Banks and the bezzle

by John Quiggin on September 24, 2011

As a sort of response to Daniel’s post, I’d like to toss up some not fully digested thoughts about the fact that there have been very few high profile criminal prosecutions of bankers or others in the finance sector arising from the 2008 meltdown. There was of course the Madoff case, but it’s something of a rule-proving exception – Madoff was essentially a one-man show and he got caught for the very simple reason that his Ponzi scheme ran out of money.

The general immunity of the financial sector is an exception to the usual pattern described in JK Galbraith’s theory of the bezzle (exemplified by Madoff). The bezzle is the amount of undetected corporate fraud. As a boom continues, and everyone does well, people realise they can siphon off money and use it to make even more money. If they are threatened with detection, the original amount stolen can be returned to the till, and thye are still ahead. But, in a crisis, this can’t be done and, in any case, outside accountants are all over the books. So, embezzlers are caught and the bezzle shrinks. It stays small in the early stages of recovery when most decisions are being made by the cautious types who survived the crisis. But as the boom continues, hungrier and less-risk averse types come to the fore and the bezzle begins to grow again.

It’s also typically true that actions seen, while profitable as corner-cutting at worst, and as cleverly overcoming silly regulatory obstacles at best, are commonly prosecuted under much more aggressive interpretations of the law when lots of people have lost their money.

Why is it no one, or hardly anyone has been caught and convicted this time around? A few possible explanations over the fold, along with an attempt to respond to DD on whether this matters.

1. There wasn’t any crime going on in the banking sector this time around. I’ll pass over this one in silence, except to note (as in point 3), that so much self-enrichment at the expense of the public in general was legal that ordinary embezzlement is something of a mug’s game, to be played only by people who don’t have access to the big table, but do have some capacity to juggle the books

2. Regulators and prosecutors are complicit in the game and are letting financial criminals go free. I don’t really buy this one either, at least as a general rule. In the post-crisis atmosphere, successful prosecutions are, in some sense good for everyone except the perps. In particular, the financial sector gets to say that the rotten apples have been cleaned out and that we can get back to normal. The things I’ve read suggest that prosecutors looking for evidence have found it exceptionally difficult to find good cases to prosecute

3. The scale of legal, privately profitable but socially destructive, financial activity is so massive that, even post-meltdown, it’s impossible to detect embezzlement against the general background of dubious financial manipulation

4. The bailout was so comprehensive that the bezzle just kept on growing.

Coming out of all this, I agree that there’s little to be gained from going after a few high-profile scapegoats here. As in the scene at the beginning of Grapes of Wrath everybody involved is replaceable, and most of those who might be prosecuted have already been replaced[1]. So, the real issue is whether prosecutions will act as catharsis (appeasing the anger that would otherwise help to drive a more comprehensive attack on financial excesses) or as catalyst for directing that anger in the right way. That depends on specific circumstance.[2]

But to my mind, the lesson is that its the sector as a whole that needs to be punished, with a drastic reduction in size, profitability, influence and freedom of action.

fn1. There’s a contrast here with the News International case, where successful prosecutions of the Murdochs and their top henchmen would make a big difference.
fn2. The last couple of sentences added in response to some useful comments

{ 194 comments }

1

dsquared 09.24.11 at 6:08 pm

I would basically agree with this except that the need for a smaller and better capitalised banking system is pretty much unrelated to concepts of “punishment”. Particularly important for Australia, actually – I would guess that it would be a bad idea to delay a fairly major reform of Aussie mortgage finance until there was a crisis to punish them for. (Also Sweden, Canada and a few other places)

2

hopkin 09.24.11 at 6:14 pm

For a given level of desired bezzle, the amount of fraud is surely an inverse function of the level of regulation. If you’re allowed to sell loans on commission and offload them onto third parties who can legally write incomprehensible contracts to spirit away the risk, then who needs fraud?

Incidentally, there’s strong econometric evidence that levels of corruption correlate strongly (inversely) with levels of economic regulation. This would explain why corruption perceptions in finance-heavy countries like the UK haven’t really shifted since the crisis.

3

hopkin 09.24.11 at 6:15 pm

Error in /2 – for ‘inversely’ I meant ‘positively’.

4

straightwood 09.24.11 at 6:41 pm

Just as bacteria and viruses mutate so as to become harder and harder for drugs to kill, the greed-heads in the financial sector are constantly creating new mechanisms for avoiding and defeating regulatory enforcement. Among their greatest successes is the perfection of stealthy methods of legalized corruption that are fully screened by plausible justifications, specifically:

1) Creating tacit quid-pro-quo revolving door career incentives for personnel in regulatory agencies. If they don’t rock the boat, they move to high-paying jobs in the private sector. Even if idealistic junior staff wish to perform responsibly, their managers, who have taken the deal, will shut down their investigations (e.g., the Madoff SEC “mistakes”). This tactic is covered by defending hiring of “experienced” staff and preserving freedom of employment mobility.

2) Securing legal recognition of corporate political funding and lobbying expenditures as an exercise in free speech, effectively allowing financial corporations to shout down critics through an array of mercenary proxies and hired legislators. Dodd-Frank reform legislation was undermined and weakened at every opportunity by the best lobbyists money can buy, and they are still at it. This tactic is covered by corporate “personhood” and associated First Amendment rights.

These two stealthy methods of legalized corruption have contributed greatly to the lack of prosecutions of finance industry malefactors and the lack of effective reform legislation. The banksters are still running the show, and everyone knows it.

5

geo 09.24.11 at 6:50 pm

the lesson is that its the sector as a whole that needs to be punished, with a drastic reduction in size, profitability, influence and freedom of action

Amen to that. This, however, doesn’t follow:

there’s little to be gained from going after a few high-profile scapegoats here

For two reasons. First, deterrence. Reducing “freedom of action” is easier said than done; sufficiently ingenious greedy bastards will circumvent any legal/regulatory scheme — ie, break the law — and they should act in the knowledge that the response to the discovery of their illegal activity will not be “Ah well, we must reduce the freedom of action of potential future lawbreakers,” but rather criminal prosecution.

A second, and even more important, reason is cultural. There is simply no substitute for a culture of law-abidingness, where most people expect that most other people will obey most of the laws most of the time, rather than assuming, as at present, that the strong do what they can and the weak suffer what they must. International law has no authority because, for a half-century after the proclamation of the UN Charter, the great powers, especially the United States, made perfectly clear that they would not be bound by it. The single most disastrous moment of Obama’s presidency was his exhortation to “look to the future, not the past” in announcing that criminal and civil lawbreaking by his Bush Administration predecessors would go unpunished, and even uninvestigated.

By and large, ordinary people simply don’t expect powerful people to obey the law. This pervasive (and fully justified) cynicism is (CAUTION: approaching a rousing rhetorical climax) a recipe for tyranny.

6

PSC 09.24.11 at 6:51 pm

d^2:

More capital entails lower RoE, and lower payout ratios as a bank grows, all other things being equal.

Go to the average bank investor relations guy, or the average bank lobbyist, and ask; “What do you think of the idea of committing the banking system to sub-10% RoE for the foreseeable future – is this punishment?”

The vast majority would say yes. All those from banks that did kind-of-ok through the crisis would complain bitterly about being punished for the sins of others.

7

Lemuel Pitkin 09.24.11 at 6:54 pm

the need for a smaller and better capitalised banking system is pretty much unrelated to concepts of “punishment”.

They’re not identical, true. But surely they are related?

We (society) hired you guys (the financial system) to do a job. It’s now clear that you did that job (financial intermediation) badly, and charged way too much for it. So evidently we shouldn’t continue hiring you, or at least we should demand cheaper rates. We can reach this decision without raising any question of moral fault or punishment. But that doesn’t mean that the desire to punish you, won’t make it easier for us to do what rationally has to be done.

It’s true that we don’t need to blame the banks, to adopt the policies that John Q. suggests. But shrinking and re-regulating the financial system is politically really, really hard, and one reason it’s so hard is because it’s opposed by financial institutions that still have enormous political and social power. So a little righteous anger might be necessary to build support for reform, and weaken the opposition from Daniel’s colleagues.

If we were living in a world now where no one even wanted to even be seen cleaning a bank building, what with all the show trials and hangings from lampposts, I would say Daniel had a point. But that’s not remotely the world we are living in. Given how far we are from any meaningful reduction ins the size or freedom of action of finance, we’re pretty clearly looking at too little anger, not too much.

8

Lemuel Pitkin 09.24.11 at 6:55 pm

Also, what geo said.

9

Henri Vieuxtemps 09.24.11 at 7:13 pm

If you take 200 bucks from a cash registry, I bet no one is going to agonize over the question of whether there’s little to be gained from going after you or a lot. They’ll just prosecute you. But when you manage to steal $200 million, this suddenly becomes a very important consideration.

10

dilbert dogbert 09.24.11 at 7:17 pm

“As in the scene at the beginning of Grapes of Wrath everybody involved is replaceable, and most of those who might be prosecuted have already been replaced[1].”
This is somewhat the answer my BIL gave me last year when I asked if the panic had chastised the perps and they would be more cautious the next time around. He said, “No the guys that got burned have been replaced by those who will repeat the experiment.”
Prof Quiggin, Did you read Delong’s post on DD’s post this morning?

11

david 09.24.11 at 7:18 pm

James Galbraith’s recent work seems relevant here. Rule of law is an important element of a functioning financial system, and heads on pikes is a good way to develop a culture of respect for the law. “If only Attorney General Holder were still alive…..”

On the previous thread, people are angry at bankers because the big bonuses they hear about seem to be the result of skimming, scamming, and gambling with other people’s money, and having had to put up with two irritating decades of bankers claiming to use their huge brains to do the lord’s work, a three year demonstration, painful and unmissable, of the social disutility of so much banking doesn’t seem to have stopped the bonuses, the skimming, the scamming, or the gambling. It’s very irritating.

12

AcademicLurker 09.24.11 at 7:19 pm

Henry Vieuxtemps @8

I was thinking the same thing. Apart from massive financial fraud I know of no other class of crime for which the argument – “Well, even if we investigate and prosecute those against whom we have strong evidence of guilt, it won’t eliminate this kind of crime entirely, so why bother?” – is taken seriously by so many people.

13

Tom West 09.24.11 at 7:23 pm

But to my mind, the lesson is that its the sector as a whole that needs to be punished, with a drastic reduction in size, profitability, influence and freedom of action.

I disagree. I think the lesson is that the whole banking sector has to be more carefully regulated, likely bringing about a substantial reduction in size, profitability, influence and freedom of action. Punishment has nothing to do with it.

We also need to accept that when times are good, we’ll have substantially fewer benefits (while the good times last) for our populace than our neighbours who don’t regulate as closely.

But all of this is simply regulation of a risky field. We don’t talk about nuclear reactors management being punished by regulation because the cost of mistakes is so high, nor do we talk about punishing fireworks manufacturers by regulating their manufacture more highly than other goods.

We simply recognize that institutions where failure is more costly must be regulated more closely.

14

Tom West 09.24.11 at 7:25 pm

Whoops. I shouldn’t have sat on my post so long. Everything was covered already. Sorry.

15

zunguzungu 09.24.11 at 7:45 pm

“Scandal itself is a peculiar historical form that only reveals its real meaning long after the public outcry and formal investigations have ceased. Scandals point to the underlying tensions and anxieties of an age, even as the y work ironically to resolve crises by finding new ways to repress these tensions and anxieties. Scandals require careful management, and they elicit widespread vicarious attention, because they invariably produce a spectacle in which we see how the mighty have fallen. Whether caused by sexual indiscretion, extreme political ambition, undue greed, or other appetites driven by the desire for self-fulfillment and self-aggrandizement, the public unfolding of scandal provides public titillation at the same time it becomes a morality play. Despite either that authority will be subverted or the rules and conventions of public (or private) life radically changed, scandals in fact usually lead to far more benign outcomes. For the most part, public scandals become ritual moments in which the sacrifice of the reputation of one or more individuals allows many more to continue their scandalous ways, if perhaps with minimal safeguards and protocols that are meant to ensure that the terrible excesses of the past will not occur again. Scandals often do lead to reforms, but the reforms usually work to protect the potential agents of scandal rather than its actual victims. Indeed, it is the scandal itself that must be erased, not the underlying systemic reasons for scandal. The scandal is only the tip of the iceberg, the moment of excess that in the end works to conceal the far more endemic excesses that, at least for modern times, have become normalized…”

Nicholas Dirks, The Scandal of Empire: India and the Creation of Imperial Britain, p.29-30

16

Andre Mayer 09.24.11 at 7:45 pm

Taking the mortgage situation as the core issue, it seems to me that what we had was a situation in which financial institutions were able to profit, knowingly, from the dishonesty of the small fry. Prosecution is difficult and would be likely to focus at the low end, where the potential malefactors are in more or less infinite supply. Effective regulation has a much better chance of working.

17

dsquared 09.24.11 at 7:46 pm

But when you manage to steal $200 million

Making incorrect decisions in the running of a bank and trading operstion isn’t a crime and never will be (is anyone else proposing to have their every business decision Monday morning quarterbacked by a criminal court? Should kids be able to prosecute teachers if they don’t like the eay their lives turned out?). People against whom a colourable criminal case can be made have been and are being prosecuted. As I am apparently not yet tired of saying, if you want to make your political program conditional on finding prosecutable crimes, you’re going to be consistently disappointed.

18

Omega Centauri 09.24.11 at 7:51 pm

Theres the general social and cultural regression happening because everyone believes that the foxes are guarding the henhouse. So why should us hens, behave in any manner other than to be completely greedy and selfish. There really is a social value, to high profile show trials, ecen though achievement of justice isn’t served. We now have a significant part of the electorate motivated by a desire for vengence. And, we’ve seen in, for example the tea party, how easily that can be manipulated to further the ends of the perps.

19

Sebastian H 09.24.11 at 7:52 pm

It is sort of a synthesis of 1, 2, and 3, but I think it probably deserves a separate point:
there aren’t prosecutions because so much wrongdoing has been made legal or otherwise protected, and/or the byzantine complexity of certain trades makes things deniable.

Maybe it would be more enlightening to take a couple of case studies first before talking about theory. I’m not well enough in the know to really propose them, except maybe this one:

Why has Goldman Sachs paid no apparent price for absolutely crystal clear wrongdoing in the Greek debt issue? (Note I say wrongdoing, I have no idea if it was *illegal*). It was clearly wrong of them to disguise the Greek debt by arranging swaps to allow borrowing of 1 billion euros without having it appear on the formal debt.

Similarly, why has Goldman paid no price for packaging incredibly junky mortgage based securities while simultaneously shorting the market? If you are shorting, it is difficult to believe that you have put out enough disclosures to make packaging the junky securities ok in a legal sense, and there is almost no way you can convince me that it isn’t wrongdoing.

20

Sebastian H 09.24.11 at 7:54 pm

(Note to d-squared): I don’t believe either of the examples could be characterized as mere “incorrect decisions”.

21

ScentOfViolets 09.24.11 at 8:09 pm

But to my mind, the lesson is that its the sector as a whole that needs to be punished, with a drastic reduction in size, profitability, influence and freedom of action.

Well yes, I think experience has shown that getting rid of regulations like Glass-Steagall which were expressly designed to make sure this sort of melt-down was a bad idea, and contrariwise, more regulation is needed to drastically reduce the size, profitability, influence, and freedom of action of the financial sector.

But surely this is just taking prudent, corrective action with the benefit of hindsight, right? At least that’s what I call it. So why are you calling this “punishment”?

Are you perhaps intending a less literal interpretation of the term? Sort of like engineers talking about weight “penalties” with no thoughts punishment intended?

If so, I’d be careful to say so. It was very apparent on the last thread that Daniel had an inclination to, er, misread some posts as some sort of misdirected morality plays.

