Bankster Fraud Has Driven 100 Million Into Poverty, Killing Many

Bankster Fraud Has Driven 100 Million Into Poverty, Killing Many

Washington’s Blog
Aug 12, 2012

Fraud caused the Great Depression and the current financial crisis, and the economy will neverrecover until fraud is prosecuted.

Fraud is the business model adopted by the giant banks. See this.

The Obama administration has made it official policy not to prosecute fraud.  Indeed, the “watchdogs” in D.C. are so corrupt that they are as easily bribed as a policeman in a third world banana republic.

The mouthpieces in Wall Street and D.C.  pretend that financial  fraud (like Libor) is a “victimless crime“.

But the World Bank notes that the financial crisis  – you know, the one caused by financial fraud – has driven between 64 and  100 million people into destitution.

Some estimate the figure to be much higher. For example, one 2009 study estimated that 140 million people would be driven into poverty in Asia alone.

AP reported in 2009:

The global financial crisis has pushed the ranks of the hungry to a record 1 billion people … United Nations food officials said Friday in Rome.

This is not just a matter of having less money for entertainment or luxury goods.  Increased poverty leads to an earlier death.

As the Los Angeles times notes:

Poverty appears to trump smoking, obesity and education as a health burden, potentially causing a loss of 8.2 years of perfect health.

This is not an abstract concept. A lot of kids will die due to Wall Street fraud:

The global financial crisis sweeping through Wall Street and the European banking sector will touch the lives of the world’s most vulnerable, pushing millions into deeper poverty and leading to the deaths of thousands of children, according to a new United Nations study.

***

The report highlighted the prospect of an increase of between 200,000 and 400,000 in infant mortality and that child malnutrition, already rising, will be one of the main drivers of higher child death rates.

While developing countries will be hardest hit, increased poverty and hunger are hitting the U.S., Britainand other first world countries are as well. The inability of the newly-poor to pay to heat their homes also kills.

Paul Moore – former Head of Risk at HBOS – says that the financial crisis has resulted in the greatest humanitarian crisis since WWII.

Moore says that we are witnessing a “financial holocaust” brought on by the banksters … with huge numbers of potential deaths in the works unless we fundamentally change the system.

bann01

Top Economists: Trust is Necessary for a Stable Economy … But Trust Won’t Be Restored Until We Prosecute Wall Street Fraud

Posted on March 8, 2011 by WashingtonsBlog

Most policy makers still don’t understand the urgent need to restore trust in our financial system, or the need to prosecute Wall Street executives for fraud and other criminal wrongdoing.

But top economists have been saying for well over a decade that trust is necessary for a stable economy, and that prosecuting the criminals Is necessary to restore trust.

Trust is Necessary for a Stable Economy

In his influential 1993 book Making Democracy Work, Robert Putnam showed how civic attitudes and trust could account for differences in the economic and government performance between northern and southern Italy.

Political economist Francis Fukiyama wrote a book called Trust in 1995, arguing that the most pervasive cultural characteristic influencing a nation’s prosperity and ability to compete is the level of trust or cooperative behavior based upon shared norms. He stated that the United States, like Japan and Germany, has been a high-trust society historically but that this status has eroded in recent years.

In 1998, Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University, Professor of Neurology at Loma Linda University Medical Center, and a senior researcher at UCLA) and Stephen Knack (a Lead Economist in the World Bank’s Research Department and Public Sector Governance Department) wrotea paper called Trust and Growth, arguing:

Adam Smith … observed notable differences across nations in the ‘probity’ and ‘punctuality’ of their populations. For example, the Dutch ‘are the most faithful to their word.’John Stuart Mill wrote: ‘There are countries in Europe . . . where the most serious impediment to conducting business concerns on a large scale, is the rarity of persons who are supposed fit to be trusted with the receipt and expenditure of large sums of money’ (Mill, 1848, p. 132).

Enormous differences across countries in the propensity to trust others survive
today.

***

Trust is higher in ‘fair’ societies.

***

High trust societies produce more output than low trust societies. A fortiori, a sufficient amount of trust may be crucial to successful development. Douglass North (1990, p. 54) writes,

The inability of societies to develop effective, lowcost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World.

***

If trust is too low in a society, savings will be insufficient to sustain
positive output growth. Such a poverty trap is more likely when institutions –
both formal and informal – which punish cheaters are weak.

