Monday, December 31, 2012

2012 and the Scope of the New Lawless Capitalism

JONNY GLUM LATELY: Jon Corzine, in the Hamptons this week.
On August 15, 2012, the New York Times reported that the US Department of Justice would not pursue criminal charges against Jon Corzine (right), or anyone else, in connection with the failure of MF Global. More than four months later, it appears the New York Times got that one right. The media silence on the case has been deafening. In fact, numerous Google searches turn up only the New York Times story on the MF Global criminal inquiry. The one exception is a Reuters report confirming the Times story on September 12, 2012. dre cummings blogged on MF Global's demise and the over $1 billion missing from customer accounts shortly after it declared bankruptcy.

It is possible that, as the Obama Administration has claimed repeatedly with respect to financial crimes, that while "much of the conduct that led to the financial crisis was unethical and irresponsible. . . .[W]e also have discovered that some of this behavior, while morally reprehensible, may not necessarily have been criminal." But that seems exceedingly unlikely.

First, the legal system ought to condemn morally reprehensible behavior that is very costly to society as the putative criminal behavior in the financial sector certainly was. Indeed, if such costly and anti-social misconduct is not criminal then the legal system is deficient and legislation must be introduced to promptly address these deficiencies. The Obama Administration has not expanded white collar crimes. I note that I proposed new criminal provisions to stem the too big to fail problem (criminal penalties for causing losses to a TBTF bank through recklessness) in 2009. Managers would likely avoid TBTF in the first instance rather than face such criminal sanctions. This proposal never attracted Obama Administration support. 

Second, bank fraud, wire fraud, mail fraud, and securities and commodities fraud are all federal crimes. MF Global never disclosed in statements mailed to customers (including banks) that they were dipping into customer funds in violation of exchange and CFTC rules. These customers no doubt lost massive amounts of money as even today payments on customer segregated funds total only 26 cents on the dollar. Shareholders also did not receive disclosure of this shoddy, illegal and fraudulent business practice. Consequently, it is certain that a massive fraud was committed. Further, we know who directed the fraud--Assistant Treasurer Edith O'Brien sent an email stating that Jon Corzine (or more precisely "JC") directed that customer funds be transferred to cover losses. The assistant treasurer invoked the 5th Amendment before congress in order to avoid incriminating herself.

So, the Obama Administration's claim that the conduct here "is not necessarily criminal" can only be termed utter hogwash with less than a 5 percent likelihood. MF Global definitely broke federal law. The only question is who directed the criminal conduct. Immunizing Edith O'Brien is the logical next step--if the government had any inclination to learn the truth and pursue criminal charges.

That brings us to the HSBC fiasco, which I blogged about a little more than two weeks ago. Again, here there was no doubt of pervasive and costly illegality. The bank admitted to money laundering for drug cartels and trading with the enemy--including Iran. Given our nation's eagerness to incarcerate young people of color pursuant to the the so-called War on Drugs, certainly banks that conspired with drug cartels would face harsh punishment for money laundering the proceeds of drug transactions, right? Wrong! HSBC and all of its agents face zero criminal sanction and only HSBC shareholders paid any fine. Those involved in petty drug transactions, even tangentially, on the other hand, get ridiculously harsh sentences.

Why did DOJ decide to let HSBC go completely unaccountable for massive criminality? Well, DOJ claims that punishing criminality in the financial sector (at least within the megabanks) may disrupt financial markets or cause importnt firms to fail. As I argued two weeks ago, this is absurd. The best means to destroy big finance is to telegraph to investors that financiers are not accountable for criminality. Why would anyone invest in a massive racketeering scheme?

So, the government has yet to even proffer a colorable claim why it does not pursue criminal charges against criminal bankers.

But, aside from the patent nonsense that DOJ now peddles to justify its abuse of prosecutorial discretion, is MF Global. MF Global was the largest bankruptcy since Lehman. Yet, the failure of MF Global had minimal impact on the stability of the financial system. It failed, and MF Global declared bankruptcy on October 31, 2011, but still the DOJ brought no criminal prosecutions against the firm or any individual.

Basically, the DOJ jumps from excuse to excuse for why criminal charges are not pursued in the financial sector. Sometimes they argue no crimes were committed--even when criminality is manifest. Other times they try to use the prospect of systemic risk to justify non-prosecution--even though going after individuals actually reduces systemic risk by bolstering confidence. The only thesis that makes sense is this: rich and powerful senior bankers now hold immunity for white collar crime. There is no policy at work, just pure political power.

Whether future jobs, lobbyists, campaign contributions or board seats are used, Wall Street elites simply hold too much sway in Washington to go to jail. Jon Corzine epitomizes this. He was one of the Obama campaign's top fundraisers. He raised over $500,000, although the campaign did return Corzine's direct contributions of $70,000. According to Bloomberg and the Government Accountability Institute, Attorney General Eric Holder's former law firm, Covington & Burling, represented MF Global (as well as virtually all of the megabanks). As of the date of bankruptcy, MF Global owed Covington over $114,000. (p. 26, para. 23).

This must qualify as the most under reported story of 2012. A new lawlessness grips the apex of the American economy and its scope remains highly obscure. The new lawlessness can only be discerned through leaks to the NY Times, like this and this. Between MF Global and HSBC there is is no longer any doubt that rich and powerful financiers enjoy criminal immunity from white collar crimes.

Compare this American reality with the Icelandic legal system's response to the financial crisis. Iceland just jailed a bank CEO and CFO for their role in the meltdown. As I highlight in Lawless Capitalism the rule of law in the US is collapsing.

In recent weeks the situation has gone from bad to worse.



  2. We have now reached the point at which the DOJ simply cannot afford to prosecute or even to seriously investigate the financial crimes of the large banking institutions because in doing so, any investigation would reveal the corruption and participation of the DOJ as well as the legislative and judicial branch of government. An example of this was given in the pathetic investigation into Holder's "Fast and Furious" gunrunning operation. As soon as it became evident that the ATF was selling guns to the cartels, the investigation was shut down. It is the banks that control the government, not the other way around. This marks the beginning of the end for the travesty that the American government has become. When the thieves begin to turn upon themselves -- when even the flimsiest scrap of pretense is cast aside, a denouement is imminent.

  3. How do we become guilty of spiritual lawlessness? How does this lawlessness affect the eternal destiny of our souls, or does it?