in the practice for an additional three years through the granting of dispensations to HSBC Group policy.”

Breuer’s false statement about HSBC’s cooperation and immediate compliance would be exceptionally damaging to DOJ should it ever decide to enforce the law and prosecute HSBC’s and its fraudulent officers’ crimes. He is doing a bang-up job as HSBC’s defense counsel, but he is supposed to be the head of our Criminal Division. His mission is to ensure one our nation’s defining principles that made us great – no man is above the law. Breuer has betrayed his duty and our nation’s core value by accepting Geithner’s demand that the SDIs and their fraudulent officers must above the law – they must be immune from prosecution.

Treasury pushes “too big to prosecute” – and tries to hide its critical role

The New York Times reported from the beginning of the discussion of the HSBC settlement the critical role Treasury and the banking regulators played in urging DOJ not to prosecute HSBC – and Treasury’s effort to deny that role.

“State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.
While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy.
Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.
Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter….
A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.
Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.
“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”
Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury SecretaryTimothy F. Geithner, people briefed on the matter said. The meeting never took place.”

To sum it up: the regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes. They warned that such a guilty plea could cause a systemic crisis because HSBC was an SDI. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged Holder to meet personally with Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, Breuer emphasized that DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.

Note the disingenuous statement made by the Treasury to the press. Yes, DOJ makes the “decision” whether to prosecute, but if DOJ were to prosecute in a case where Treasury had warned that the sky would fall if there were a prosecution – and the sky did fall – then the DOJ’s leaders would be the idiots who ignored Treasury and blew up the world’s economy.

The Treasury statement completes setting the stage for the tale I promised to complete about Geithner’s sensitivity to his role in blocking prosecutions becoming better known. Breuer and I were interviewed by NPR about the HSBC settlement. I criticized it and I explained why settlement negotiations were unique in such circumstances because the government’s overriding priority was in reducing its fine to a level that it was sure would not pose any meaningful risk to the health of the SDI. When the government fears that any SDI failure will cause a global systemic crisis the government’s paramount priority in negotiating a recovery is to restrict rather than maximize its recovery in order to ensure there is no meaningful risk of the settlement leading to the SDI’s failure. The government’s press flacks find it easy to “spin” settlements with profitable SDIs because their capital and profits are so enormous that the government can negotiate a fine that sounds very large to the public but is relatively minor from the SDI’s perspective. The settlement is both a “record” amount and a modest cost of doing (fraudulent) business for HSBC.

When the NPR story ran originally it contained a quotation from me noting Geithner’s long-standing opposition to prosecuting SDIs and the government’s incentive to reduce greatly the penalties on HSBC because it was an SDI. My quotation mentioning Geithner was removed from the NPR story at the request of Treasury and replaced with this “Clarification.”

Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department that made the decision to defer prosecution of HSBC.

I was not “speculating” that “Geithner did not want to put HSBC out of business.” My statement was not only factual; it wasn’t controversial given the many insider exposes that have confirmed Geithner’s position on SDIs. (A position now parroted by Breuer.) The statement that Treasury got placed in the “clarification” is the same carefully crafted disingenuous statement that Treasury is using to obscure the continuing success of Geithner’s efforts to prevent prosecutions of the SDIs. What we now know definitively is how hyper-sensitive Geithner is to anything that brings to greater public attention his pusillanimous role in ensuring that fraudulent SDIs and the banksters that control them can commit their crimes with impunity from the criminal laws. As always, I emphasize the ultimate culpability for the shameful “too big to prosecute” indulgence granted to the criminal enterprise known as HSBC rests with President Obama and Prime Minister Cameron. It is also worth noting that the Republican Party and Governor Romney never protested this failure to prosecute and that Obama is largely continuing President Bush’s failure to even investigate seriously the banksters. Welcome to crony capitalism.

Matt Taibbi: HSBC Epitomizes the Double Standard in American Justice

2012-12-13T19:37:00.001-08:00

Why Did Obama and Cameron Save a Criminal Enterprise Like HSBC?

