2012 and the Scope of the New Lawless Capitalism

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.

More Cowbell . . .

Catching up on newsworthy events from a very busy 2012.  Below are links to stories that caught our attention this past year, but never quite made it onto our blog roll.  Happy Holidays and memorable reflections on a simultaneously exciting and challenging 2012.

From March 2012:

Tech Titans Fund Undocumented Students
The Wall Street Journal reported that Silicon Valley heavy-hitters, tired of waiting on Congress to pass the DREAM Act, were acting to assist undocumented graduates to stay and work in the United States.

Homeowners Battle Banks to Stop Foreclosures . . .  and Win
MSNBC reported that homeowners were taking their banks to court when they were faced with foreclosure and a bank that was unwilling to negotiate or work with the homeowner.  In many of these cases, because the banks could not prove homeownership or its practice of "robo-signing," the foreclosures were halted by the courts.

Former Coca-Cola Bottling Executive Charged with Insider Trading
The Washington Post reported that Steve Harold, a former Vice-President of Strategy and Innovation at Coca-Cola had been charged by the SEC with insider trading.  During a 2010 acquisition of a bottling company, Harold purchased 15,000 shares of Coca-Cola Enterprises (through his wife's brokerage account), the day before the acquisition was announced.  The next day, Coke's stock soared and Harold reaped a profit of $87,000 on an investment of about $290,000.

Bank Officials Cited in Churn of Foreclosures
The New York Times reported "Managers at major banks ignored widespread errors in the foreclosure process, in some cases instructing employees to adopt make-believe titles and speed documents through the system despite internal objections, according to a wide-ranging review by federal investigators."

From April 2012:

Lobbying Disclosures Shake Up Proxy Season
Business 2 Community reported that "[a]ctivist shareholders are aggressively pushing to get broan new lobbying disclosure initiatives on proxy ballots this year, in an effort to convince a number of corporations to voluntarily disclose campaign contributions to investors. . . .  Advocates of the new proposals are billing them as ‘a natural extension’ of shareholder campaigns calling for greater political spending transparency, which have led nearly 100 companies over the last seven years to voluntarily increase information available on company websites relating to campaign contributions."

Insider Trading Riddle:  Why Do The Rich Risk It?
Three high-profile cases beg the question, why do the wealthy risk insider trading?  In the past several years, three millionaires/billionaires have been accused/convicted of insider trading, all at profits that netted very little in comparison to their net worth, including Mark Cuban, Martha Stewart and Raj Rajaratnam.  Stewart saved $45,000 in losses based on her insider trading; Cuban avoided losing $750,000 of his $2.3 billion net worth by allegedly engaging in insider trading; and Rajaratnam was convicted of insider trades that took in $60 million, as his company managed $7 billion.  Why?

When Shareholders Make Their Voices Heard
From Gretchen Morgenson in the New York Times, the Dodd-Frank "say on pay" provisions are actually making an impact on executive compensation.  Though not binding, these votes, particularly when negative, are inspiring corporate executives to change their compensation structures and in some cases, take pay cuts.  "[An] example of a shareholder-induced change came at Johnson & Johnson. In 2011, its pay practices got a thumbs-down from a quarter of the shares voted at its annual meeting. This year, J.& J. revamped its long-term incentive program for executives. Out went longstanding cash payments for long-term incentives. Now, the company awards stock units that vest only over three years and after meeting three goals aligned with shareholder returns. The company’s proxy statement said the change came 'as a result of what we learned in 2011.'"

Why People Hate the Banks
Joe Nocera, in a New York Times op-ed, describes banking practices that justify the public's genuine distrust of banks and in some cases abhorrence of them.  Nocera writes:  "As it turns out, this same kind of awful behavior [subprime mortgage abuse] has been taking place inside the credit card collections departments of the big banks. Records are a mess. Robo-signing has been commonplace. Collections practices hurt primarily the poor and the unsophisticated, just like foreclosure practices. (I sometimes wonder if banks would make any profits at all if they couldn’t take advantage of the poor and unsophisticated.)."