Heap, Tan and Zizzo and others have come to similar conclusions.

In 2001, Zak and Knack showed that “strengthening the rule of law, reducing inequality, and by facilitating interpersonal understanding” all increase trust. They conclude:

Our analysis shows that trust can be raised directly by increasing communication and education, and indirectly by strengthening formal institutions that enforce contracts and by reducing income inequality. Among the policies that impact these factors, only education, … and freedom satisfy the efficiency criterion which compares the cost of policies with the benefits citizens receive in terms of higher living standards. Further, our analysis suggests that good policy initiates a virtuous circle: policies that raise trust efficiently, improve living standards, raise civil liberties, enhance institutions, and reduce corruption, further raising trust. Trust, democracy, and the rule of law are thus the foundation of abiding prosperity.

A 2005 letter in premier scientific journal Nature reviewed the research on trust and economics:

Trust … plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country’s institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.

Forbes wrote an article in 2006 entitled “The Economics of Trust”. The article summarizes the importance of trust in creating a healthy economy:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust–now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

“If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country’s income.

***

Above all, trust enables people to do business with each other. Doing business is what creates wealth.

***

Economists distinguish between the personal, informal trust that comes from being friendly with your neighbors and the impersonal, institutionalized trust that lets you give your credit card number out over the Internet.

In 2007, Yann Algan (Professor of Economics at Paris School of Economics and University Paris East) and Pierre Cahuc (Professor of Economics at the Ecole Polytechnique (Paris)) reported:

We find a significant impact of trust on income per capita for 30 countries over the period 1949-2003.

Similarly, market psychologists Richard L. Peterson M.D. and Frank Murtha, PhD noted in 2008

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won’t move.

Trust is gone: there is no longer trust between counterparties in the financial system. Furthermore, confidence is at a low. Investors have lost their confidence in the ability of shares to provide decent returns (since they haven’t).

In 2009, Paola Sapienza (associate professor of finance and the Zell Center Faculty Fellow at Northwestern University) and Luigi Zingales (Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business) pointed out:

The drop in trust, we believe, is a major factor behind the deteriorating economic conditions. To demonstrate its importance, we launched the Chicago Booth/Kellogg School Financial Trust Index. Our first set of data—based on interviews conducted at the end of December 2008—shows that between September and December, 52 percent of Americans lost trust in the banks. Similarly, 65 percent lost trust in the stock market. A BBB/Gallup poll that surveyed a similar sample of Americans last April confirms this dramatic drop. At that time, 42 percent of Americans trusted financial institutions, versus 34 percent in our survey today, while 53 percent said they trusted U.S. companies, versus just 12 percent today.

As trust declines, so does Americans’ willingness to invest their money in the financial system. Our data show that trust in the stock market affects people’s intention to buy stocks, even after accounting for expectations of future stock-market performance. Similarly, a person’s trust in banks predicts the likelihood that he will make a run on his bank in a moment of crisis: 25 percent of those who don’t trust banks withdrew their deposits and stored them as cash last fall, compared with only 3 percent of those who said they still trusted the banks. Thus, trust in financial institutions is a key factor for the smooth functioning of capital markets and, by extension, the economy. Changes in trust matter.

They quote a Nobel laureate economist on the subject:

“Virtually every commercial transaction has within itself an element of trust,” writes economist Kenneth Arrow, a Nobel laureate. When we deposit money in a bank, we trust that it’s safe. When a company orders goods, it trusts its counterpart to deliver them in good faith. Trust facilitates transactions because it saves the costs of monitoring and screening; it is an essential lubricant that greases the wheels of the economic system.

In 2009, Time Magazine pointed out:

Traditionally, gold has been a store of value when citizens do not trust their governmentpolitically or economically.

In other words, the government’s political actions affect investments, such as gold, and thus the broader economy.

In 2010, a distinguished international group of economists (Giancarlo Corsetti, Michael P. Devereux, Luigi Guiso, John Hassler, Gilles Saint-Paul, Hans-Werner Sinn, Jan-Egbert Sturm and Xavier Vives)wrote:

Public distrust of bankers and financial markets has risen dramatically with the financial crisis. This column argues that this loss of trust in the financial system played a critical role in the collapse of economic activity that followed. To undo the damage, financial regulation needs to focus on restoring that trust.