2012-12-13T05:35:00.002-08:00

Why is HSBC still in operation? On the same day (December 10, 2012) that the Barack Obama administration leaked the story of the HSBC settlement, astory ran in the New York Times that was full of self-praise by the Obama and David Cameron (U.K.) governments for their "cooperative approach" to cracking down on systemically dangerous institutions (SDIs). SDIs are treated as "too big to fail" because they pose a global systemic risk when they fail. The HSBC settlement puts the lie to the Obama/Cameron crack-down on the SDIs for it revealed a disgrace -- Obama and Cameron treat the SDIs as too big to prosecute. Indeed, HSBC demonstrates that the SDIs' senior officers are treated by Obama and Cameron as too elite to prosecute. The propaganda meme of the NYT story -- that the SDIs would never again be given special favors due to reforms being adopted by Obama and Cameron -- lasted four hours before it was destroyed by the disgraceful reality of the Obama and Cameron governments' refusal to prosecute HSBC and its officers for their tens of thousands of felonies.

The NYT article begins by accepting the Obama/Cameron framing of the SDI issue, without any critical analysis. "It is one of the thorniest problems hanging over the financial system: how should authorities deal with the collapse of a sprawling global bank to protect the financial system at large?" The reporter's implicit assumption is that we must have banks that are systemically dangerous when they fail.

This example exemplifies why implicit assumptions are so dangerous. They exclude far better alternatives or terrible risks from even being considered -- and they do so unknowingly. If the reporter had made the assumption explicitly he would have been forced to defend it with analytics. The article acknowledges that SDIs drove the financial crisis that caused the Great Recession. In the U.S. alone this caused over a $15 trillion loss in wealth and led to the loss, or prevented the creation, of over 10 million jobs. According to the Bush and Obama administrations we were lucky in preventing the crisis from growing vastly larger. SDIs are economic weapons of mass destruction -- but they cause their primary destruction inside the nation in which they reside.

Why allow a weapon of mass destruction that primarily destroys your own nation? That is an act of insanity. The City of London cannot credibly threaten the United States by creating SDIs and threatening to destroy the UK's economy. The proponents of SDIs bear an enormous burden of persuasion to prove why we shouldn't end the catastrophic danger they pose by shrinking them to the point where they are no longer potential weapons of mass economic destruction. Their burden is even greater when one considers the dominant view of economists that the smaller banks would be more efficient than the SDIs, which are massively too large to manage. The NYT reporter does not even attempt to meet that burden. The reporter also presents no indication that the U.S. and U.K. regulators even considered ending our exposure to these weapons of mass economic destruction.

The article acknowledges that trying to prevent an SDI from causing a systemic, global financial crisis once it fails is likely to fail. First, the regulators are not at all sure that they can prevent a systemic crisis with their "cooperative" proposals. Second, few regulators would risk a global systemic crisis when the alternative of bailing out the failing SDI inherently exists. Regulators have seen the disastrous results of failing to bail out Lehman.

The obvious alternative (to everyone except the reporter, the U.S. and U.K. regulators, and the Obama and Cameron governments who have implicitly assumed it out of existence) is to shrink the SDIs to the point that they no longer pose a systemic risk and to conduct the shrinkage now before they fail. That alternative would vastly reduce the economic WMD and make the banks more efficient -- a win-win solution.

The further good news is that those two "wins" are not the limits of the advantages of shrinking the SDIs before they fail. The NYT article, implicitly, assumes the Obama/Cameron framing of another issue critical to determining the SDI policies we should adopt. "'Too big to fail' is the label for the problem that confronts governments when a large bank is on its last legs." The implicit assumption is that SDIs pose a "problem" only when they are on their "last legs." Had the reporter made this assumption explicitly he would have recognized it is unsupportable. Beyond their inefficiency, SDIs pose grave risks to a nation when they are profitable and growing. SDIs make "free markets," integrity and justice impossible to maintain, they create the perverse political power that produces crony capitalism, and they drive the "competition to laxity" that drives regulatory failure. I have explained most of these points in prior writings, so I will summarize.

Guaranteed to Loot: The Perverse Incentives of Systemically Dangerous Institutions' CEOs.
SDIs' uninsured, general creditors get bailed out even though the contractual deal they agree to would normally cause them to suffer severe losses. The result is that they can borrow significantly more cheaply from general creditors than can their smaller rivals. SDIs that are insured banks receive an explicit governmental subsidy (deposit insurance), but the implicit federal subsidy to general creditors is far larger and is unique to SDIs. The very conservative economists who authored the book Guaranteed to Fail (2011) describe the implicit subsidy as being so large that it is the metaphorical equivalent of "bringing a gun to a knife fight." They conclude that the subsidies are so large that they inherently create "a highly distorted market." Indeed, they argue that the SDIs that created the mortgage crisis so distorted the market that there was "nothing free" about the mortgage markets. The authors also explain the SDIs' immense political power and their ability to corrupt regulators and regulation.