In any event, now that I’ve pointed this out, can we all explicitly agree that taking corrective action to prevent a similar recurrence is not “punishment” in the moralistic sense, but rather a competent managerial move?

22

Henri Vieuxtemps 09.24.11 at 8:09 pm

Those were, in fact, correct decisions: they have enriched themselves at the expense of others and got away with it. Surely there were plenty of prosecutable crimes in every case: fraud, bribery, influence peddling. Read some Matt Taibbi.

23

Lemuel Pitkin 09.24.11 at 8:12 pm

if you want to make your political program conditional on finding prosecutable crimes, you’re going to be consistently disappointed.

OK, but if you have the chance to use some high-profile prosecutions to build support for your program, why not take it?

Let’s grant for the moment that populist anger at bankers is neither a necessary nor sufficient condition for reform of the financial system. Why isn’t it helpful?

24

Roger 09.24.11 at 8:17 pm

D2 : “Making incorrect decisions in the running of a bank and trading operstion isn’t a crime and never will be (is anyone else proposing to have their every business decision Monday morning quarterbacked by a criminal court? Should kids be able to prosecute teachers if they don’t like the eay their lives turned out?).”
Interesting point! One that, no doubt, Jerome Kerviel and Kweku Adoboli would agree with. And banks in general agree with it until they don’t – which is why they prosecuted Jerome Kerviel and are prosecuting Kweku Adoboli. Matt Stoller noted, last week, that the same processes that put some people in jail are overlooked for those higher in the chain, who get the authorized losses get out of jail card because, well, its apparently the banks call to prosecute and the state has to hang around and wait, like an anxious suitor, to see what the fat cats are going to do:
http://www.nakedcapitalism.com/2011/09/matt-stoller-authorized-losses-%E2%80%93-the-lehman-lesson-ubss-rogue-trader-missed.html

So, I’m very interested in whether CT is going to mount a Free Jerome Kerviel group.

25

ScentOfViolets 09.24.11 at 8:26 pm

2. Regulators and prosecutors are complicit in the game and are letting financial criminals go free. I don’t really buy this one either, at least as a general rule.

How about looking at specific cases to the contrary rather than just relying on your sense of a general rule? Consider specifically the pursuit of foreclosure fraud charges by state’s attorney generals against certain large institutions and how they’ve been pressured to back off:

Eric T. Schneiderman, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal.

In recent weeks, Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks.

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

Wow, the people with the power to actually charge large financial institutions with criminal wrongdoing are being told to back off while those same parties settle damages for pennies on the dollar and immunize themselves from further prosecutions?

And people like Daniel are at the same time arguing that the fact that no charges have been filed so far is proof that instances of malfeasance were few, small, and inconsequential?

Say it ain’t so.

26

dsquared 09.24.11 at 8:29 pm

Because one day this crisis will be over, and the bankers will still be the ones with the money and the power, and they will be less likely than ever to feel like sharing it. As I say, keep telling someone that they are the enemy of mankind and sooner or later they are going to believe you.

With respect to the Greek swap transaction, nobody’s been prosecuted because the deal wasn’t illegal, and because the filing of ESA accounts for Greece is Greece’s job, not Goldman Sachs. Also note that although we are all running around waving our arms at the immorality! Of concealing government debts! In Greece!, actually everyone knew at the time that Greece and Italy were cooking the books, and everyone turned a blind eye to it because they wanted EMU to get away on time. This is a perfect example of people wanting to bend the rules, and then screaming blue murder when it all goes wrong. The only more ridiculous burst of moral outrage I can think of was when an American Secretary of State, representing a department that had spent forty years in making Hosni Mubarak a wealthy man and propping him up as a dictator, started having a go at the international banks for letting him have a bank account!

Personally I do think the Greek transactions stank to high heaven and I would have advised against them (I’ve damaged my career on a couple of occasions in slightly similar situations), for the simple reason that rinky dink schemes like this always end up coming a cropper, and when they do the banks are always blamed. But given that the EMI and Bundesbank were practically screaming at the Greeks “get the debt under the Maastricht threshold, we don’t care how you do it and everything will be fine once the Euro is here” then I do think it’s a bit rough to go after the banks involved and tell them that, retrospectively, they should have been the morality police for a Europe that was hell bent on making a mistake. It’s llike prosecuting bartenders for drunk driving – sometimes in really blatant cases, you can see why it makes sense to do so, but there is always a feeling of “hang on, isn’t the real criminal here the guy who actually did the crime?”

27

dsquared 09.24.11 at 8:32 pm

#24. I’ve studied a lot of rogue trader cases for a variety of jobs over the last twenty years and yes, my view is that a lot of them are quite egregious miscarriages of justice.

But if you want to go for the brass ring, look bank in the archives to the first few months of Crookeed Timber and you will see that I do actually believe and am still prepared to argue that Gordon Gekko was innocent.

28

ckc (not kc) 09.24.11 at 8:39 pm

Because one day this crisis will be over, and the bankers will still be the ones with the money and the power, and they will be less likely than ever to feel like sharing it. As I say, keep telling someone that they are the enemy of mankind and sooner or later they are going to believe you.

…less likely?

29

Main Street Muse 09.24.11 at 8:42 pm

“The things I’ve read suggest that prosecutors looking for evidence have found it exceptionally difficult to find good cases to prosecute…”

If indeed it is legal to offer large loans to people with no hope of paying them back, then who the legislator who stepped forward with new regulations that stop this reckless and financially dangerous practice?!

And if it is illegal, then why hasn’t anyone been prosecuted for approving massive numbers of NINJA loans?

Instead, we’ve seen the US government step in and expensively mop up the mess from such an unsound business model. Look at Countrywide – why wasn’t Countrywide held accountable for bad loans instead of being held up as a wise investment for BoA? Why isn’t anyone from Countrywide in jail?

The financial sector operates in a world removed from capitalism. When their bets succeed, they profit wildly. When their bets fail, they’re propped up by the government and profit wildly (GS had record profits in 2009, though it likely would have gone belly up with the rest of the sector had the government not intervened.)

GS also is able to sell an “investment” instrument to a customer while simultaneously selling insurance that pays out big to another customer when their own instrument blows up. Translate that business practice to any other sector and the BS of this business model is obvious. The fine they paid for this transaction was for not disclosing the name of the party who bought insurance; the act itself was apparently okay.

But imagine a pharma company that sells medicine to patients and sells insurance to a third party so the third party can profit when the medicine ends up killing vast numbers of patients. Or imagine a meat packing company selling meat covered in listeria to consumers and simultaneously selling insurance for a nice, tidy sum to another party that wins big bucks when the listeria causes massive illness to those who ingest this meat.

Doesn’t work! Nor should should such a model work in banking….

And a financial company that that engages in such activities is not, despite their attempts to persuade us otherwise, engaging in “progress.” They’re carnies, engaging in a highly profitable shell game.

30

Bloix 09.24.11 at 8:49 pm

#26 – “everyone” knew that the Greeks were cooking the books but turned a “blind eye”? Presumably, then, the bankers at Deutsche Bank, Société Générale, Crédit Agricole, and Commerz Bank knew it. And if they were intentionally investing in junk-quality bonds from Greece, they were criminally negligent. Now the European taxpayer and the Greek pensioner is being told that they must bail out the bankers. But why? It’s one thing to save the banks. But why save the bankers? Why shouldn’t these wretches be fired immediately, investigated thoroughly, and sued where appropriate? Willful blindness is not a defense to civil liability. It’s no excuse for a banker that the politicians wanted him to ignore his professional obligations, and hey, it paid well, so he did.

31

dsquared 09.24.11 at 8:57 pm

And if they were intentionally investing in junk-quality bonds from Greece, they were criminally negligent.

You’re killing me here. Investing in low-quality bonds is, per se and with no qualifications, not only negligent, but criminally negligent? Come on.

32

Tom Bach 09.24.11 at 9:03 pm

dsquared, I think Bloix point is that you argued that everybody knew that the Greeks cooked the books, which is another way of saying broke the law, but the banks invested any old how, which is another way of saying tried to profit from behavior they knew, you said, was illegal. For surely, it’s illegal to cook the books. Or is that just another consequence of a complex system, the failure of which is nobody’s fault?

33

bianca steele 09.24.11 at 9:12 pm

Oh, sure, it makes sense: The Greeks were responsible for filing accurate information, and Goldman Sachs didn’t need to tell them what to do, so when it necessarily came down around their ears it was the Greeks’ fault and Goldman Sachs was okay. Only a super-cautious worry-wort without enough confidence in the system would say otherwise. Right.

It does leave open the question whether “get debt down by any means possible” was intended to mean “say debt is down whether it was or not.” Which I suppose is possible. Why not? I wouldn’t but maybe I’m naive.

34

dsquared 09.24.11 at 9:21 pm

What I mean is that the Greek swaps were a grubby and unethical travesty that was more or less bound to end up as an embarrassment to everyone involved – I will even add that you could probably make a case that there was a significant regulatory breach of the duty to not take part in misrepresentation. But we were talking about criminal prosecutions here, which is quite a tough standard. And given that standard, I think it’s quite understandable that nobody was prosecuted.

35

Sev 09.24.11 at 9:22 pm

#25 SOV Thanks. The headwinds are so strong that there simply doesn’t seem to be a viable career path this time for those interested in prosecution. Though some, like Schneiderman, are trying. I only know what I read on nakedcapitalism, but it certainly looks like the mortgage-processing banks engaged in a degree of negligence that amounts to securities fraud, which may be one of the few areas in which they will be forced to confront opponents with the standing and resources to make them pay. Then again, they are also dying the death of a thousand cuts in small actions in state courts (foreclosure defense).

36

bianca steele 09.24.11 at 9:25 pm

As for the NINJA loans: From what I’ve read, a large part of those involved fraudulent paperwork, and the paperwork was falsified by clerks working for or with Countrywide (and other lenders), often enough without borrowers’ knowledge. When things came down around their ears, in fact, some borrowers who actually qualified for loans were prosecuted for fraud because their signatures appeared on that paperwork. The employees haven’t been prosecuted. Their managers haven’t been either. But how would you know why the employees did what they did? Was it because of the office had its own little internal culture that encouraged fraud, or was it because they failed to acclimate to broader cultural expectations?

37

ckc (not kc) 09.24.11 at 9:30 pm

…failed to acclimate to broader cultural expectations

I’m stealing this!

38

Lemuel Pitkin 09.24.11 at 9:32 pm

Because one day this crisis will be over, and the bankers will still be the ones with the money and the power, and they will be less likely than ever to feel like sharing it.

There it is: the wealth and power of the financial system is just an unchallengeable law of nature. The only hope for the rest of us is to be nice to the bankers, so that they will “feel like” sharing it with the rest of us. Because god knows they can’t be compelled to.

If this is true, then yes, populist anger at the banks is pointless. But if it’s true, then politics in general is pointless.

I’m done here.

39

Tom Bach 09.24.11 at 9:34 pm

So we should only prosecute the easy cases despite the damage? Is cooking the books borderline unethical, as opposed to criminal? Is participating in a criminal scheme criminal? Given what has happen, yet again, due to speculation and, I would argue, some form of peculation wouldn’t the prudent thing be to prosecute despite the difficulty?

40

Doctor Slack 09.24.11 at 9:54 pm

keep telling someone that they are the enemy of mankind and sooner or later they are going to believe you.

The longer they act like they believe it (and I frankly think that bird has already flown), the more screwed they’ll be when political parties come along that remember how to use popular rage as a means to power.

41

MarkUp 09.24.11 at 9:54 pm

@34 – “But we were talking about criminal prosecutions here, which is quite a tough standard. And given that standard, I think it’s quite understandable that nobody was prosecuted.”

Would you say then there is, or may likely be, “clear and convincing evidence?”

42

marcel 09.24.11 at 9:58 pm

dsquared wrote::

But if you want to go for the brass ring, look bank in the archives to the first few months of Crookeed Timber and you will see that I do actually believe and am still prepared to argue that Gordon Gekko was innocent

Feels like a hall of mirrors here. Gordon Gekko was a fictional character (based on a real one, yes, but…) So d2 is telling us that he is such a contrarian that he defended a fictional character against the pitchfork brigade? Must be some hidden meaning here, very well hidden…

43

marcel 09.24.11 at 10:08 pm

You know, Bull Connor was not really at fault for his use of fire hoses and police dogs, nor was Sheriff Clark to blame for what he and his “deputies” did on the Pettus Bridge (I was about to go all Godwin, and use an earlier example as well, but decided that it is premature to bring this comment thread to that kind of climax). They were both just caught in a system beyond their control, and were merely responding its incentives. Nothing would have been gained by punishing them for their decisions and actions, and in fact, the U.S. is a better country today that it was so forbearing.

44

Alex 09.24.11 at 10:42 pm

“everyone” knew that the Greeks were cooking the books but turned a “blind eye”? Presumably, then, the bankers at Deutsche Bank, Société Générale, Crédit Agricole, and Commerz Bank knew it.

It is worth remembering that it was an absolutely critical goal of policy for France and Germany and the European Commission that the Euro get launched, and that the rules France and Germany and the EComm defined for it be seen to be obeyed in some form.

So much so, for example, that the executive management of France Telecom was prevailed on (no mean feat – we’re talking super-elite engineer-civil servants of the French style) to fork over an enormous “voluntary contribution” out of the company’s treasury so that the French government budget would be within the rules on the day. This was accounting of a special kind, as the French Republic was the controlling shareholder, but eh. Austria transferred the ownership of three lakes from the Republic of Austria to the Federal Forest Agency, which bought them off the Republic with vendor finance from the Austrian National Bank, thus creating a cash receivable from the foresters and a net-out between the asset transfer to them and the liability from them. Karl-Heinz Grasser then announced that he’d balanced the budget out of sheer saving-virtue, and all conforming to Maastricht. (Google him.) I could go on.

It is entirely plausible and I think an unavoidable conclusion that the French and German and other European political elites were right there with their banks in doing whatever was necessary to float the deal. For the French ones, nobody doubts that the state can exercise plenty of influence. But Deutsche Bank traditionally acts as the go-to bank for whatever the Government wants, like lending the DDR a ton of money. I personally think with hindsight I should have been far more sceptical about the Euro at the time.

There is plenty of blame to go around. Enough for the bankers and the wannabe Rachmans and the ass-hat rightwing economists and flexible friend civil servants and…yup, the designers of the Euro.

45

ehj2 09.24.11 at 10:42 pm

By June of 2007, the credit derivatives market, barely a decade old, had grown to an aggregate total of outstanding contracts of $51 trillion, the equivalent of $7,700 for every person on the planet. (1)

The notion of trillions of dollars based on nothing more than “confidence” is staggering to me, but leads me to stand with DD on quite a bit of what he’s saying.

I make a distinction between investment banking and my local country bank that will give me a mortgage using the savings of my neighbors.

Investment banks are less in the business of selling money for profit (loans) than they are in the business of selling confidence. And the problem here is that everyone is complicit, from the government to independent regulators to the media. Nobody on the Board of any Fortune 500 company would keep her job to the end of the day if she stood up and said, “This is unsustainable, this is a bubble, we’ve got to pull back.”

Everybody is in the business of benefitting from confidence, no matter who makes it, and nobody has an incentive to dilute it.

Some of the excess we see on Wall Street are simply the markers of success. The guy down the block buys a new fancy car, Wall Street bankers throw bizarre parties and gift themselves outrageously. It’s short term success, certainly, but it’s a systemic problem of the entire structure of our market system that makes it so.

The system can’t blame itself and is structured to offload the blame to those with the least voice. But it belongs to all of us. I can’t blame the bankers any more than I blame the government (and its lack of regulation) which the people around me demand.

In the engineering world, the more horsepower, the more redundant and powerful the necessary governor’s and brakes and failsafes. The notion of graceful failure is common in engineering — no one would drive a car if the tires exploded rather than deflated upon failure.