From October 2012:

Mississippi Town Sued Over "School-to-Prison-Pipeline"
The Corporate Justice Blog continues to monitor the evils of the "prison-industrial-complex" and school-to-prison seems another byproduct of the broken prison regime in the United States.  The Department of Justice is suing a town and school district in Meridian, Mississippi for operating a system in which students are denied basic constitutional rights, sent to court and incarcerated for minor school infractions.  Further, ColorLines reports that the school-to-prison-pipeline has just received its first-ever airing before the United States Senate.

From December 2012:

That Terrible Trillion
Economist Paul Krugman talks about the federal deficit and describes, as Keynes would have, that an economic depression is not the appropriate time to cut government spending.

The GOP's Electoral College Scheme
As reported in The Nation, "Republicans alarmed at the apparent challenges they face in winning the White House are preparing an all-out assault on the Electoral College system in critical states, an initiative that would significantly ease the party's path to the Oval Office."

Elizabeth Warren and Timothy Geithner

Timothy Geithner with President Obama aboard Air Force One

Very important news coming out of Washington D.C. in recent days.  First, with the imminent departure of Timothy Geithner as head of the U.S. Treasury department in 2013, a unique opportunity for President Barack Obama has presented, where he has the chance to nominate, for the first time in a long time, a Treasury Secretary that is NOT a Wall Street puppet. Second, with the election of consumer protection expert Elizabeth Warren to the U.S. Senate (D., MA), the United States Senate has a unique opportunity to genuinely  utlize an individual with expertise when it comes to consumer protection and capital markets regulation.  Senator Warren has just been named as a member of the Senate Banking Committee.

As per Geithner's resignation, Professor Tim Canova has just published a compelling article with American Prospect entitled "Not Another Wall Street Puppet," where he calls upon President Obama to abandon the strategy of Treasury leadership direct from Wall Street, and instead adopt a strategy of nominating a Treasury Secretary that places the needs of Main Street, and middle class Americans, ahead of the needs and desires of Wall Street Banks.  According to Canova:  "In his first post-election press conference, President Barack Obama said voters had awarded him only one mandate: to help middle class families and those striving to reach the middle class. In line with fulfilling this charge, the administration’s top priority would be creating manufacturing jobs and rebuilding the nation’s schools and infrastructure. An early bellwether of the president’s commitment to this will be his selection of a replacement for Timothy Geithner, who is expected to step down as Treasury secretary early next year. The nomination presents an opportunity for a White House course correction, finally putting Main Street ahead of Wall Street. . . .

Most of the names mentioned as potential new Treasury secretaries are people with Wall Street backgrounds like BlackRock CEO Larry Fink, or deficit hawks from within the administration such as White House Budget Director Jacob Lew. After three decades of a Wall Street Treasury, that’s the last thing the country needs or voters want. What’s now needed is a secretary who can answer Obama’s convention-speech call for “bold, persistent experimentation”—language recycled from President Franklin Delano Roosevelt, whose administration was genuinely bold, experimental, and largely successful in confronting another protracted economic crisis."

Canova not only points out the failed strategy of Wall Street insiders as Treasury policymaker, but he suggests the names of individuals that would very likely fight first for American citizens and a robust middle class, rather than fighting first for the survival and profitability of Wall Street banks.  Canova suggests the following:  "First, Obama should consider nominating the first female Treasury secretary. Brooksley Born, chairperson of the Commodity Futures Trading Commission in the ’90s, sounded the alarm about the growing risks in the unregulated financial-derivatives market. Unfortunately, her warnings were beaten down by Alan Greenspan, Larry Summers, and Robert Rubin—Geithner’s old mentors. Sheila Bair, a Republican who, unlike the present Federal Reserve Chairman Ben Bernanke, would have swept out the failing bankers and broken up some big banks when Wall Street was on government life support. Sarah Bloom Raskin, a very effective former Maryland state banking commissioner and now the most progressive governor on the Federal Reserve Board, well understands the importance of repairing the debt overhang in the housing and consumer sectors by helping the middle class."