The HSBC case illustrates why SDIs destroy integrity and justice. Public reports of the results of the government investigations of HSBC describe a bank that has been a criminal enterprise for at least 15 years. The current settlement addresses only three of the many scandals HSBC has committed over that time period. HSBC is a recidivist of epic proportions, but the Obama and Cameron governments have failed to prosecute HSBC or any of its officers. When powerful corporations and their controlling officers grow wealthy through massive frauds and do so with impunity from criminal sanction integrity and justice are eaten away. Effective financial regulation, supervision, and prosecutions are essential to "free" financial markets. When cheaters prosper honest firms are driven from the markets, a point that the Nobel Laureate George Akerlof explained in his famous 1970 article on markets for "lemons." He described a "Gresham's" dynamic in which bad ethics drove good ethics from the marketplace.

[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.

Fraud and the destruction of integrity among SDIs will tend to spread to their market rivals due to this Gresham's dynamic. The result is another form of systemic risk.

The Justice Department, HSBC's regulators, and the Obama and Cameron governments had the perfect opportunity to break this Gresham's dynamic and restore justice and integrity by prosecuting and taking vigorous regulatory steps that forced HSBC to shrink over the next five years to the point that it was no longer an SDI. They could have done so at a time when HSBC was reporting very high profits rather than during a crisis. It was their paramount role and duty as prosecutors and regulators to break the Gresham's dynamic by restoring the rule of law. Doing so would have been good for the markets, for increased competition, for bank efficiency, for the independence of the regulators and prosecutors, for safety and soundness, and for our democracy. Instead, they made the Gresham's dynamic far worse, shamed their institutions and professions, and betrayed their duty to the nation and citizenry.

But things are likely far worse than this description suggests, for the pathetic truth is that there is no indication that the regulators, prosecutors, or government leaders considered doing the right thing at HSBC. That is how destructive making implicit assumptions and adopting the pro-crony framing of issues is in the real world. I hope I am wrong and that an insider will resign in disgust and disclose how she fought to shrink HSBC but was overruled by her superiors.

William K. Black

Capitalism Without Failure

Bill Black: Leaving Felons in Charge of our Largest Financial Institutions is Now United States Policy

Bitcoin Arouses Passions: Why You Should Buy Now. And Why You Should Buy Never.

Bill Black: Pervasive Fraud by Our "Most Reputable" Banks

Jacob Lew: Poster Child for Revolving Door Disease

Spotlight on Jounalist Amy Goodman

What’s Wrong with the Financial Services Industry?

By Barry Ritholtz - February 21st, 2013, 7:20AM

Comments

26 Responses to “What’s Wrong with the Financial Services Industry?”

Frederic Bastiat: When Plunder Becomes a Way of Life for a Group of Men...

Bill Black: Judge Rakoff Rules in Favor of Insurer against Lender in Important Decision

Tom Ferguson's Investment Theory of Politics

Excellent Daily Show and Bloomberg Neil Barofsky Interviews

Leaving Felons in Charge of our Banks is Good Policy and Will Lead to Financial Stability

Lanny Breuer on Whistleblowers and Prosecuting Bankers (Liar Liar version)

President of Iceland: Preventing Bank Failure Kills Competitiveness and Harms the Economy

The OCC's Tragic Response to the Frontline Expose: The Untouchables

William K. Black

The Untouchables

Jaime Falcon vs. Frontline: Why Wall Street's Leaders Have Escaped Prosecution

Charles Ferguson: Reforms Necessary to Fix the Financial Sector

Lawrence Lessig on Aaron Swartz

Charles Ferguson, Bill Black, and Matt Taibbi on Jack Lew's Appointment: Fail

This Shaolin Rebel Intruder Wishes a Superb 2013 to All*

2012 - The Year of Bank Fraud

By Ben Walsh DECEMBER 19, 2012

Glenn Greenwald: Woman Imprisoned for Life for Minor Drug Offense; Banking Giant Immune to Justice for Massive Drug Laundering

UPDATE

The Second Great Betrayal: Obama and Cameron Decide that Banks are above the Law

Matt Taibbi: HSBC Epitomizes the Double Standard in American Justice

Why Did Obama and Cameron Save a Criminal Enterprise Like HSBC?

By Ben Walsh

DECEMBER 19, 2012