I suspect there are ways to implement better regulation and triggering events that automatically provide alarms and offsets to movements of investment markets based on exuberance or collapsing confidence, just as there are ways to measure sudden increases or decreases in oil pressure in disparate areas of a managed mechanical system.

Long before we reached $51 trillion, lots of alarms should have been going off and professional economists everywhere should have been arguing in public fora about the consequences.

(1) Donald MacKenzie’s Material Markets: How Economic Agents Are Constructed will be published by Oxford. He teaches sociology at Edinburgh University.

Pasted from

46

ezra abrams 09.24.11 at 10:59 pm

maybe I don’t follow your argument, but there is, even at 1st glance, extensive evidence of *crimminal* fraud.
For instance, G Morgenson had a piece about a year ago that was an interview with a loan officer for one of the NINJA load originators (no income no job app).
So, with clear, overwhelming evidence of large scale crimminal activity, why no prosecutions.
well, as some have noticed, a lot of resources are going into counter terrorism, aka security theater (on the 9/11 anniversery, the Times had a photo of a soldier with an assault rifle patrolling in lower manhattan. Does anyone here know about the muzzle velocity and kick of a semiautomatic rifle ? what is that soldier gonna do, shout, everyone but the terrorist, lie down, and then spray bullets ? I s he just gonna spray and accept casultys ?)
But returning to our main thread of thought..
Another reason is that many of the prosecutors would be shown to be complicit, eg the SEC and possibly others (re, story of sec cheif counsel and madoff)
Another reason is that we all know that most of the socalled “liberals” like obama and B Frank and Schumer get a lot of money from wall street; it is not cynical to say that yuo don’t prosecute the people who fnnd you.

Another reason is that an honest prosecution would probably involve putting blankfein and paulson and even corzine in jail, and disimone, etc etc, which would involve systemic risk
I dunno, thats just off the top of my head.

47

ehj2 09.24.11 at 11:08 pm

Sorry, the LRB link I had is now dead.

48

ehj2 09.24.11 at 11:11 pm

49

Sebastian H 09.25.11 at 12:39 am

I’m really not following the argument on the Greek debt fraud. You seem to be two-stepping back and forth.

You seem to be saying that the fraud wasn’t illegal, which almost certainly says more about Goldman’s influence on the law than anything whatsoever about the wrongness of the fraud. For heaven’s sake what was the purpose of the ‘investment’ other than to commit the fraud? And of course generate HUGE fees for Goldman? And what about the simultaneous Goldman hedge against Greece? They certainly got that for cheaper than they would have if the counterparties knew about an additional 1billion euros debt, which Goldman had itself had fraudulently concealed.

Then you are saying that the fraud was well known by the institutional investor banks.

But that isn’t a helpful explanation, if true, because that would suggest that the institutional banks were actively complict in a known fraud with respect to their investors and depositors.

So you have gone from Goldman’s fraud, to allegedly known fraud by an enormous number of very large banks.

And this is allegedly a DEFENCE of bankers. Yikes.

50

dsquared 09.25.11 at 12:46 am

Sebastian, the point is that a) what we are talking about here is not “the time Goldman committed a fraud on Greece” but “the time that Goldman facilitated Greece committing a fraud”. And that b) not only did everyone know that Greece was committing a fraud, everyone in the relevant political community wanted Greece to commit a fraud (as Alex details in #44, because all the other EMU candidates were doing it too) in order to get EMU to work.

It was, as I think I’ve said twice now, a really bad transaction that shouldn’t have been carried out and it’s quite right that everyone thinks the less of all involved (and as I say, I think it might quite likely have been a regulatory breach). But the reason that this wasn’t a criminal offence has nothing to do with big bank influence on the law.

51

CharleyCarp 09.25.11 at 12:48 am

DD, when the Bushies claimed that all instances of detainee abuse were investigated, and those where there were crimes committed were prosecuted, you believed them too, right? One problem here is that no one has any confidence in the guardians. And frankly the guardians haven’t given us any reason to have confidence in them.

I’m not personally wedded to the idea that there was massive crime in the financial sector. I haven’t looked into it that carefully, and what I do know about is more like bad judgment than crime.

I can see why plenty of people wouldn’t want to have every business decision second guessed. To which I say, ‘fine, then you won’t be needing any public money to bail you out, either, now will you. Nor any regulatory approvals to conduct your business, nor do you plan on using the mechanisms of the state to enforce contracts you’ve entered into.’

In my line of work, my every decision can be second guessed, and I’m personally liable if I fail to meet the standard of care. And even if I do meet the standard, when I fuck up and lose a bunch of the client’s money, neither they nor anyone they know is ever going to hire me to do anything. I think that’s a standard a bunch of people could get behind.

52

Tom Bach 09.25.11 at 12:54 am

what we are talking about here is not “the time Goldman committed a fraud on Greece” but “the time that Goldman facilitated Greece committing a fraud”.
So facilitating a crime, often referred to as aiding and abetting, isn’t a crime if a bank is involved?

53

JimV 09.25.11 at 1:05 am

Anecdotal data point: once upon a time, circa the 1950’s, some high-level managers at a big company were convicted of price-fixing and went to jail. I know this, because a couple of decades later, when I joined the company, we had yearly briefings where we were exhorted to never, ever do anything that could be remotely construed as price-fixing. As an design engineer my opportunities for this seemed nonexistent, but no jokes on the subject were tolerated, because “This is serious, guys! People went to jail! Top people!”

54

Sebastian H 09.25.11 at 1:13 am

a) what we are talking about here is not “the time Goldman committed a fraud on Greece” but “the time that Goldman facilitated Greece committing a fraud”

If I deliberately construct a maze of sham transactions so that a client/friend/relative/business can commit a fraud, I’m guilty of a crime. Why isn’t Goldman doing the same a crime? Are they going to pretend they didn’t know that it was for no other reason than to make material misrepresentations? (see your point b)

“b) not only did everyone know that Greece was committing a fraud, everyone in the relevant political community wanted Greece to commit a fraud “

I’m completely unaware of any reason whatsoever why this bears on Goldman’s criminal conduct. And interestingly, this may actually be a fantastic reason to go after Goldman. You keep worrying about the downside risk of people going after banks. But if the EU fined Goldman’s say $9billion (approx 1 year’s profit) to be deposited in a “save the banks” fund, we wouldn’t have a sudden chill on the useful lubrication of legitimate business transactions, we would have banks scared to death of playing with politcally motivated fraud.

That sounds win/win to me.

55

Witt 09.25.11 at 1:16 am

51: Amen, Charley.

A related point to the discussions over criminal prosecution — I think it should be stated plainly that bankers really aren’t even suffering any social consequences (that matter to them). No ostracism, no shame, no telling your kid to be something else when he grows up.

I’d be more sympathetic to “Would criminal prosecution really help here?” if the context were “Given heartfelt acknowledgement of wrongdoing, persuasive re-orientation of the field, and institutionalized safeguards to prevent a repeat.” Since it isn’t — damn straight I want to see criminal prosecutions.

This thread and the prior are convincing me that even a stellar wristwatch can be wrong occasionally, perhaps because of being too close to the action.

56

dsquared 09.25.11 at 1:28 am

So facilitating a crime, often referred to as aiding and abetting, isn’t a crime if a bank is involved?

Ackchualllyyyy … reporting an incorrect debt figure to Eurostat isn’t a crime. HTH. It’s not a crime because nobody sane would have made it a crime, because if it was a crime, EMU would never have happened.

It’s (as I have now said four times, sorry Patient Reader), quite possibly a regulatory breach for the banks doing it, because banks are held to a higher standard by the special regulations applicable. But it’s not a crime.

But if the EU fined Goldman’s say $9billion (approx 1 year’s profit) to be deposited in a “save the banks” fund, we wouldn’t have a sudden chill on the useful lubrication of legitimate business transactions, we would have banks scared to death of playing with politcally motivated fraud.

Can you think of a possible reason why the EU, which currently needs to find some way to restructure EMU which will inevitably be completely unacceptable to European voters who are understandably outraged at the extent to which they’ve been lied to for twelve years, and half of whom massively resent the huge economic dislocations imposed on them by the other half, who in turn massively resent having to pay the bill, is not going to be particularly keen on a crackdown on politically motivated fraud any time soon? That wonderful line from the Godfather comes to mind; “we’re all part of the same hypocrisy here, Senator”.

A related point to the discussions over criminal prosecution—I think it should be stated plainly that bankers really aren’t even suffering any social consequences

You will perhaps understand that I disagree.

57

Tom Bach 09.25.11 at 1:34 am

Ackchualllyyyy

So when you said facilitating fraud you meant fraud in a non-criminal sense?

Really now, is this some game where you constantly shift goal posts, words and their meanings in a desperate attempt to make what, should it ever come to trail, be found a crime always and already obviously not a crime because, after all, it’s complicated and who knows what really happened. If so, you might get pinched for poaching McArdle’s patented mode of argumentation.

Ackchualllyyyy

B

58

Lemuel Pitkin 09.25.11 at 1:38 am

In my line of work, my every decision can be second guessed, and I’m personally liable if I fail to meet the standard of care.

Right. Another term for having government second-guess your decisions, with potential criminal penalties if the decisions are bad enough, is “regulation.” That banks don”t want to be regulated, does not surprise me. What does surprise me is that Daniel Davies has managed to convince himself that what’s in the short-term interest of bankers must logically be what’s best for society as a whole, On the positive side, he doesn’t seem to be convincing anybody else.

once upon a time, circa the 1950’s, some high-level managers at a big company were convicted of price-fixing and went to jail. I know this, because a couple of decades later, when I joined the company, we had yearly briefings where we were exhorted to never, ever do anything that could be remotely construed as price-fixing.

I think this is a typical outcome in real life. Daniel Davies, on the other hand, thinks the outcome would be that they would price fix twice as hard, just to stick it to the people who had said mean things about them.

59

Tom Bach 09.25.11 at 1:41 am

That wonderful line from the Godfather comes to mind; “we’re all part of the same hypocrisy here, Senator”.
So the bankers the mafia, which is to say a criminal organization, and the politicians are corrupted by the bankers, like the senator, and yet some how or another, you want us to believe that neither is criminally liable for their behavior. Not what you might call particularly convincing.

60

Bloix 09.25.11 at 1:45 am

#31-“You’re killing me here. Investing in low-quality bonds is, per se and with no qualifications, not only negligent, but criminally negligent? Come on.”

I am entrusted with money belonging to someone else. I have a legal obligation to invest only in bonds that are safe – rated AAA. I invest in bonds that are denominated AAA, but I know that the denomination is fraudulent. It doesn’t matter that “everyone” knows that the AAA label is a fraud, what matters is that I know it. I have an obligation to invest, not merely in bonds that are labeled AAA by fraudsters at the ratings agencies, but in bonds that genuinely meet the AAA standard of safety.

If I “turn a blind eye” to what “everyone” knows, and invest in the fraudulently rated bonds because “everyone” is doing it, then I am a fraudster. The defense that the whole mob was looting the store and I’d have been a fool to walk away is not a defense. To the contrary, it is an admission of participation in a criminal conspiracy.

61

Bloix 09.25.11 at 1:58 am

#44-“it is entirely plausible and I think an unavoidable conclusion that the French and German and other European political elites were right there with their banks in doing whatever was necessary to float the deal.”

And therefore the greedy Greek pensioners must lose their pensions and the selfish Greek students must face a decade of unemployment and the arrogant Greek grade-schoolers must see their class sizes double.

62

Sebastian H 09.25.11 at 2:07 am

See bloix at 60 for why knowingly investing in a fraud could be an actual factual crime.

but also
“Can you think of a possible reason why the EU…is not going to be particularly keen on a crackdown on politically motivated fraud any time soon?”

Among themselves? Sure. But nailing an unpopular bank like Goldman to the wall, blaming them for abetting a fraud on the EU system, and pretending that the politicians were fooled by the big evil banks… I suspect that might be more appealing than you think.

And you might want to note that you are the one comparing the banks to the mafia. In your defence of them. Double Yikes.

“Ackchualllyyyy … reporting an incorrect debt figure to Eurostat isn’t a crime. HTH. It’s not a crime because nobody sane would have made it a crime, because if it was a crime, EMU would never have happened.”

You’re not thinking like a prosecutor. It was clearly a material misrepresentation. Goldman profited from it. Any bank which sold Greek bonds under the representation, and which knew it was a material misrepresentation could be chased after unless they always disclosed that they knew it (which of course they most certainly did not). Even without seeing damning emails, there is the core of a case there, with the potential for all sorts of fun discovery into Goldman’s inner workings. In fact I strongly suspect that Goldman’s is dirty enough that the threat of discovery alone would bring them to the table for a plea agreement with large fines.

63

Sebastian H 09.25.11 at 2:09 am

And again, the major downside would appear to be that banks would be scared to death of engaging in sham transactions for political fraud. That is probably a good thing, and it might even deflect the more general anger…

64

Rich Puchalsky 09.25.11 at 2:19 am

Daniel’s whole “these are not crimes” bit is true, but ridiculous. What the bankers did aren’t crimes because bankers are the kind of people who decide what crimes are. Nothing that they do as a class can ever be a crime. On the other hand, being a vagrant is a punishable crime in many jurisdictions because it’s a poor-person activity.

Daniel’s indignation at the people saying “who are the the real criminals” comes down to those people not knowing that anything rich people do is not a crime. That’s what all of the twaddle about egalitarianism and inability of punishment to change behavior is about.

65

greg 09.25.11 at 3:35 am

“But to my mind, the lesson is that its the sector as a whole that needs to be punished, with a drastic reduction in size, profitability, influence and freedom of action. “

The banking sector has, over the past 30 years, increased from ‘producing’ about 3% GDP, to over 8% GDP.

http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html

Of course, it doesn’t ‘produce’ anything. Its purpose is to help allocate capital to the maximum benefit of society. Something it no longer does, despite the enormous rents it extracts.

Like any industry too large for its market, it cannot be expected to be well behaved, as it must rely instead on fraud and force in order to prosper. This is its recent history, and this history can only be expected to continue. It is a cancer on society, and like any cancer, has become resistant to the immunological responses by the patient necessary for the patient to save his own life. Intervention becomes necessary.

As for the next crisis, it is already upon us. Greece must be allowed to default, but the world’s financial sector is so committed it cannot be allowed to default. And that is just the beginning.

Trying to save the financial sector is like sacrificing the patient to save the cancer. Our governments will try to save the financial sector.

66

Peter T 09.25.11 at 5:32 am

As Bianca at 36 above (and others) noted, the main factor behind the meltdown was the housing bubble in the US. And that bubble was facilitated by a great deal of conduct that was formally illegal – robo-signing, failing to file mortgages at the place of formal record, failing to transmit custody in accordance with the law, failing to ensure that securitised mortgages had been handled with due process. Law is also about proper process, and proper process was blatantly ignored. And this has been exposed in numerous court cases across the US. There have been some large financial settlements. Indeed, from what I read, there is considerable – if muted – panic at the prospect that some general ruling could lead to a huge number of mortgages being declared unenforceable, and an even larger number of derivatives contracts being ruled invalid. And there is a lot of arm-twisting going on to avoid this.

So illegality is not hard to find. Nor would it be hard to prosecute except that success threatens to bring about an even bigger meltdown.

67

john b 09.25.11 at 5:41 am

And therefore the greedy Greek pensioners must lose their pensions and the selfish Greek students must face a decade of unemployment and the arrogant Greek grade-schoolers must see their class sizes double.

Consider the wife and kids of a successful con-artist who gets caught and bankrupted. Suddenly, instead of a nice house in town and a country estate, a yacht, private schools and Bentleys, they have to make do with *what they can actually afford*. It sucks for them, and they don’t have any moral responsibility for the con-artist’s behaviour, but nobody in their right mind would suggest that their losing the nice things they can’t actually afford (and never could, and only had because of the con-artist’s fraud) was the wrong outcome.

