Banks and the bezzle

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)

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

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.

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.

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.

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.

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.

“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

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.

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.

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?

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?

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.

#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.

“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.

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.

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.

#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).

…failed to acclimate to broader cultural expectations

I’m stealing this!

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?

@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?”

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.

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

Sorry, the LRB link I had is now dead.

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.

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.

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!”

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.

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

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.

#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.

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…

“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.

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.

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.

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

@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.

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?

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.

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.

… 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.

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.

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.

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.

“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.

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!”

“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.

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

@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.

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?

“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.

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.

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

@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.

@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.

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.

[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.

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.

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.

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)?

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?

“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.

“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.

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?

““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.

“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”?

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.

I wonder if there were any arrests over this.

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.

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?

#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: “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.

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.

“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.

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

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.

_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.

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.

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…

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.

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.

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.

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.

@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?

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.

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.

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.

“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.)

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.

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?

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!

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.

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.

“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.)

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.