As per Elizabeth Warren, despite intense pressure from Wall Street lobbyists, Senate Majority Leader Harry Reid has placed Senator Warren on the Senate Banking Committee.  From the L.A. Times:  "Talk about karma.  After lobbying ferociously to prevent Elizabeth Warren from running the new Consumer Financial Protection Bureau, the banking industry now must contend with her sitting on the Senate Banking Committee.  Rumors have circulated for weeks the Massachusetts senator-elect would be tapped for the gig overseeing the industry she so completely cheesed off with accusations of fraud and unfair play."

Wall Street bankers and lobbyists spent millions to keep Senator Warren from joining the U.S. Senate, backing her opponent, incumbent Scott Brown, more than 9 to 1 in campaign contributions.  "Warren has been a harsh critic of Wall Street practices, and the securities and investment industry spent $3 million in an unsuccessful effort to boost her Republican opponent Scott Brown in the Massachusetts Senate race, according to the Center for Responsive Politics.  The financial/ insurance/ real estate sector spent another $6 million to boost Brown. Those sectors combined spent less than $1 million on Warren's behalf."

LAWLESS CAPITALISM and HSBC

On Tuesday, the US Department of Justice announced the civil settlement of a major pattern of criminal misconduct by HSBC Holdings plc and HSBC Bank USA for about $1.9 billion in fines and forfeitures. No criminal action will occur; instead under a deferred prosecution agreement HSBC promises to stop violating the law and allow compliance monitoring for 5 years.

"A four-count felony criminal information was filed today in federal court in the Eastern District of New York charging HSBC with willfully failing to maintain an effective anti-money laundering (AML) program [and] willfully failing to conduct due diligence on its foreign correspondent affiliates . . . . HSBC has waived federal indictment, agreed to the filing of the information, and has accepted responsibility for its criminal conduct and that of its employees." 

HSBC engaged in horrendously criminal conduct: "HSBC Bank USA violated the [Bank Secrecy Act] by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders.  The HSBC Group violated the [International Emergency Economic Powers Act ] and the [Trading with the Enemy Act] by illegally conducting transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma – all countries that were subject to sanctions enforced by the Office of Foreign Assets Control (OFAC) at the time of the transactions."

For example, HSBC processed "over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico during this period, when HSBC Mexico’s own lax AML controls caused it to be the preferred financial institution for drug cartels and money launderers."

"A significant portion of the laundered drug trafficking proceeds were involved in the Black Market Peso Exchange (BMPE), a complex money laundering system that is designed to move the proceeds from the sale of illegal drugs in the United States to drug cartels outside of the United States, often in Colombia."

According to DOJ: "In addition to forfeiting $1.256 billion as part of its deferred prosecution agreement (DPA) with the Department of Justice, HSBC has also agreed to pay $665 million in civil penalties – $500 million to the Office of the Comptroller of the Currency (OCC) and $165 million to the Federal Reserve – for its AML program violations."

As Professor Ellen Podgor argues, deferred prosecution agreements have their place, and they certainly are a tool for positively influencing corporate behavior. But, I fundamentally agree with Bill Black that the failure to indict the individuals who committed these serious felonies in the financial sector is ill-founded: "It's mind-boggling how they think you can have a financial system and allow this kind of impunity." HSBC "put the world at enormous risk." Corporations act only through agents; necessarily the charges against HSBC mean that numerous individuals participated in (and conspired to commit) felonies.

The failure to indict any individual in the face of HSBC's galactic criminality corrodes the rule of law throughout society and creates perverse incentives at the apex of our economy. After all when a corporation pays fines, it is innocent shareholders who pay. If senior officers and directors know they can fatten their compensation by generating illusory profits through criminal conduct at the expense of shareholders and the economy generally then the very viability of capitalism itself is at risk.