68

john b 09.25.11 at 5:56 am

that bubble was facilitated by a great deal of conduct that was formally illegal

This is true, but doesn’t help you. Sticking a few thousand mortgage brokers in jail may have some deterrent effect for junior people in low-end finance jobs, although this is arguably balanced by the whole “if you did that then the whole economy would collapse” thing. But it won’t do anything at all about the investment bankers who made enormous sums through insane but legal, model-based financial products.

The thread seems to be based on the view that “if, looking back in retrospect, something was probably a bad idea, then we should throw people in jail for doing it”. That isn’t how the law works, in medicine or food or construction or any regulated profession.

If, in 2006, credit ratings agencies were respected (they were), and it was seen as reasonable to use their ratings as a guide to risk (it was), then any attempt to throw someone in jail for investing in products that were AAA-rated and blew up is going to be laughed out of court. Just like if you follow FDA rules and your meat paste nonetheless ends up killing people, you don’t end up in jail, even if you *were* selling anti-salmonella drugs at the same time.

69

Lemuel Pitkin 09.25.11 at 6:39 am

this is arguably balanced by the whole “if you did that then the whole economy would collapse” thing.

This is pretty rich coming from someone who, in literally the previous comment, was absolutely certain that Greek citizens must lose their pensions, jobs and public services if they “can’t actually afford” them, whatever that means. Funny how we have to do justice whatever the consequences only when it involves punishing someone else.

The thread seems to be based on the view that “if, looking back in retrospect, something was probably a bad idea, then we should throw people in jail for doing it”.

More like: If, looking back in retrospect, something was clearly a terrible idea, we should make sure the consequences for the people who did it are bad enough that nobody wants to try it again in the future.

70

CharleyCarp 09.25.11 at 7:05 am

And that bubble was facilitated by a great deal of conduct that was formally illegal – robo-signing, failing to file mortgages at the place of formal record, failing to transmit custody in accordance with the law, failing to ensure that securitised mortgages had been handled with due process.

These are crimes? Or do they just strip away legal protections that might otherwise apply had procedures been followed?

71

Walt 09.25.11 at 7:11 am

If I forge a title to “prove” that I own your house, that’s not a crime? I’d assumed that it was.

72

Chris Bertram 09.25.11 at 7:29 am

_losing the nice things they can’t actually afford (and never could_

I’m not sure how things look in the alternative reality where Greece never joined the euro in the first place AND where Greek taxes were properly collected etc. But I doubt they look as bad for _those people_ as they do now.

As Elizabeth Anderson points out in another context, there’s something inconsistent about “living-with-the-consequences-of-your-choices” discourse within a common political project based on, you know, solidarity, equality of respect etc. Within a single state, at least one based on liberal principles, you precisely ought not to impose on the imprudent and the reckless the consequences of their choices but to permit them to resume proper relations of citizenship etc. The EU isn’t a single state, but the whole Euro project was fuelled by a drive towards something like one and was always going to come a cropper once the demands of solidarity started leading to demands on the Germans and others to help out peoples with whom they did not, in fact, feel in solidarity. So there’s been a lot of having-it-both-ways by the political classes of Europe. However we reconstruct things now that’s all come apart, has to allow those at the sharp end to get their lives back together with dignity.

Also, as cannot be stated often enough, helping out the Greeks is comparatively cheap. There aren’t many of them and their economy is small (smaller than some German Lander). AFAICS, the combination of a serious haircut for the lenders plus some fiscal support ought not to be unachievable.

73

CharleyCarp 09.25.11 at 7:49 am

@Walt, I don’t think the bubble was ‘enabled’ by forgery. And I don’t think forgery is exactly what robo-signing is about. My understanding of the term, and it’s bubble application, is that in order to aid in securitization, the original signed documents were replaced by digital records. Just like your bank account — the money doesn’t ever exist in paper or metalic form, but as a digital record in a computer somewhere. This reduces transaction costs, because the note holder doesn’t have to have some piece of paper in a filing cabinet somewhere, and makes instantaneous transfer possible.

Of course, this presents a problem when the bubble bursts, and, because borrowers are defaulting, some judge won’t let the holder enforce the note without producing a piece of paper. Even then, though, it’s really only a problem of the cost of producing a replacement document. And of tracking the various transfers. Robo-signing is, as I understand it, just a shortcut for doing this. IMO, and I could be wrong about this, what we’re really talking about here in most instances is trebling or quadrupling the cost of a foreclosure. Not about wiping out vast amounts of debt.

74

CharleyCarp 09.25.11 at 7:56 am

Of course, banks are stupid, and make mistakes. But it’s my impression that, for the most part, the loans someone is using robo-signed documents to enforce were actually taken out. What’s at issue is whether the person seeking to foreclose can prove that he’s the actual party entitled to do so.

75

Henri Vieuxtemps 09.25.11 at 8:18 am

you precisely ought not to impose on the imprudent and the reckless the consequences of their choices but to permit them to resume proper relations of citizenship etc.

Maybe not the consequences, but some consequences, surely?

76

Chris Bertram 09.25.11 at 9:07 am

Yes Henri, I should have written “the _full_ consequences”.

Basically, my point is, that destroying the social minimum in Greece is completely inconsistent with the European project _as advertised_ .

77

john b 09.25.11 at 10:49 am

This is pretty rich coming from someone who, in literally the previous comment, was absolutely certain that Greek citizens must lose their pensions, jobs and public services if they “can’t actually afford” them, whatever that means. Funny how we have to do justice whatever the consequences only when it involves punishing someone else.

“Whatever that means” is a bit ridiculous. “In the long term, governments should spend roughly their tax receipts, rather than borrowing 10% of GDP every year and lying about it; therefore, if a country has been doing the latter, it should stop, which realistically will involve hiking taxes and cutting services”. Pretty clear, I reckon.

(and I’m neither a Greek public sector worker nor a US mortgage broker, so “punishing someone else” is also nonsensical).

More like: If, looking back in retrospect, something was clearly a terrible idea, we should make sure the consequences for the people who did it are bad enough that nobody wants to try it again in the future.

Fair enough. I believe in the rule of law myself, but Stalinism’s cool too.

78

john b 09.25.11 at 10:54 am

The point about Greece and austerity is absolutely *not* about paying back the debt, incidentally. Nobody seriously expects Greece to pay back the debt; that’s done and gone.

But even if the debt were formally written off tomorrow and nobody minded and everyone was happy to lend new money, the Greek government would still be spending vastly more than it received. So either Greece runs up an enormous *new* debt, or it raises taxes and cuts spending…

79

Roger 09.25.11 at 10:59 am

We know, from the U.S. experience, what happened when laws were toughened to make lending standards better and prevent fraud. It happened in Georgia, and is recounted in the excellent report on the housing bubble as a collective experience (not a game inscribed in fairy tale modelmaking) by Alyssa Katz (which I reviewed here: http://www.statesman.com/life/content/life/stories/books/2009/06/28/0628katz.html). After the Georgia standards were strengthened, a coalition of banks, Fannie Mae, and real estate developers formed to chase out the governor who had guided the strengthening of the regulations and to loosen them again. Because, contra D2’s assertion that banks are merely the phylogenetic expression of banker sentiments (all of whom have their feelings so hurt by being insulted in the Guardian that they aren’t going to be nice to us ever again!), banks are in business to rack up profits. http://alyssakatz.com/tag/atlanta

“And one of the ways we can, at the grass level, help to hoist bankers high, is to operate as some neighborhood community activists have been operating in Atlanta. To quote from Katz’s website:

Watching the deceptively gentle documentary When a House Is not a Home, produced by two residents of a historic Atlanta neighborhood ravaged by years of unchecked mortgage fraud financed by Bear Stearns and other loan securitizers, I wondered whether the correct charge would not be “apathetic,” but “pragmatic.” We don’t have street protest to speak of, but here in Zip 30310, which has seen more foreclosures than any neighborhood outside of Cleveland, residents got together to investigate exactly why it was that a third or more of the houses on their blocks sat empty, and why their tax assessments were rising based on implausible property values. They pored through county real estate records (the video instructs other citizens on how to work the spreadsheets), published and distributed a newspaper, organized regular meetings attended by elected officials, law enforcement, bankers, academics and others in a position to help, and weighed in to make sure that one of the worst perpetrators of the real estate schemes received the maximum possible prison sentence. Some of the participants in the video — including co-producer Brent Brewer and State Senator Vincent Fort — appear in my book.

The 30310 Mortgage Fraud Task Force won’t ever get AIG bonuses returned or stop Treasury from subsidizing speculation in bad assets, but it has accomplished something just as important in its own way. Its members have asserted ownership of their neighborhood, and proven that property values are not the only ones that count.”

Populist anger, contra d2, is the best weapon we have to change the financial system. The cool, techno approach – exemplified by Obama – has been a political disaster, and resulted in the financial sector gaining immensely more political power as they finance a Republican party that is not so contemptuous of populism and knows how to turn it into a defense of the wealthiest. Using anger at the bankers is the best strategy the left has at the moment, and laying down that weapon to consider things ‘meritocratically’ from a calm mandarin position will simply flush any even slightly left party down the toilet.

80

Chris Bertram 09.25.11 at 11:02 am

_“In the long term, governments should spend roughly their tax receipts, …._

John, this has to be wrong wrong wrong in the case of any political unit composed of smaller and unequal pieces. Granted, there should be sensible institutionalized ways of having the rich parts subsidize the poor parts ….

81

Chris Bertram 09.25.11 at 11:05 am

… i.e wealthy Germans (and Danes and Finns … etc) should either accept that some (quit a lot) of their taxes must go to guarantee a social minimum in the poorer parts of Europe or we should stop pretending and all go our separate ways.

82

Andrew F. 09.25.11 at 11:06 am

I’ve been away from this blog for a few days, but much of this conversation strikes me as somewhat bizarre.

Financial firms haven’t escaped the GFC unscathed. Government suits seeking many billions of dollars continue to be filed, in addition to private suits.

Negligence in conducting business is commonly viewed not as a criminal matter, but as a civil matter. The crisis was the result of bad business decisions amplified and spread across the system. Criminal acts had little to do with it. The demand for heads on pikes derives from an understandable anger and a misunderstanding of the problem.

The European debt crisis is even less applicable here than the housing bubble and financial crisis of 08-09.

The financial sector as a whole is in the tank, European banks are frantically treading water… and we’re seriously talking about punishing the sector?

83

Peter T 09.25.11 at 11:10 am

To be clear, it is my understanding that the law in most US states was clear that, for a mortgage to be valid, various steps HAD to be followed. And to sell a security, again, certain steps set out in law HAD to be followed. Just as a certificate of marriage bought over the internet does not actually make valid marriage, so a a robo-signed statement that a digital record unattested by the proper authorities exists somewhere does not make a valid mortgage or security. It’s the banks business to make sure these steps are followed. They charged people significant amounts in fees supposedly to do these things.

The decisions to avoid legally-mandated processes were not made by underlings – they involved serious amounts of contract money and agreements between most banks and lenders. This looks very like either criminal negligence or deliberate fraud.

Various banks have admitted in court that some of this conduct – which has been found illegal – is still happening.

A system of law that does not apply to the rich on the grounds that doing so would excessively inconvenience them is unlikely to be respected by others for very long.

84

Alexei McDonald 09.25.11 at 11:22 am

@CharleyCarp #73 – one of the main points about the MERS system is that it seems to have bypassed local land registries and therefore not paid the requisite fees or filed the proper documentation for the transfer of property to be legal. So, any selling on of mortgages or mortgage tranches (for securitisation purposes) *knowing* that the transfer wasn’t legal, well, that would be fraud, surely?

85

Phil 09.25.11 at 11:39 am

D^2: It’s … quite possibly a regulatory breach for the banks doing it, because banks are held to a higher standard by the special regulations applicable. But it’s not a crime.

I don’t know much about financial services, but I do know a bit about regulation. And what I know about regulation is that, in most areas, the idea that “regulatory breach” and “criminal offence” are totally different and unconnected concepts doesn’t hold water for a moment. Local authorities issue regulatory instruments called things like Noise Abatement Notices; the Health and Safety Executive issues Enforcement Notices; the courts issue Protection from Harassment Orders and ASBOs, among much else. None of these is a criminal penalty in itself, and none of them indicates that somebody is guilty of a crime; they’re all instruments for modifying future behaviour, not punishing past behaviour. But they work – to the extent that they do work – because breaches of those orders are prosecuted. They’re not issued (by and large) with a view to setting up a breach which can be prosecuted; on the contrary, the people issueing the orders generally want to avoid a prosecution if at all possible, and keep the metaphorical revolver in the drawer for as long as possible. But there has to be a revolver in the drawer – there has to be a realistic threat of criminal prosecution to back the order up if the behaviour is going to be modified.

But maybe it’s different in financial services; maybe the regulations that GS may or may not have breached are more what you’d call guidelines than actual rules.

86

Phil 09.25.11 at 11:46 am

The phrase “the Slap on the Wrist of Damocles” also comes to mind.

87

jpe 09.25.11 at 11:54 am

The failed prosecution of Bear Sterns CDO fund manager is instructive: the law is unclear and the facts are messy, The Bear case was as straight forward as it could get and the defendants were fouund not guilty.

88

Alex 09.25.11 at 12:00 pm

And therefore the greedy Greek pensioners must lose their pensions and the selfish Greek students must face a decade of unemployment and the arrogant Greek grade-schoolers must see their class sizes double.

You really didn’t bother reading my comment, did you? You just didn’t fucking read it before shooting your mouth off. Or you might have noticed the paragraph in which I directly blamed: bankers, greedy buy-to-let landlords, right-wing economists, floppy regulators, and French and German politicians. You might even have noticed that the whole observation was about…French and German and European Commission politicians and their direct culpability!

89

The Raven 09.25.11 at 12:06 pm

“Because one day this crisis will be over, and the bankers will still be the ones with the money and the power, and they will be less likely than ever to feel like sharing it.”

This strikes me as a compelling argument for class revolution.

Surely that was not what was intended.

90

jpe 09.25.11 at 12:11 pm

So, any selling on of mortgages or mortgage tranches (for securitisation purposes) knowing that the transfer wasn’t legal,

The transfers were still legal. There’s nothing illegal about bypassing local recording systems. The only question is one of enforceability, and the relevant documents disclosed that MERS was used.

So we can put the above argument to rest.

re: Sebastian’s white whale about fraud and Greek derivatives in entering the Eurozone: one could colorably argue that Greece committed fraud, but the bank wasn’t a party to that so they couldn’t be held accountable for fraud. Greece wanted a particular derivative, GS sold it to them, and that’s that. There’s nothing illegal about that.

91

jpe 09.25.11 at 12:14 pm

If I “turn a blind eye” to what “everyone” knows, and invest in the fraudulently rated bonds because “everyone” is doing it, then I am a fraudster.

No, not at all. It means you’ve violated a fiduciary duty to the people that have entrusted you w/ their assets, but you haven’t committed fraud.

“Fraud” in these sorts of discussion is typically stripped of any semantic content and used in the old logical positivist sense of a cognitive content-free “boo!”

92

Rich Puchalsky 09.25.11 at 12:15 pm

“If I forge a title to “prove” that I own your house, that’s not a crime? I’d assumed that it was.”

Walt, grifters forge, banks operate under the normal rules of business. Muggers steal your wallet and run off, banks make bad business decisions that after all are not criminal. The different is real, and fundamental. All of the people who say that various individuals who would have been fraudsters plain and simple legally weren’t because they were engaging in banker practices are quite right.

And don’t try to make a moral case that, no matter whether the law has been captured so that rich people get off scot free for poor-person crimes or not, the actions involved are essentially similar. As Daniel points out, morality just gums up the works of technocratic egalitarianism, and people like you are what’s wrong with the left anyways.

