Saturday, March 9, 2013

Bankers Above the Law. . .There Will be Hell to Pay

Earlier this week, Attorney General Holder testified to Congress that:
"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large."
Not only is this testimony flat wrong, I argue that Holder must know that it is at best deeply misleading to Congress and the American people. Here is why:

1) If the DOJ were indicting individual bankers for fraud, then this explanation might explain why banks themselves are never indicted. It does not explain at all the absence of indictments against bankers. In fact, we know that high-level bankers can be incarcerated with zero impact on the economy. This is proven by the case of Raj Gupta, the Goldman board member indicted for insider trading. So, Attorney General Holder's explanation of the lack of criminal prosecution at big banks explains nothing about why no individual or senior manager of any Wall Street bank has been indicted for any crime at all related to the subprime debacle. In short, in announcing a new DOJ policy of "too-big-to-jail," Holder completely failed to justify its most important element--immunity for individual bankers for financial crime.

2) Giving TBTF banks even more in government indulgences is not going to help the economy it is going to drag the economy to the gates of hell. As Bloomberg recently reported the megabanks make little or no money; instead, all of their profits are attributable to the implicit subsidy provided by the perception of government backing which lowers their cost of funds by .80 percentage points. So instead of giving the banks the ability to skirt financial fraud laws, we should be breaking them up, like we did under the New Deal. Perhaps the one silver lining to Holder's comment is that "too-big-to-jail" creates one more reason to break up the megabanks ASAP.

3) Holder is clearly allowing political connections to play a role in prosecutorial discretion and this comment proves it. We know that criminality occurred at MF Global. Yet, no prosecutions occurred. They failed, and no economic dislocation ensued. So clearly no TBTF issue is at play with MF Global. The only issue at play with MF Global was the patent political power of major Obama fundraiser and former Senator and former Governor Jon Corzine. So how does Holder explain MF Global?

4) A key point of my recent book, Lawless Capitalism, is that "investment and financial markets can only be built upon trust." How can any investor trust a financial system dominated by megabanks that are above the law? Capitalism requires trust and trust can only be inspired by a rational rule of law applicable to all. Exemptions for the most economically powerful are likely to be the most economically damaging as they control the most concentrated resources. In other words, giving legal indulgences to those with trillions under their control means that trillions will be deployed with no care towards illegality. Only profit, no matter how cravenly grabbed, will matter. The American people are already rapidly losing trust in the system. In a recent Northwestern/Univ. of Chicago survey, only 22% of Americans trust the financial system.  Holder's bold power-grab on behalf of the banks is sure to accelerate this unraveling of trust. That means severe economic pain.

5) Another key point of Lawless Capitalism (as well as Daron Acemoglu and James Robinson's instant classic Why Nations Fail) is that laws and regulations must tether elite interests to macroeconomic growth and under conditions of high inequality that challenge intensifies. Holder's statement is simply further proof that elites will eschew the law and seek to operate outside legal constraints once too much economic wealth is concentrated in too few hands. We learned that in the run up to the subprime collapse and Holder seems intent on repeating that painful lesson. This can be termed the injustice of inequality.

Trust and alignment of elite interests are simply two sides of the economic rule of law. A sound economic rule of law must inveigh against elite privilege, mitigate disempowerment and secure rationalized law and regulation. Allowing some to operate above the law is inimical to these goals. Indeed, giving the most powerful in your society a green light for lawlessness tempts the creation of a kleptocracy.

According to Webster's a kleptcoracy is "government by those who seek chiefly status and personal gain at the expense of the governed." In a kleptocracy, the politically connected can pilfer the investments of others with criminal impunity. This past week, the Attorney General of the United States' testimony to Congress signals that those holding the most economic power are indeed above the law--this creates the most perverse incentives.

I graduated law school in 1986. I practiced for 10 years, almost exclusively focused on financial regulation--at the SEC as well as the FDIC. In all that time, I have never heard more nonsense about the law than that spouted by the Attorney General of the United States before the United States Congress earlier this week.

8 comments:

  1. Forget about jailing them...shoot the bastards

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  2. "Hope & Change"? More like we hope we have some change left before the Obama Kleptocracy robs us all blind. These guys make the Bush crew look like mere pikers. Witness Jon "the Don" Conzine, as corrupt a mother-****er as one could ever look for, still walking the satreets after 'vaporizing' $1.6Trillion. And he has yet to be questioned or charged. They will let the time run out on his game just like all the other banksters out there. Steal from a 7-11, do hard time, rob the nation and party with the President.

    We are a 'banana republic' in all but the crop of bananas...

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  3. Did we really have a choice in Romney? Would the bankers risk it on voters? Or were they hedged regardless of the election outcome?

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    1. It seems as though the banks are always going to be safe. Its actually genius when you consider that most government relations offices are comprised of former members of the state and federal legislatures. So, in reality...it all comes down to who has the stronger relationships.

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  4. The real issue here from an "in the trenches" standpoint is that the general public does not understand the intricacies of what is actually happening. There is so much political smog clouding the actual issues- the metrics, the data, and the policies- that we are reduced to party line rhetoric that accomplishes nothing but swaying voters back and forth between candidates that neither serve their interests, but do not necessarily themselves understand what is going on.

    It is enough to make one either enraged or apathetic to what is going on, because the common man, the student, and the small business owner are now helpless in front of the mac truck barreling down on them that is the current economic political system.

    Lets look at Detroit. Michigan instituted the "Emergency Manager" system where the democratically elected local government could be replaced by an appointed manager if they were drastically failing at their jobs. I wont even get into the politics there, but recently, the emergency manager that was put into place to "fix" Detroit was an individual who had tax liens on his personal properties in other states... and he wrote it off as a mistake by his accountant.

    The point is there is a disparity of identity and communication between the representatives and there constituents, and this is indicative of the larger problem, which is the disparity of not just wealth, but perspective, lifestyle, and reality. It is a government that does not represent its people, it is a government that represents its party, and.... short story long, the party is no longer the American people, the party is/are, the corporations that prop up the politicians.

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  5. It seems as though the banks are always going to be safe. Its actually genius when you consider that most government relations offices are comprised of former members of the state and federal legislatures. So, in reality...it all comes down to who has the stronger relationships.

    ReplyDelete
  6. Its actually genius when you consider that most government relations offices are comprised of former members of the state and federal legislatures. So, in reality...it all comes down to who has the stronger relationships.

    ReplyDelete
  7. The great flaw in their plan is that we outnumber them by the millions. Change will come from us, not them.
    How do we mobalise the masses and get organised?

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