In Lawless Capitalism I argue that we have allowed those controlling the most wealth--like the megabanks--to rise above the law and escape traditional norms of criminal and civil accountability. The power of corporate and financial elites to subvert law and regulation drove the entire financial crisis of 2007-2009.

The HSBC catastrophe proves once again that the US (and capitalism generally) desperately requires a sturdier economic rule of law. While I articulate a number of mechanisms in Lawless Capitalism for imposing a real economic rule of law in the US, it must start with holding all economic actors to the same criminal standards (based upon a reasonable assessment of social costs) regardless of wealth or employment with a megabank.

There is no sound reason for failing to pursue criminals within the financial sector. The DOJ's decision to pursue HSBC through fines alone and allow individual crimes to go unpunished is certain to spawn more lawlessness. According to the New York Times the reason authorities brought no criminal charges revolved around concerns about the stability of the global financial system; yet, nothing can undermine confidence in the financial system and destroy capitalism with more speed and certainty than an official green light for even heinous financial crimes. The rule of law is dying in modern America as our corrupt governing elite arrogate more and more legal indulgences and prerogatives not available to all. The new potentates are now officially immune from white collar crime.

ADDENDUM:

NY Times editorial 12/12/12: "IT IS A DARK DAY FOR THE RULE OF LAW."

Krugman on the Fiscal Cliff

Nobel Laureate Paul Krugman

With the "fiscal cliff" frenzy building, Nobel Laureate Paul Krugman weighs in describing how those that gravely warn about the deficit are now trying to have it both ways.  In the New York Times, Krugman takes to task those that concern themselves more with the deficit than they do with unemployment.   

Per Krugman:  "Yet there is a whole industry built around the promotion of deficit panic. Lavishly funded corporate groups keep hyping the danger of government debt and the urgency of deficit reduction now now now — except that these same groups are suddenly warning against too much deficit reduction. No wonder the public is confused.  Meanwhile, there is almost no organized pressure to deal with the terrible thing that is actually happening right now — namely, mass unemployment. Yes, we’ve made progress over the past year. But long-term unemployment remains at levels not seen since the Great Depression: as of October, 4.9 million Americans had been unemployed for more than six months, and 3.6 million had been out of work for more than a year."

Ultimately, the fiscal cliff debate, as did most of the Presidential election rhetoric, boils down to different economic approaches to government spending.  The campaign debate focused on trickle down economics versus trickle down government, to paraphrase the two candidates for President.  Krugman describes a Keynesian approach to difficult unemployment and deficit spending panic:

Again, Krugman argues:  "So what can be done? The panic over the fiscal cliff has been revelatory. It shows that even the deficit scolds are closet Keynesians. That is, they believe that right now spending cuts and tax hikes would destroy jobs; it’s impossible to make that claim while denying that temporary spending increases and tax cuts would create jobs. Yes, our still-depressed economy needs more fiscal stimulus. . . . So why aren’t we helping the unemployed? It’s not because we can’t afford it. Given those ultralow borrowing costs, plus the damage unemployment is doing to our economy and hence to the tax base, you can make a pretty good case that spending more to create jobs now would actually improve our long-run fiscal position.

Nor, I think, is it really ideology. Even Republicans, when opposing cuts in defense spending, immediately start talking about how such cuts would destroy jobs — and I’m sorry, but weaponized Keynesianism, the assertion that government spending creates jobs, but only if it goes to the military, doesn’t make sense.  No, in the end it’s hard to avoid concluding that it’s about class. Influential people in Washington aren’t worried about losing their jobs; by and large they don’t even know anyone who’s unemployed. The plight of the unemployed simply doesn’t loom large in their minds — and, of course, the unemployed don’t hire lobbyists or make big campaign contributions.  

So the unemployment crisis goes on and on, even though we have both the knowledge and the means to solve it. It’s a vast tragedy — and it’s also an outrage." 

Paul Krugman sees the fiscal cliff as problematic, but not for the reasons that so many pundits and politicians do.

[Photo of Paul Krugman courtesy of Wikimedia Commons and Prolineserver]