93

Jon H 09.25.11 at 12:30 pm

“Making incorrect decisions in the running of a bank and trading operstion isn’t a crime and never will be “

Then bankers and traders are just going to have to get used to being thought of as crooked, unprosecutable, predatory spivs. They need to quit whining, quit bragging about their supposed brilliance and social darwinian superiority, and content themselves with vast wealth and power in society. Might as well start throwing ‘bunga bunga’ parties while they’re at it.

94

Jon H 09.25.11 at 12:37 pm

Or, to put it another way, bankers and traders should expect to be treated with the amount of respect accorded to other shady but generally legal industries, such as pornography.

A guy whose job is designing complicated, borderline-fraudulent ETFs should expect about as much social status and respect as a guy who makes totally legal choke-and-gag oral sex porn.

95

John Quiggin 09.25.11 at 12:55 pm

Looking at the thread, I tend to conclude that, assuming it was possible to prosecute a few high-profile cases, the cathartic effect would dominate.

To restate my view simply, the problem with the last bubble wasn’t the inevitable instances of criminality, it was the stuff that was perfectly legal. That’s even more true of what’s going on now.

Getting hung up on whether a handful of the participants can or should be prosecuted is a distraction.

96

Alex 09.25.11 at 1:44 pm

After all, the Enron/WorldCom/GBLX, Grubman, Blodget etc prosecutions didn’t exactly usher in an era of stainless steel integrity in public life. Blodget hasn’t even buggered off like he was told to.

97

Andrew F. 09.25.11 at 2:09 pm

But is the problem today that banks are taking too much risk? I think we may have pushed them to take too little risk now.
B

98

Alexei McDonald 09.25.11 at 3:49 pm

@jpe #90 That was certainly the claim made by the industry. The State Attorneys seem not to agree (Naked Capital, passim).

99

CharleyCarp 09.25.11 at 4:06 pm

@Alexei, are you referring to this sort of thing?

http://www.nytimes.com/2011/08/31/business/bank-of-america-accused-of-breaching-mortgage-accord.html

The Nevada filing also maintains that Countrywide, which Bank of America acquired in 2008, did not deliver necessary loan documentation when it put together mortgage securities and sold them to investors during the boom. Under the typical pooling and servicing agreements struck between Countrywide and investors who bought the securities, the bank was required to endorse the mortgage note and deliver it to the trustee overseeing the pool. Countrywide failed to do so, the complaint notes.

These paperwork failures should have barred the bank from foreclosing on borrowers, the Nevada complaint says, but it went ahead nonetheless. This aspect of Ms. Masto’s complaint echoes a lawsuit filed in early August by Mr. Schneiderman, the New York attorney general, to block a settlement between Bank of New York and Bank of America covering 530 Countrywide mortgage pools. In that case, Mr. Schneiderman contends that Countrywide did not deposit loans into the mortgage pools as required and that the bank had no right to bring foreclosure actions against these borrowers.

I doubt even DD objects to civil suits where the elements of tort or contract claims can be made out.

100

jpe 09.25.11 at 4:09 pm

Alexi: the state AGs aren’t suing over the illegality of MERS. MERS isn’t illegal; it’s just an open question in some jurisdictions whether it’s effective in keeping a security interest in the property.

That said, the 50 state AG stuff is about robosigning, not MERS. (link)

101

gastro george 09.25.11 at 4:11 pm

Re investment banking “honesty” I was staggered to be enlightened by this article. So shares that we buy for our pensions are loaned out to hedge funds by the investment fund, the hedgers short the shares to make a profit, depressing the value of my pension, and most funds pocket the fees. In what way is that not immoral?

102

jpe 09.25.11 at 4:19 pm

@ gastro george: the pensions approve it and take a fee for it. You should be blaming the short-sighted, greedy pension funds in addition to the banks.

103

Sebastian 09.25.11 at 4:22 pm

“Sebastian’s white whale about fraud and Greek derivatives in entering the Eurozone: one could colorably argue that Greece committed fraud, but the bank wasn’t a party to that so they couldn’t be held accountable for fraud. Greece wanted a particular derivative, GS sold it to them, and that’s that. There’s nothing illegal about that.”

Two points, one with actual knowledge and one which needs someone who knows more:

1. The bank not being a party to the actual fraud doesn’t absolve it of liable if it knew that it enormous fees were gained in structuring the transactions to perpetrate fraud. Unless the financial sector has received a special dispensation from regular fraud rules (in which case it should be immediately reversed), Goldman’s is not off the hook just by not being a ‘party’ to the transaction. (And according to Daniel, everyone knew about the fraud, so Goldman’s–the bank structuring the fraud–certainly knew).

2. And this is where I need further expertise to chime in, my understanding is that it most certainly was NOT a case where Greece just requested 1 billion euros worth of a particular instrument. Goldman was hired (and enormous fees paid) to create a maze of instruments which would hide the fact that 1 billion euros were being borrowed. They were complicit in perpetrating a fraud because they engineered the way that it would be hidden from view, not because they were just filling an order. Right? And the Goldman went further. They knew that Greece was more likely to default then other people did (because they engineered and created the transactions) and then bought enormous credit default positions (which would pay off in case of a Greek default) at lower prices than would be available if the fraud were known, that could form the grain of an additional fraud. The enormity of this position ADDITIONALLY caused open Greek financing to become more expensive, pushing Greece further toward default. I don’t know what that is, but it isn’t just a ‘mistaken’ business transaction or ‘poor business judgment’ or whatever Daniel is calling it.

I’m totally behind the idea that lots of poor business judgments go wrong and that the loss of money in them is plenty punishment enough. But these A) don’t look like mere poor business judgments and B) the banks are asking us to bail them out to avoid losing money on what looks to the average outsider to be fraud.

104

Sebastian 09.25.11 at 4:24 pm

“You should be blaming the short-sighted, greedy pension funds in addition to the banks.”

Who runs the short-sighted, greedy pension funds? Same ugly financial sector, same ugly result.

105

Watson Ladd 09.25.11 at 4:29 pm

Chris, a reasonable argument can be made that Greece is poor because of particular policy decisions that it has made. Why should Germans pay so the Greeks can have their taxicab drivers closed to competition?

John Quiggin, I think Sarbanes-Oxly might take some of the credit for reducing the bezzle. 2001 exposed Enron, WorldCom, Tycho, and a few others. I’ve not heard much similar from a much deeper recession.

106

jpe 09.25.11 at 4:35 pm

@ Sebastian: Greece and Italy successfully lobbied to have the accounting at issue made part of the financial framework. Apart from the non-existence of the third party culpability you assert*, there was no primary culpability, either: what Greece did was on the up-and-up In other words, this is a case of what was unethical was perfectly lawful. Or: everyone knew this would happen because Eurostat had said it was OK to do it.

* My strong intuition here is that a third party wouldn’t be on the hook here, but I’m too lazy to do the research to confirm it. That’s the general rule in the states, although I’ll concede that there could be differences either for these particular facts or under EU law.

107

jpe 09.25.11 at 4:44 pm

(let me note that, on further looking, I’m open to the possibility of being wrong re: 3rd party liability, intuition notwithstanding)

108

piglet 09.25.11 at 5:03 pm

“If I forge a title to “prove” that I own your house, that’s not a crime? I’d assumed that it was.”

That’s a point that I have also been wondering about a lot. Those are notarized affidavits made under oath. If they are materially wrong or heaven forbid the signature is faked, that IS a crime (I’m not sure whether felony or misdemeanor). That is completely indisputable. And yet, afaik no prosecutor has looked at it that way. The “toughest” thing that could happen to a bank when confronted with fraudulent documents was that the foreclosure process was interrupted until they had “gotten the paperwork in order”. I would really appreciate if anybody more knowledgeable here had an explanation for it. Just as a random example, checking a box incorrectly on an immigration form can be grounds for prison, deportation, being stripped of citizenship. A mistake on an IRS form also can have pretty heavy consequences. It is hard not to conclude that the legal system has a remarkable tolerance for certain kinds of wrongdoing involving “respectable” players.

109

Alexei McDonald 09.25.11 at 5:05 pm

@JPE #100 Sure, if you believe Judge Soud that what appears at first glance to be fraud is mere neglect and sloppiness. Otherwise, you know, signing affidavits that the notes had been “lost” when in fact they had been wilfully destroyed would have made things problematic for the judge. Or, if the same bundle of mortgage appeared to have been sold to several different buyers, or if the system says that a mortgage is held on a property that was never mortgaged, well perhaps that was carelessness, and perhaps MERS’ inability to follow state laws likewise an oversight. On the other hand, some other judges don’t agree with him that the MERS transfers are legal at all, and I don’t claim any expertise in the field myself. But if you have been following the discussions about the 50 attorneys on NT, you will have seen many of these issues flagged already.
And, of course, the USSC can rule that up is down and make further debate pointless, but I do think that it’s not so open and shut a case as you feel.

110

piglet 09.25.11 at 5:13 pm

“My understanding of the term, and it’s bubble application, is that in order to aid in securitization, the original signed documents were replaced by digital records.”

My comment above refers to robo-signing.

111

jonm 09.25.11 at 5:20 pm

@jq #95 “To restate my view simply, the problem with the last bubble wasn’t the inevitable instances of criminality, it was the stuff that was perfectly legal.”

I think this is basically correct. There are morally dubious actions along the whole sausage-making chain of transactions in a mortgage, from the person hoping to avoid taxes and make a killing on the property market through the banks et al. and on to the municipal finance officer looking for a few extra basis points on investments for their pension fund. Only at a few points (like mortgage applications) are these likely to be prosecutable. At some like Lehman’s risk management you’d think and hope the company officers would be prosecutable under the relevant law (Delaware, naturally) but that turns out not to be the case.

Re: regulation, minor things are being done; e.g. some structured derivatives are basically unprofitable to trade now because of the capital requirements. On the whole however, the financial sector has got off lightly and no serious attempt has been made to eliminate the incentives for ultra-leveraged bank financing that is at the core of the fragility of the system. Given the corruption of the relevant members of Congress (Republicans and Democrats alike) I see no prospect of this changing.

112

geo 09.25.11 at 5:40 pm

@95: assuming it was possible to prosecute a few high-profile cases, the cathartic effect would dominate … Getting hung up on whether a handful of the participants can or should be prosecuted is a distraction

We must look to the future, not the past.

113

jpe 09.25.11 at 6:04 pm

Alexi: you seem to have a hard time understanding the difference illegal and ineffective, so maybe an example would help. Say we want to contract that in exactly one year and one day, I’ll paint your house, and we just verbally agree. Under the statute of frauds, this contract has to be in writing or it’s not binding. Is our agreement illegal? No, it’s just unenforceable. Most states accept the MERS model, but even in those that don’t the transfer to MERS isn’t illegal, it just creates an unenforceable security interest in the property (which is to say, it destroys the security interest).

The robosigning and frauds on the court during foreclosures are all illegal, of course, but there’s nothing illegal about assigning a note and mortgage to MERS.

114

BBA 09.25.11 at 6:13 pm

There’s the additional angle of regulatory arbitrage, in which businesses are structured so as to use the most permissive regulatory regime possible. This led to a vicious cycle beginning in the 1980s where the US and UK deregulated ever more rapidly to prevent business from fleeing across the Atlantic. It’s still around – witness Bob Diamond’s threat to move Barclays to New York – and it’s a major factor in both the weakness of current regulation and the reluctance to enforce those laws that are still in force.

115

CharleyCarp 09.25.11 at 6:22 pm

[t]he robosigning and frauds on the court during foreclosures are all illegal, of course

I agree with this, but note that nothing about this stuff contributed to the bubble, and that these are illegal shortcuts, but that the underlying transaction is usually valid. That is, it’s a rare case where there isn’t actually a loan in default. Lack of criminal prosecution of these case strikes me as being basically the same as lack of prosecution of witnesses who are impeached at trial or in a deposition. Which happens in many more trials and depositions than not. It might be so that a perjury conviction could be had in a great number of cases, but it’s generally thought that the more direct sanction — having a jury disbelieve you and you lose your case — is sufficient punishment.

We could invest the money needed to give a speeding ticket to every single person who drives faster that 55 mph on the Washington Beltway. What they are doing is illegal. And yet, there’s no support outside the lunatic fringe for such a thing.

116

piglet 09.25.11 at 6:56 pm

CharleyCarp: I’m not aware of even a single case of robo-signing being prosecuted.

117

ScentOfViolets 09.25.11 at 7:00 pm

I agree with this, but note that nothing about this stuff contributed to the bubble, and that these are illegal shortcuts, but that the underlying transaction is usually valid. That is, it’s a rare case where there isn’t actually a loan in default.

The “underlying transaction” is usually valid. Well, no, it isn’t. In fact, it actually goes to the heart of the whole shoddy business – and I do mean, literally, shoddy. The procedure that enabled the housing bubble was the slicing and dicing into those odious tranches, CDO’s and the like. Said slicing and dicing is much harder – and slower – if you actually have to transfer physical documents.

Note btw the significance of prosecuting these sorts of procedural offenses – you can’t initiate proceedings against a homeowner unless you actually have the paper that says you own the mortgage. Contrariwise, if you can’t produce the physical documents, you can’t claim the property as an asset on your balance sheet. That one’s giving a bunch of banksters the night sweats. Because while you know and I know that institutions in question are – ahem! – “under-capitalized”, it’s been official policy to pretend that they aren’t. And then do everything possible to recapitalize them (to the huge detriment of everyone else, see Krugman and Japan’s Lost Decade) that can’t be outright called on as doing so.

But if these prosecutions go through . . . here’s some stuff re NY AG Schneiderman:

Schneiderman didn’t mince words. He explained that the loan transfer documentation for lots and lots of mortgages is FUBAR and that servicers and their vendors are trying to fraudulently paper over the problems (spiced, I might add, with a healthy dose of legalese)

and:

Settlement would be a godsend at this point. Schneiderman is basically calling into question the entire securitization market, which subsequently calls into question ownership and standing to foreclose for most of the US residential housing market.

What does this mean, practically speaking?

Already, the Schneiderman decision is reverberating. Fannie Mae and Freddie Mac plan to hit Bank of America with more mortgage repurchases, raising more liability for them. And today, in the ultimate “I hope for mutual destruction” lawsuit, AIG sued BofA over representations and warrants on their mortgage bonds. They are seeking $10 billion on $28 billion in bonds. This is the largest number sought by a single investor, and it’s a direct piggy-back on what will come out in the settlement, should New York and Delaware be allowed to intervene. This brings the number in mortgage bond lawsuits up to $197 billion.

BofA, meanwhile, has seen its stock sink to a 52-week low, down 26% in a month.

Iow, some of the big players that have so far been shielded from any consequences may soon become very, very vulnerable. They could, in fact, become publicly acknowledged to be bankrupt, which would likely be followed by a very short, very quick death march.

118

Barry 09.25.11 at 7:10 pm

dsquared 09.24.11 at 7:46 pm

” Making incorrect decisions in the running of a bank and trading operstion isn’t a crime and never will be (is anyone else proposing to have their every business decision Monday morning quarterbacked by a criminal court? Should kids be able to prosecute teachers if they don’t like the eay their lives turned out?). People against whom a colourable criminal case can be made have been and are being prosecuted. As I am apparently not yet tired of saying, if you want to make your political program conditional on finding prosecutable crimes, you’re going to be consistently disappointed.”

Daniel, this “(is anyone else proposing to have their every business decision Monday morning quarterbacked by a criminal court?” is a lie, pure and simple. Nobody save streetcorner lunatics is proposing this.

And please stop bullsh*tting. You have your very own post to BS endlessly on; the least that you can do is to stop polluting the rest of CT.

There have been massive crimes, starting with fradulent ratings of securities, to the tune of trillions of dollars, and fraudulent falsification of mortgages, and that’s just what we know of .

At this point I’m going to heed the advice of some blogger, who once said something about the errors of trusting those who have proven untrustworthy.

119

Barry 09.25.11 at 7:12 pm

John Q: “Regulators and prosecutors are complicit in the game and are letting financial criminals go free. I don’t really buy this one either, at least as a general rule. In the post-crisis atmosphere, successful prosecutions are, in some sense good for everyone except the perps. In particular, the financial sector gets to say that the rotten apples have been cleaned out and that we can get back to normal. The things I’ve read suggest that prosecutors looking for evidence have found it exceptionally difficult to find good cases to prosecute”

Well, let’s fisk this.

First, you are presenting no evidence in favor of your thesis; just groundless assertion.

Second, it’s clear that there’s massive corruption and a revolving door system (start with Matt Taibbi’s article in ‘The Rolling Stone’).

Third, it’s clear that the line taken by the financial system is that None of This is Anybody’s Fault (save meddling governments, n*ggers getting mortgages, and uncertainty). They don’t want high-level prosecutions, and the prosecutors would like high-level donations to their campaigns, and cushy post-government jobs.

120

zamfir 09.25.11 at 7:25 pm

I would already be quite happy if someone convincenced that a lot of this stuff is going to be illegal or simply impossible next time. Prosecuting some now where possible would greatly help to convince me of the good intentions. But something else might help to convince instead.

I am afraid dd is at the moment convincing me of the opposite. That nearly everyone with enough insight in the system to make the real changes doesn’t believe changes are really needed. That it was essentially a technical mistake, that it’s all going to alright. And we should ask for redistribution, because we never did that before.

121

Barry 09.25.11 at 7:31 pm

Oh, John – another thing about prosecutions. If you were an ambitious guy at the Treasury, DoJ or SEC, would you pursue any high-level cases, given how the elites in the banking world move so easily between that world and the elite government posts?

Would you go after G-S when it’s all but certain that they actually and legally own the position of US Secretary of the Treasury? When the guys advising the president seem to mostly have fat bank accounts from Wall Street ‘consulting’? When the Attorney General eagerly swept massive criminality off the table, under the policy of ‘look forward, not backwards’ (except, of course, for whistleblowers)?

122

gastro george 09.25.11 at 7:48 pm

jpe @ 102, Sebastian @ 104

My point exactly, Sebastian, this is two branches of the finance industry colluding to rip us off, undercover, no transparency. Not an uncommon scenario, I posit.

123

Lemuel Pitkin 09.25.11 at 8:07 pm

Financial firms haven’t escaped the GFC unscathed. … The financial sector as a whole is in the tank

Maybe on Planet Andrew F. But here on planet Earth, finance in enjoying record profits. In the US, financial sector profits are currently at 4.7 percent of GDP — a bit down from their all-time high of 5.2 percent of GDP in 2009Q4, but still higher than at any point prior to the Great Recession.

The smug, clueless entitlement of you people is really incredible. You guys screwed up your job — allocating capital — so badly that millions of people lost their homes and many more millions lost their jobs. You didn’t face any consequences at all and you’re as rich as ever. And the problem is supposed to be that we aren’t being nice enough to you?

124

dsquared 09.25.11 at 8:46 pm

You have your very own post to BS endlessly on; the least that you can do is to stop polluting the rest of CT.

Glorious. Just when I was wondering if perhaps I hadn’t been quite clear enough, if I should have put more emphasis on the need for regulatory reform, perhaps I didn’t signal my commitment to egalitarian politics clearly enough, this one comes along. And it becomes crystal clear. Glorious.

125

K. Williams 09.25.11 at 8:54 pm

“But here on planet Earth, finance in enjoying record profits. In the US, financial sector profits are currently at 4.7 percent of GDP—a bit down from their all-time high of 5.2 percent of GDP in 2009Q4, but still higher than at any point prior to the Great Recession.”

That’s a silly statistic to cite as evidence of the health of Wall Street, because “financial sector profits” includes the profits earned by the Federal Reserve (that is, the government), and those have been historically, massively high for the past few years. Take the Fed’s profits out, and the performance of the financial sector looks much less impressive — as evidenced by the banks’ stock prices, which are lower than they’ve been at any time in the past decade with the exception of the 2009 bottom.

It’s also the case that the government’s numbers on “financial sector profits” are seriously distorted by the fact that the government does not count losses on investments (that is, write-offs) as losses. Take a look at the graph you link to. It shows the financial sector as having been profitable even during the worst times of 2008 and 2009. But this is self-evidently absurd — when AIG was losing $60 billion a year, Fannie and Freddie were piling up losses much bigger than that, and the country’s biggest banks were all reporting huge write-offs, there’s no way the financial sector as a whole (which is, as we’re always told, dominated by a small number of firms) was profitable. It only registers that way because of the way the government reports the numbers.

126

Lemuel Pitkin 09.25.11 at 8:54 pm

Just when I was wondering if perhaps I hadn’t been quite clear enough, if I should have put more emphasis on the need for regulatory reform,

In case you’re still wondering: Yes, you should have. In fact, you should have put all the emphasis on that, and left out the “don’t be so mean to bankers” part entirely.

127

K. Williams 09.25.11 at 8:58 pm

“There have been massive crimes, starting with fradulent ratings of securities, to the tune of trillions of dollars, and fraudulent falsification of mortgages, and that’s just what we know of .”

No, you don’t know that there were fraudulent ratings of trillions of dollars of securities. There’s no proof of this at all, while there’s plenty of evidence that the ratings agencies were inept and incompetent fools who, like most Americans, believed that housing prices would never fall as fast as they did. If you have proof of criminality on the part of the rating agencies, link to it. And don’t cite the fact that raters were paid by the people who were marketing the securities. That’s no evidence of fraud at all, because everyone who bought the securities knew that the raters were paid by the sellers.

128

Lemuel Pitkin 09.25.11 at 9:01 pm

“financial sector profits” includes the profits earned by the Federal Reserve

No it doesn’t. This is the corporate business sector only.

this is self-evidently absurd

Yup, if the facts surprise you, must be something wrong with the facts.

129

geo 09.25.11 at 9:12 pm

JQ, addition to OP: the real issue is whether prosecutions will act as catharsis (appeasing the anger that would otherwise help to drive a more comprehensive attack on financial excesses) or as catalyst for directing that anger in the right way

This is a useful and thought-provoking formulation. Suppose we apply the same test (substituting appropriately for “financial excesses”) to the question of whether or not to prosecute war crimes, defense procurement fraud, civil liberties violations, toxic waste dumping, or, for that matter, anything else that respectable, important, and well-protected people do?

130

Sebastian H 09.25.11 at 9:13 pm

“Just when I was wondering if perhaps I hadn’t been quite clear enough, if I should have put more emphasis on the need for regulatory reform,”

Well you could respond to the more serious questions/discussion rather than to Barry.

It isn’t just banker bashing. I’m actually super-sympathetic to the second guessing in business problem. I think that at times government/court system really can treat mere bad decisionmaking as a crime/tort, and that such things can be bad for the system. For example I believe that lots of the shareholder derivative suits that were popular in the 1980s and 1990s were complete crap. But even from that, relatively right-wing, point of view, it *still* looks like there was incredibly shady wrongdoing and outright fraud going on at very high levels. And even from that, relatively right-wing, point of view, it *still* looks like the banks and other high level financial players got bailed out of a mess that was largely self-created, don’t seem to accept that the mess was largely self-created, and want to continue with business-as-usual-circa 2007.

That doesn’t strike me as banker-bashing concerns. It is pro-accountability concerns, and I have lots of them. One of the virtues of a functioning market system is that the losers go out of business to be replaced by people who were either luckier, or smarter, or more prudent, or more postively innovative. It seems to me as if many of the bad, or evil, or merely deeply wrong actors are still making big profits off of the government ass-saving teat. And I think there is an excellent *moral* case for that to be considered wrong.

Look, if a prosecutor wants to indict Goldman, go through the discovery process, and then decide that they can’t go to court over it, fine. Or if they get to a jury and the jury thinks they can’t convict, fine. But we haven’t even bothered to get to that point, and I don’t understand why not. (Or rather I have all sorts of public choice/capture reasons for suspecting why not, but they just lead to a “well then fuck the bankers” attitude that you don’t seem to think is appropriate).

131

K. Williams 09.25.11 at 9:21 pm

““financial sector profits” includes the profits earned by the Federal Reserve

No it doesn’t. This is the corporate business sector only.”

No, Lemuel, you’re wrong. And the extraordinary — although utterly unsurprising, given your general self-righteousness — thing is that you didn’t even check to see if you might be wrong before putting up a post insisting that you were right. The numbers in that St. Louis Fed graph come from the BEA. Here’s how the BEA describes how it comes up with its “corporate profits” number:

Corporate profits with inventory valuation and capital consumption adjustmentsis the net current-production income of organizations treated as corporations in the NIPA’s. These organizations consist of all entities required to file Federal corporate tax returns, including mutual financial institutions and cooperatives subject to Federal income tax; private noninsured pension funds; nonprofit institutions that primarily serve business; Federal Reserve banks,; and federally sponsored credit agencies.”

Did you get that? Federal Reserve profits are included in corporate profits. So don’t tell me that this is “the corporate business sector only” when it isn’t. More important, don’t say anything to me or to anyone about “the facts,” when you clearly aren’t interested in them.

132

straightwood 09.25.11 at 9:21 pm

It’s just one big fractal pattern. The same dishonest tactics used by the financial sector to explain its malignant condition are applied by its individual members to shield themselves from blame for participating in grossly irresponsible institutional behavior.

1) Everyone is at fault, therefore no one should be punished. 2) This is just the way the business cycle works. 3) The government shouldn’t have let us do this. 4) Give us more money or we will wreck everything. 5) Nobody could ever have expected this to happen. 6) It’s impossible to know that you are in an asset bubble, therefore it is reasonable to assume that prices will rise forever.

These people simply cannot exhibit contrition. All they know is greed.

133

Rich Puchalsky 09.25.11 at 9:27 pm

“Just when I was wondering if perhaps I hadn’t been quite clear enough, if I should have put more emphasis on the need for regulatory reform, perhaps I didn’t signal my commitment to egalitarian politics clearly enough, this one comes along. “

Signal your commitment? Hearing that kind of phrase is bad enough when one hears it from a politician, but really, what do you have to signal your commitment to? Is there a Regulatory Reform / Egalitarian Politics Board and you are one of the ten members, and we are eagerly waiting to hear how you’ll vote?

Because if what you’re talking about is a blog post, what I remember is a lot of neener neener about how if people want to blame anyone, they have to blame the middle class British home buyers and the Greek pensioners, and how doesn’t that make you feel all silly now for not supporting egalitarian politics. Was there any mention of regulatory reform beyond “And oh by the way I support regulatory reform, so I’m not a complete prat”?

Is there any banker who says, in the current climate of opinion, “By the way I oppose regulatory reform”?

134

John Quiggin 09.25.11 at 9:48 pm

@Geo, I agree that the test is generally applicable. If you are implying that the answer is always that a few well chosen prosecutions (or other exemplary punishments) invariably stimulate a demand for more fundamental reforms, I disagree. As has already been pointed out, in the particular context of financial wrongdoing, there were quite a few successful prosecutions in the wake of the dotcom bubble, including the leaders of Enron and the entire business of Arthur Anderson. These gave a bit of impetus to Sarbanes-Oxley, but the more fundamental problems of Wall Street weren’t addressed.

As another example, the prosecution of Martha Stewart for insider trading was, in my view, an egregious example of misdirected effort. Do you want to defend this exercise?

135

Phil 09.25.11 at 10:20 pm

wondering if perhaps I hadn’t been quite clear enough, if I should have put more emphasis on the need for regulatory reform

I think my point about the connection between the concepts of “regulatory breach” and “criminal offence” at 85 was relevant here. But for some reason all my comments on CT seem to drop into the memory hole, so never mind.

136

dsquared 09.25.11 at 10:24 pm

I think it’s worth pointing out, by the way, that although the housing boom took off in about 2001/2, the catastrophic increase in US household debt was already well underway; it was the counterpart to the Clinton era combination of big current account deficits combined with government sector surpluses. This timing of the beginning of the household sector debt boom matches up quite well with my story of a macro driven demand pull, but not well with stories of financial sector created supply push.

137

John Quiggin 09.25.11 at 10:28 pm

I’d argue though that the macro push was due in large measure to the operation of the Greenspan put following the dotcom bubble and bust (and, earlier, LTCM).

138

dsquared 09.25.11 at 10:36 pm

I was meaning to reply to that one Phil but was distracted. I for my part have next to no knowledge of regulation outside financial services, but the FSA has lots of powers to fine individuals and ban them from the industry (and you still have to pay the fine if you’re banned!) in cases where no hope of a criminal prosecution would ever exist. They were given these powers precisely because it was found to be more or less impossible to prove mens rea in a lot of these cases; if someone says “well, actually we did pretty much assume that there would not be a ten sigma event”, then this is a very tough defence to break down unless you’re going to take the Bloix view that high-risk securities are intrinsically criminal (which of course there are strong public policy reasons for not doing). So in many cases, particularly with respect to market abuse, there is a crime on the statute book under which practically nobody is ever convicted, and then a similar regulatory sanction, which an amazingly broad definition and no provision for the accused to see a court, under which three or four people get done every month.

Hence my view of the GS/Greece case. Not a chance in hell of proving either that a basically legal ESA accounting fudge was the deciding factor that caused some identifiable set of securities to default, or that the GS team knew that Greece might default at all. In general, criminal responsibility for misleading accounts tends to fall on the guy who signs them (again for good public policy reasons)

139

Substance McGravitas 09.25.11 at 10:36 pm

140

dsquared 09.25.11 at 10:41 pm

137: surprisingly hard to see it that way from the data. I certainly presume and assume that the Greenspan put kept things going for longer than they should have, but Wynne Godley was (I’ve just been reminded on Twitter) already warning of dire consequences from the levels of US personal sector debt in 1999/2000. Rather than adding new asset-based debt, it looks like a lot of housing wealth just subsituted for equity asset-based debt already taken on. The more I look at this, the less important an actor the banking sector looks. (Which, for a bit of rageboy fan service, implies that actually, bailing them out wasn’t really all that important and that maybe it was the right decision to let Lehman go bust).

141

dsquared 09.25.11 at 10:47 pm

139. That’s actually quite shocking. At least one stage of that loan would have been totally illegal in the UK (cold-call sales of the mortgage product), and the lender’s duty of best advice would have meant that the loan got chucked straight out by the Financial Services Ombudsman. I thought that most US states had put something similar in place after 2000, when there was a big out-of-court settlement with Household International.

142

CharleyCarp 09.25.11 at 10:49 pm

@SOV — If I wasn’t clear, by ‘underlying transaction’ I meant the homeowner borrowing money from the bank.

It’s no crime to slice or dice. Or to make warranties in a transfer agreement that it can’t keep. Nor is it a crime for the banks to put a metric fuckton of $100 bills into a woodchipper and generate fine confetti. If this is what they did by not keeping the original pieces of paper, the penalty is going to be self-executing.

Obviously, misleading a court is serious business. And can and should be dealt with in courts.

I have to say, though, that it is *not* a crime to sue on an oral contract made upon consideration of marriage, for example, or to sue an Executor or Administrator upon any speciall promise to answere damages out, of his owne Estate.

143

geo 09.25.11 at 10:53 pm

JQ@134: Not exactly what I was implying. I was implying that, with respect to financial fraud as well as to war crimes, defense procurement fraud, civil liberties violations, toxic waste dumping, and most other crimes by well-connected people, we have (at least in the US) a shocking, disgraceful, thoroughly undemocratic culture of impunity, which produces a cynical and apathetic citizenry and effectively subverts all efforts at mobilizing said citizenry to demand fundamental reforms. Do you disagree?

144

William Timberman 09.25.11 at 11:11 pm

geo @ 143

Standing ovation.

145

Bloix 09.25.11 at 11:28 pm

#127- “there’s plenty of evidence that the ratings agencies were inept and incompetent fools … [but]iIf you have proof of criminality on the part of the rating agencies, link to it.”
Um, I don’t have subpoena power, so I can’t dispositively refute the “we were too stupid to breathe” defense, and the feds are extraordinarily uninterested in looking into it. Nonetheless:

http://www.calculatedriskblog.com/2007/09/ackerman-on-rating-agencies-its.html

http://maxkeiser.com/2011/05/09/yes-portugal-opens-inquiry-into-criminal-rating-agencies/

http://www.outsidethebeltway.com/italy-raids-sp-moody/

146

ckc (not kc) 09.26.11 at 12:00 am

…the lender’s duty of best advice would have meant that the loan got chucked straight out by the Financial Services Ombudsman….

or else….what?

147

dsquared 09.26.11 at 12:02 am

146: “chucked out”, in the sense that the FO would rule that it was a case of misselling and the lender would have to wear the loss.

148

ckc (not kc) 09.26.11 at 12:12 am

…well, I was actually wondering to what extent/how often “would have meant” ever translates into “meant/means” (which is exactly what most of us hope for when we think about consequences – or punishment, if that’s a more satisfying term).

149

dsquared 09.26.11 at 12:25 am

well, under the UK Financial Ombudsman scheme, nearly all the time – you have to be very unfortunate indeed (basically not to know about the Citizens’ Advice Bureau) to not be referred to the Ombudsman if you have more or less any financial problem.

150

realdelia 09.26.11 at 12:46 am

As Daniel seeems to be up and active:

What’s happening at your blog?

This is the message you get if you attempt to read the thing:

This blog is open to invited readers only
http://d-squareddigest.blogspot.com/

It doesn’t look like you have been invited to read this blog. If you think this is a mistake, you might want to contact the blog author and request an invitation.

151

K. Williams 09.26.11 at 1:43 am

“so I can’t dispositively refute the “we were too stupid to breathe” defense, and the feds are extraordinarily uninterested in looking into it. Nonetheless:”

Odd. The first link you offered up contains a convincing refutation of the idea that there was something criminal in what the rating agencies did, by the Calculated Risk blogger, who was way ahead of the curve in recognizing the scope and scale of the financial crisis.

“I can understand why there is a problem with the rating agencies combining consulting and rating roles, just as there is a problem with accounting firms combining consulting and auditing roles. Perhaps naively, though, I wonder why we think there is always such a bright line between the two. If the rating agencies publish their methodologies and due diligence criteria, in the name of full disclosure to investors, isn’t this necessarily information that issuers can use to change their practices so that their securities achieve the highest ratings? Is that in and of itself a problem, or is it only a problem if the ratings criteria are faulty? And if they are, is it necessarily because of fraudulent intent? We’re all rightly impatient with too much of this “mistakes were made” line, but are we really going to hold rating agencies to the standard of either perfect prediction of credit loss or jail time?”

I think that pretty much says it all. The fact that the rating agencies were being paid by the issuers was never hidden. Investors were able — and did — have differing opinions of the agencies’ ratings, which is why all AAA bonds didn’t carry the same yields. Again, there’s just no proof of fraud.

152

OCS 09.26.11 at 2:05 am

That’s actually quite shocking.

Why? From what I can tell, everyone involved behaved lawfully and according to the incentives that were in place. The cold caller and the closer were both being paid to sell mortgages, and although this particular couple were mentally challenged, they were adults who had the legal authority to make the decisions they did. Obviously it was in the best interest of the mortgage originator to make as many sales as it could, and although in hindsight we can see there was little chance this particular mortgage could be paid back we have no evidence of fraud. The originator obviously had a willing buyer in the bank, which had no problem packaging this mortgage up and reselling it, etc. At every step, people were behaving legally and reacting to incentives.

I’m actually trying to make a limited but important point here — you can have a system in which people behave legally and rationally, and still find the results of that system morally outrageous. Is moral outrage enough? No. But it is appropriate.

153

Bill Murray 09.26.11 at 2:08 am

I wish dsquared much success in his upcoming job as economics and financial editor to Slate

154

john b 09.26.11 at 3:08 am

I’m actually trying to make a limited but important point here—you can have a system in which people behave legally and rationally, and still find the results of that system morally outrageous.

I think part of the issue here is that Dan seems to be arguing from his experience of the UK financial system, which is substantially less corrupt and wicked than the US financial system, and in which a case like 139 would never happen. The UK has strong consumer protection rules which eliminate many of the scams seen in the US; the UK mortgage industry was run by banks rather than by crooked commission-based brokers; and while there’s an *element* of revolving-door to UK politics, the bankers don’t own the government to quite the same degree.

155

Sebastian 09.26.11 at 6:22 am

This nails it:

I have said before that stated income is a way of letting borrowers be underwriters, instead of making lenders be underwriters… What the stated income lenders are doing is getting themselves off the hook by encouraging borrowers to make misrepresentations. That is, they’re taking risky loans, but instead of doing so with eyes open and docs on the table, they’re putting their customers at risk of prosecution while producing aggregate data that appears to show that there is minimal risk in what they’re doing. This practice is not only unsafe and unsound, it’s contemptible.

We use the term “bagholder” all the time, and it seems to me we’ve forgotten where that metaphor comes from. It didn’t used to be considered acceptable to find some naive rube you could manipulate into holding the bag when the cops showed up, while the seasoned robbers scarpered. I’m really amazed by all these self-employed folks who keep popping up in our comments to defend stated income lending. It is a way for you to get a loan on terms that mean you potentially face prosecution if something goes wrong. Your enthusiasm for taking this risk is making a lot of marginal lenders happy, because you’re helping them hide the true risk in their loan portfolios from auditors, examiners, and counterparties. You aren’t getting those stated income loans because lenders like to do business with entrepreneurs, “the backbone of America.” You’re not getting an “exception” from a lender who puts it in writing and takes the responsibility for its own decision. You’re getting stated income loans because you’re willing to be the bagholder.

The bankers found a way to perpetrate a fraud, knowing full well it was a fraud. They also found a way to make sure that other people are holding the bag when the fraud is revealed.

That is contemptible.

156

Tom 09.26.11 at 6:24 am

‘What’s happening at your blog?’

It’s otherwise known as having a strop and taking your ball in. Not the behaviour you expect from intellectually robust invest bankers, but there you go. Or maybe it’s now just the preserve of self justifying millionaires who won’t be mean to him.

157

Chris Bertram 09.26.11 at 7:15 am

_Why should Germans pay so the Greeks can have their taxicab drivers closed to competition?_

I’m not _au fait_ with comparative taxi regulation in Germany and Greece, though I doubt that German taxis are more open to competition that Greek ones given the mania the Germans have for licensing and regulating work in various trades. My own view, though, fwiw, is that taxi regulation has, at most, played a minor role in Greece’s current predicament. However, I wouldn’t be surprised to learn that the Postone/Cultrone school of Marxism has a “theory” to the contrary.

158

Phil 09.26.11 at 7:21 am

in many cases, particularly with respect to market abuse, there is a crime on the statute book under which practically nobody is ever convicted, and then a similar regulatory sanction, which an amazingly broad definition and no provision for the accused to see a court, under which three or four people get done every month

That works for me, pretty much, although I think we probably need more of it. (As it goes, I think there’s a lot to be said for the “regulation backed ultimately by criminal sanctions which are hardly ever invoked” approach, precisely in the area of crimes of the powerful – and precisely because the blighters are powerful. I’m less keen on it as a way of fast-tracking behaviour modification for people with hardly any power over their own lives, let alone anyone else’s, for much the same reason.)

As someone with a very minor interest in the share price of Lloyds Banking Group, I’m also interested in this “bailing them out wasn’t really all that important” line of argument. “If you want to get angry, get angry with the politicians who made all the relevant decisions, not the individual people who benefited from them” has a lot going for it, too.

159

thor 09.26.11 at 7:34 am

You say your goal is to make a structural change and avoid a cathartic, superficial move to replace the replaceables. Two obvious problems:
From a marketing point of view, you cannot charge against such a powerful agent such as the American financial sector without bold, populist politics. That includes pointing concrete fingers at concrete faces and saying: look, he took your house, he took your retirement. Obama’s complete denial of such tatics doomed him.
Politics aside, impunity is cumulative, and I’m afraid the cycle described by Galbraith aren’t cycling this time. The lack of punishment means we just get back at the apex, with less bezzle but the same level of malice.

160

Roger 09.26.11 at 7:39 am

134 – I don’t understand this argument. You aren’t suggesting that Enron shouldn’t have been prosecuted, are you? And surely you have to give some attention to the fact that you are talking about the Bush Justice Department. I’ve heard that they were not exactly a crackerjack team, those Bush lawyers.

Supposedly, though, we had the new, FDR light team on board in 2009. The precedent there is another financially caused crash – one that occured in 1929. And contra the Enron example, prosecuting crimes and reforming the system went hand in hand. You have heard of the Pecora hearings? Which lead to the Glass Steagle act? What happened was that the virtuous bankers, who were just doin’ their jobs, got villified and treated o so meanly not only by commentors on blogs, but by Congressmen and prosecutors. At the end of it, the mean treatment did not make bankers feel that they needed to express their hurt feelings by closing up shop and only loaning money to people who said nice, sweet things about them – it led, instead, to the structure of regulation that worked very successfully, up to the 80s, in preventing economic meltdowns spreading from the financial sector. And then de-regulation, among other things, elevated the financial sector to an importance that it last had in the twenties, and the financiers engaged in the vicious rent-seeking activities they love to engage in, and used some small portion of their profits to lobby strenuously to knock down both regulation and to reign in regulatory agencies. Before Enron, in fact, one of those agencies, the SEC, threatened to look at all the shady accounting that was going on in 1999, only to be told by Congressmen and Senators – Joe Lieberman being prominent among the latter – that if they poked their noses into accounting practices, the SEC would receive huge cuts in funding. I am going to take a wild guess and say that the Congressmen and Senators were moved not by ideology, but by phone calls from various representatives of the financial services sector. And no, I’m not talking about bank tellers.
I think the Pecora hearings and the villification of the bankers provides a very neat counter example to the strategic point that you and D2 seem to share: that populist anger never drives reform. On the contrary, populist anger and the villification of the bankers seems to have driven the most enduring reform of the system in a century.
Let’s hang a few bankers. Pour encourager les autres.

161

Alex 09.26.11 at 8:36 am

You aren’t suggesting that Enron shouldn’t have been prosecuted, are you? And surely you have to give some attention to the fact that you are talking about the Bush Justice Department.

No, I’m not suggesting Enron shouldn’t have been prosecuted. If I was, I’d say it. (Another telepath!)

I’m suggesting that high profile prosecutions were not a sufficient condition of a less predatory financial sector, or indeed of a less horrible standard of ethical conduct in public life. In fact, you might even wonder whether the perp-walks were a substitute for more substantial reforms.

On the other hand, even Bush’s DOJ did manage to lock somebody up for it…

162

Colin Reid 09.26.11 at 10:55 am

“In unseren Kreisen, wissen Sie, wird selten jemand geschnappt – “
“Weil man in Ihren Kreisen keine Holzwolle stiehlt, das ist klar, Herr Biedermann, das ist der Klassenunterschied.”
– Biedermann und die Brandstifter, Max Frisch 1953.

163

Mandos 09.26.11 at 11:06 am

Oy:

Because one day this crisis will be over, and the bankers will still be the ones with the money and the power, and they will be less likely than ever to feel like sharing it.

You realize what this implies, right? It implies guillotines (or the equivalent) are inevitable and probably in the not too distant future. Is that what you were trying to imply? It means that you believe that the hubris is imminent and irreversible.

164

Chris E 09.26.11 at 1:02 pm

This sort of thing, encouraged by the financial industry, didn’t exactly raise the chances of systematic fraud being found:

http://www.reuters.com/article/2011/09/14/us-sec-documents-idUSTRE78D78L20110914

I notice the officers in charge are mostly former banksters themselves.

165

The Raven 09.26.11 at 1:07 pm

D^2 is coming from a UK perspective and matters are a bit different in the USA. MERS has put 10s of millions of housing titles into question, so bank fraud is up close and personal here. Everyone knows someone who has been affected. Most of us know someone who has lost their home.

I would like to see d^2 make his argument to some of the victims face to face.

166

Guano 09.26.11 at 1:21 pm

“I’m suggesting that high profile prosecutions were not a sufficient condition of a less predatory financial sector, or indeed of a less horrible standard of ethical conduct in public life. In fact, you might even wonder whether the perp-walks were a substitute for more substantial reforms.”

But if there are no prosecutions, the public suspects that the issue is not being taken seriously and that the talk of regulatory reform is a load of eyewash. Some of the financial products that were devised seem so dubious to the public, deliberately hiding risks, that they wonder why no-one can be prosecuted. And this reduces confidence in future regulatory reform, because the public assume that even under the new regime no-one is actually going to end up breaking rocks on Darrtmoor.

167

Alex 09.26.11 at 1:35 pm

Fair enough. But we do have a recent case study of the CEO perp-walk as a means of reform, and it wasn’t effective. In fact, the prosecutions actually overlapped the take-off of the housing bubble.

By all means prosecute, but don’t imagine that it actually solves any problems in itself. I think most people here would agree that more prosecutions and heavier sentences don’t seem to be a sufficient solution to ordinary, poverty-driven crime, so why should they be a cure-all for the malefactors of great wealth? They’re probably a necessary element of the solution, but they’re far from a sufficient one.

168

Bloix 09.26.11 at 1:37 pm

#151- that was Ackerman in 2007, and Tanta thinking, as she admitted naively, that he was perhaps over the top. If proper investigations had been launched in 2007, the ratings agencies would no longer exist. Here is Calculated Risk from this summer:

http://www.calculatedriskblog.com/2011/08/report-us-investigating-s-ratings-of.html

If you refuse to turn over rocks, you won’t find any maggots. Here’s a rock that still hasn’t been turned over properly:

http://www.calculatedriskblog.com/2009/10/mcclatchy-how-moodys-sold-its-ratings.html

169

ajay 09.26.11 at 1:55 pm

But we do have a recent case study of the CEO perp-walk as a means of reform, and it wasn’t effective. In fact, the prosecutions actually overlapped the take-off of the housing bubble.

Hmm. Or you could take the view that the prosecutions successfully prevented any further non-financial corporate accounting frauds along the lines of Enron and WorldCom, but didn’t deter “financial crime” in its broadest sense.

I think most people here would agree that more prosecutions and heavier sentences don’t seem to be a sufficient solution to ordinary, poverty-driven crime

I wouldn’t agree, and I don’t think most people here would. Certainly not with regard to the “more prosecutions” bit; I thought it was fairly well established that increasing the chance of prosecution for a crime acted as a deterrent (heavier sentences probably don’t have the same deterrent effect).
Are you actually arguing that making law enforcement better doesn’t reduce crime? Or are you just saying that it won’t eliminate crime? Talking about “a solution to crime” in the sense of “a solution to smallpox” and judging policy against it does not seem a very good approach.

170

straightwood 09.26.11 at 2:13 pm

How have we regressed so far that EQUAL JUSTICE UNDER LAW is no longer an operative social value? Some black guy robs a convenience store of $500 and goes to prison. Some white guy in a nice suit cheats a municipality out of $50 million, and he gets a bonus. WTF?

Even if prosecuting banksters had ZERO impact on their malfeasance, the social stabilizing effect of due process and equal justice is enormously important, and thus requires that such prosecutions occur as a matter of principle and sound governance. Only a profoundly corrupt society would heed quasi-utilitarian sophistries that allow rich thieves to go unpunished.

171

AcademicLurker 09.26.11 at 2:19 pm

@167
By all means prosecute, but don’t imagine that it actually solves any problems in itself.

By all means prosecute car thieves, but don’t imagine that it will actually eliminate car theft.

Again, is there any other class of crime outside of big time financial chicanery where this type of argument is taken seriously?

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Sebastian 09.26.11 at 2:43 pm

“I’m suggesting that high profile prosecutions were not a sufficient condition of a less predatory financial sector”

High profile prosecutions may not be a sufficient condition for the total fix of the predatory financial sector (and I’m not sure who you think said they were) but might they not be a necessary condition? If there are no prosecutions, might it be that the bankers won’t be too concerned about the regulations?

I don’t need to be convinced that bad things happen in complex systems even with totally normal/legal choices. I understand the math behind fluid dynamics and strange attractors and so called ‘chaos’ theory pretty well. I’m perfectly willing to believe that purely with the stupid choices of the Bush administration (stupid tax regime and stupid war spending) and with the stupid choices of the EU combined with the normal froth of the economic world that we would have had a serious downturn recently.

I’m not convinced that it would have been as serious as it actually was without crazy-stupid credit default swaps and liar AAA bond slices and all sorts of responsibility abdicating lending craziness. Some of that seems to be far beyond mere ‘bad business’ decisions and well into potential fraud. But we don’t seem to even be investing that on any particularly deep level. Which disturbs me because I suspect that dooms regulatory reform *because the bankers won’t be afraid of the reforms*.

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Noumenon 09.26.11 at 3:01 pm

I’ve been trying this whole time to remember how much I loved dsquared during the Bush years, and how I used to go to Bryan Caplan’s blog just to see him rip Bryan apart in the comments. But these threads just haven’t been convincing me.

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john b 09.26.11 at 3:03 pm

Only a profoundly corrupt society would heed quasi-utilitarian sophistries that allow rich thieves to go unpunished.

Doesn’t that depend on shit like, erm, the rule of law?

As the excellent documentary (and I’ve had lengthy discussions with its researchers that convince me that it pretty much is a documentary, just that life in Sydney in the 1920s was immensely mad) Underbelly:Razor shows, there was an immense problem in Sydney with razor gangs dealing cocaine in the late 1920s, because carrying a cutthroat razor and selling cocaine were both legal, whereas carrying a gun and selling alcohol without a (restricted to respectable citizens who couldn’t sell after 6pm) license were both illegal, and so you could be jailed for your profession rather than the unfortunate criminal conduct to which your profession sometimes led you.

Following the laws passed after said hullabaloo, someone in Sydney who sells cocaine and carries a cutthroat razor to the pub can be busted for both these things. But it would be completely unjust to jail such a person for possession and selling offences committed when both of these things were legal, unless you actually had evidence that they were slashing someone up with said razor.

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Alex 09.26.11 at 3:14 pm

I agree that they’re a necessary condition. Here’s me, saying that in as many words:

They’re probably a necessary element of the solution, but they’re far from a sufficient one.

I even made the point that on that score, the utterly corrupt torture-and-vote-rigging gang that was the Bush DoJ did better than Obama…

Again, is there any other class of crime outside of big time financial chicanery where this type of argument is taken seriously?

I think it’s fairly uncontroversial that enforcement, in itself, is not enough in any class of crime. Did I go through a rip in spacetime into an alternative universe where CT commenters are all Michael Howard prison-works types? Nobody thinks speeding tickets are enough in themselves to stop people driving dangerously – a crime which is actually quite similar to bank fraud in that it’s committed by people in positions of power (i.e. cars) against people outside them (i.e. pedestrians) , and that is probably insufficiently sanctioned by society.

A lot of people here actually argue that effective banking reform will grow organically out of prosecution, that prosecutions will necessarily lead to a great public movement for change, and I think that’s naive. “Prosecution-only” was tried in the early 2000s and I remember thinking that, surely, after Enron nobody can believe in this shit any more! But instead everyone said “there go Lay and Skilling to the big house, job’s a good ‘un”.

I also seem to remember people (not real ones – pundits) arguing that this was a better idea than regulation – rather than gumming up teh markets with bureaucracy, let’em rip and have the FBI prosecute anyone who overstepped the mark. Well, that turned out about as well as you might expect.

The problem is surely that we need regulation as a prior restraint on doing stupid, dangerous or evil things so they don’t happen.

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PaulB 09.26.11 at 3:26 pm

My working experience is that bankers (on a trading floor) are on average considerably more ethical than journalists. After all, if one has the skills for the job, one can make a very comfortable living in banking without needing to do anything dodgy.

However, I’ve been persuaded by commentators on this blog that the only moral thing to do is to quit the business. So I am now at home writing this. (@JonH: I’m looking for opportunities making totally legal sex porn.) I’ve also learned here that, notwithstanding my personal experience, the average banker is a financially illiterate rogue. My harshest critics would rate me more honest and more competent than that, so I seem to have lowered the average by quitting. Perhaps that’s for the best in the long run.

I’ve put some thoughts on the economics of this on my plumbum blog.

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straightwood 09.26.11 at 3:47 pm

My working experience is that bankers (on a trading floor) are on average considerably more ethical than journalists.

Excuse me, but I believe that the trading floor “bankers” exhibit personality traits that are quite different from those who merely collect deposits and lend money. With the elimination of the separation of deposit taking and investment speculation, the sociopathic culture of the trading floor became dominant in the banking industry, and that has let to the term “bankster” becoming a common expletive.

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Roger 09.26.11 at 3:55 pm

Alex, I don’t understand your stance. I too think that there are too many petty crimes punished with too many onerous penalties. And I believe that the burden of jail time unjustly falls on blacks, hispanics and the poor. Now I’m not sure how I bootstrap from this argument to the one where we don’t want jailtime, then, to fall on the mostly white and rich bankers because they occasionally didnt dot the t kicking the family out of the family house.

Is it your ideas that if bankers aren’t prosecuted to the full extent of the law, this is going to lead to Jubilee in the courts for the poor and the non-white? Cause I don’t think so.

This discussion of bank regulation and banker prosecution seems, to say the least, historically inaccurate, as most bank histories put a lot of weight on the prosecutory atmosphere of the Pecora committee and the vilification of bankers as one of the leading causes of the passing of the Glass Steagall act. This seems relatively uncontroversial. And thus, it does seem that, contra John Quiggens and D2, vilifying bankers can serve a progressive social good. Granted, it only does so if there is a progressive party to take advantage of it, which is lacking in the current scene of Center Right vs. Center Right.

I am not shocked by D2’s position defending the banks – it is standard boilerplate reminiscent of what the Alabama Rep Spencer Bachus said early this year about financial regulation.
http://www.rawstory.com/rs/2010/12/13/incoming-gop-chairman-congress-exists-serve-banks/
However, I do find it outrageous to present this bank defense as if it were some crowning piece of ultra-Marxist analysis. It isn’t. In fact, the rhetoric is the same neo-lib rhetoric that was used against Glass Steagall in 1999 by Summers and Senator Gramm. D2 would no doubt have shed big tears for Charles E. Mitchell, the head of National City Bank who was pilloried by the Pecora committee for committing any number of “innocent” acts of banking that, to non-professional eyes, looked like swindling and peculation. And out of that image arose the kind of political force that let the politicians – made them – reign in their natural friends, the Mr. Moneybags. Good.

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Sebastian 09.26.11 at 4:23 pm

“A lot of people here actually argue that effective banking reform will grow organically out of prosecution, that prosecutions will necessarily lead to a great public movement for change, and I think that’s naive.”

I don’t think anyone is arguing that position. I can’t speak for everyone, but I strongly suspect that you won’t have a great public movement for change without prosecutions exposing the ugly machinations. I’m not saying that they always lead to useful reform, but I am saying that without them you will only be getting cosmetic reforms. And since d-squared is arguing very strongly against even attempting prosecutions, I don’t think his method leads anywhere near serious and useful reform. (It isn’t that he doesn’t think reform is good or whatever. His methods at least as expressed thus far just won’t get us there.)

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Alex 09.26.11 at 5:33 pm

Now I’m not sure how I bootstrap from this argument to the one where we don’t want jailtime, then, to fall on the mostly white and rich bankers because they occasionally didnt dot the t kicking the family out of the family house.

You don’t need to because it’s not my argument. My point is just that if I was given the choice between a round of CEO prosecutions and a really strong bank regulation law – say imposing a Glass Steagall split, mandatory exchange clearing of derivatives, a minimum % of loans to be held to maturity – I’d take the second in a flash. Because, as I keep saying, however good Pecora was, we had a second dig that I actually lived through that didn’t work out at all.

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Anderson 09.26.11 at 6:38 pm

then I do think it’s a bit rough to go after the banks involved and tell them that, retrospectively, they should have been the morality police for a Europe that was hell bent on making a mistake

Oh please. The banks KNEW that Greece couldn’t repay the loans. They KNEW they were looking at a bailout to recover their money. And they kept on lending.

The analogy to the bartender is quite good: when the patron’s so drunk he keeps falling off his stool and has to be helped up every time, you don’t keep serving him, and if you do, then you’re part of the problem.

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Tom M 09.27.11 at 3:10 am

I am happy to hear that there are no prosecutions of bankers going on. I do wonder, though, what I was doing in those meetings with the SEC, DoJ and FBI this summer. They kept referring to the meetings about the bank I did work for as investigations.

The standard pace of investigation in the US would put prosecutions of bankers at about mid-stream. Perhaps the anticipation is too much for y’all to bear?

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geo 09.27.11 at 4:57 am

Alex: given the choice between a round of CEO prosecutions and a really strong bank regulation law … I’d take the second in a flash

Yes, of course, so would we all. But what on earth leads you to formulate the alternatives that way?

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Alex 09.27.11 at 9:49 am

The fact that people are explicitly arguing that structural reforms of institutions will come about because of the prosecutions of individuals for specifically criminal (rather than stupid, irresponsible, or ethically evil) acts.

For example, I’d argue that the people responsible for 139 deserve, morally, punishment beyond what I’d consider acceptable for anybody in a civilised society…on the other hand, what would we prosecute Fred Goodwin for? “Being an arsehole and a bloody disaster” isn’t the sort of thing the criminal law deals with very well.

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Rogerhttp://crookedtimber.org/2011/09/24/banks-and-the-bezzle/comment-page-4/#comment-379419 09.27.11 at 10:04 am

Actually, I think the argument is that the political will to structurally reform financial regulations will come about because of properly amplified prosecutions of financiers, such as could easily be mounted against Goldman Sachs if the House Report on GS has any value – much as the Thalidomide case made it politically possible to pass the Kefauver bill that brought about stricter regulations of the pharmaceutical market. Criminal or civil case doesn’t really matter, and perhaps an amplified civil case with big, billion dollar losses to GS would be better. Either way, an atmosphere in which bankers are vilified seems to me to be a favorable atmosphere for constraining the power of banks and putting them back on track as quiet things that make prudent investments in needed projects that led to some social benefit. An archaic hope, I know!

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ajay 09.27.11 at 10:25 am

The standard pace of investigation in the US would put prosecutions of bankers at about mid-stream. Perhaps the anticipation is too much for y’all to bear?

Ken Lay was indicted about two and a half years after Enron collapsed, boy.

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Tom 09.27.11 at 10:58 am

http://www.economicvoice.com/alessio-rastani-gives-the-bbc-more-than-they-bargained-for/50024060

I assume we’ve all seen this ballbag, talking up his book, which I assume is a huge short position on the European economy. Gives credence to the increasingly popular perception that bankers couldn’t give a flying f*ck about the wider economy.

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Alex 09.27.11 at 11:30 am

He’s one of the Yes Men.

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PaulB 09.27.11 at 2:37 pm

Excuse me straightwood, but why do you think your guess as to what a trading floor is like outweighs the evidence of people who’ve actually been there? Why do you think that a given group of people being called names proves anything about them?

It’s beyond dispute that bankers have done stupid and deeply damaging things. I suggest that we’ll be better able to reduce the likelihood of such errors in the future if we base our approach to the problem on facts rather than prejudices.

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Rich Puchalsky 09.27.11 at 2:54 pm

Actually, if he were one of the Yes Men in one of their usual actions, I would have gotten an Email about it by now… maybe they just aren’t taking immediate credit this time, laughing and enjoying the dozens of “Is he a Yes Man or isn’t he?” articles that have now appeared. (Each with its own comment somewhere that what does it matter whether he’s a Yes Man or not, since what he said was true.) … I think that if it was them, they’ve achieved the rare triumph of it not mattering whether it’s them or not, which is a tribute to their previous work.

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Sebastian 09.27.11 at 3:41 pm

“The fact that people are explicitly arguing that structural reforms of institutions will come about because of the prosecutions of individuals for specifically criminal (rather than stupid, irresponsible, or ethically evil) acts.”

No.

We are saying A) that there were almost certainly specifically criminal acts that aren’t [at least yet] being prosecuted and B) it is politically unlikely that comprehensive structural reforms can be forced through massive banker resistance without such prosecutions, and C) without such prosecutions even if there were comprehensive structural reforms, bankers won’t be very afraid of them so from a practical point of view they are unlikely to work.

Now, if you want you could soften all of that from specifically criminal acts to “severe non-criminal breaches of fiduciary duty which ought to lead to massive fines” or something, you can do so. Or even, “severe regulatory breaches for which there ought to be massive fines”. But we aren’t getting those either.

What we are getting is mostly “we lost lots of your money, you bailed it out and it *might have hurt* one of our year’s bonuses, but after that everything is back to normal”. That isn’t systemic accountability on any level whatsoever.

(Which is not to deny that some lower to mid level bankers lost their jobs. But for the most part, in those banks which the government saved and or bailed out, there has been very little systemic accountability.)

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Lee Hartmann 09.28.11 at 12:58 pm

D^2 seems to be focused on the European/British issues – which I don’t know that much about – but it is clear that in the US, real fraud did occur, as many people in the above thread have pointed out, at levels far beyond what occurred during the 80’s S&L crisis. We should not prosecute them because… why? Bill Black, who was a regulator during the 80s, and was involved in developing those prosecutions, has much to say in this subject – google him. I don’t see why the prosecutions of those making ninja loans, misrepresenting them, packaging crap into AAA and thus deceiving investors, Goldman Sachs simultaneously pushing these packages and betting against them, isn’t warranted, and it isn’t obvious to me why this didn’t contribute to the real estate boom.

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gastro george 09.28.11 at 2:47 pm

D^2 seems to be saying that “this is a complex area”, “it’s impossible to regulate this area”, “people mainly behaved honourably” and “if remuneration is a problem then tax them”.

One aspect missed here is that remuneration on the scale that it is would be impossible if the industry was not so profitable. But that begs a few questions.

Firstly, what do those profits reward? Do they contribute to the economy or general well-being? Many would say not.

Secondly, who is paying those profits? Because somebody is.

Thirdly, why are the profits so high? Not much of a free market, I would guess.

Fourthly, are the profits necessary? A partial re-phrasing of (1). Much of this industry didn’t exist in the same form 30 years ago. Was the economy 30 years ago worse off without it? Are we better off with it?

It’s certainly destructive of more productive forms of employment, if only because it sucks in the intelligent who can see an easier route to wealth by manipulating money rather than making or doing real things. It’s those brains that create the esoteric devices that we see today.

Which returns me to the cliche about the modern food industry. “Don’t eat it unless you grandmother would recognise it as food.” If financial devices (or their consequences) are too esoteric to be understood even by the intelligent, then they shouldn’t be a major component of that industry.

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Andrew F. 10.01.11 at 11:58 am

Just to shed additional light:

A list of SEC enforcement actions related to the financial crisis: SEC

That does not include, of course, DOJ criminal prosecutions or lawsuits brought by other government agencies.

My concern, which is growing, is almost antipodal to those above. Not having fully grasped the complexity of the problem, or the costs of regulation during a time of precariously thin growth, I fear we may have rushed to impose restrictions that are onerous in their weight, uncertain in their reach, and net harmful in their effect.

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