They noted:

Trust is crucial in many transactions and certainly in those involving financial exchanges. The massive drop in trust associated with this crisis will therefore have important implications for the future of financial markets. Data show that in the late 1970s, the percentage of people who reported having full trust in banks, brokers, mutual funds or the stock market was around 40%; it had sunk to around 30% just before the crisis hit, and collapsed to barely 5% afterwards. It is now even lower than the trust people have in other people (randomly selected of course).

Prosecuting the Criminals Is Necessary to Restore Trust

Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.

***

I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That’s the point. There were victims all over the world.

***
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

Robert Shiller said recently that failing to address the legal issues will cause Americans to lose faith in business and the government:

Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

Economists such as William Black and James Galbraith agree. Galbraith says:

There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

Galbraith also says that economists should move into the background, and “criminologists to the forefront”.

Government regulators know this – or at least pay lip service to it – as well. For example, as the Director of the Securities and Exchange Commission’s enforcement division told Congress:

Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public’s fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.

Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. Indeed, William Black notes that we’ve known of this dynamic for “hundreds of years”. And see this, this, this and this.

And when Zak and Knack – quoted above – discuss “enforcing contracts”, “raising civil liberties”, and “reducing corruption”, they are talking about enforcing the rule of law, which means prosecuting violations of the law. Likewise, when they refer to “enhancing institutions”, they mean regulatory and justice systems which enforce contracts and prosecute cheaters.

And when Zak and Knack promote reduction of inequality, that means prosecuting fraud as well. Specifically, as I recently pointed out, prosecuting fraud is the best way to reduce inequality:

Robert Shiller [one of the top housing economists in the United States] said in 2009:

And it’s not like we want to level income. I’m not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.

***

If we stop bailing out the fraudsters and financial gamblers, the big banks would focus more on traditional lending and less on speculative plays which only make the rich richer and the poor poorer, and which guarantee future economic crises (which hurt the poor more than the rich).

***

Moreover, both conservatives and liberals agree that we need to prosecute financial fraud. As I’ve previously noted, fraud disproportionally benefits the big players, makes boom-bust cycles more severe, and otherwise harms the economy – all of which increase inequality and warp the market.

Of course, it’s not just economists saying this.

One of the leading business schools in America – the Wharton School of Business – published an essay by a psychologist on the causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:

According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. “Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG.” The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. “Normal expectations of what is safe and dependable were abruptly shattered,” Sachs noted. “As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred.”

People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.

He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. “She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.

“By no means a sophisticated economist, she knew … that some people had become fantastically wealthy by misusing other people’s money — hers included,” Sachs said. “In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished.”

Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to “hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.” In addition, the public will have to see proof thatgovernment and business leaders can behave responsibly before they will trust them again, he argued.

Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.

As Wall Street insider and New York Times columnist Andrew Ross Sorkin writes:

“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”

***

Fraud at big corporations surely dwarfs by orders of magnitude the shareholders’ losses of $8 billion that Mr. Holder highlighted. If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.

And as a former congressional aide recently said in some of the most colorful language to date:

“You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street,” says a former congressional aide. “That’s all it would take. Just once.”

bann01

Fraud Caused the 1930s Depression and the Current Financial Crisis

Posted on October 30, 2010 by WashingtonsBlog

Robert Shiller – one of the top housing experts in the United States – says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:

Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

The former chief accountant of the S.E.C., Lynn Turner, told the New York Times that fraud helped cause the Great Depression:

The amount of gimmickry and outright fraud dwarfs any period since the early 1970′s, when major accounting scams like Equity Funding surfaced, and the 1920′s, whenrampant fraud helped cause the crash of 1929 and led to the creation of the S.E.C.

Economist Robert Kuttner writes:

In 1932 through 1934 the Senate Banking Committee, led by its Chief Counsel Ferdinand Pecora, ferreted out the deeper fraud and corruption that led to the Crash of 1929 and the Great Depression.

Similarly, Tom Borgers refers to:

The 1930s’ Pecora Commission, which investigated the fraud that led to the Great Depression ….

Professor William K. Black writes:

The original Pecora investigation documented the causes of the economic collapse that led to the Great Depression. It … established that conflicts of interest andfraud were common among elite finance and government officials.

The Pecora investigations provided the factual basis that produced a consensus that the financial system and political allies were corrupt.

Moreover, the Glass Steagall Act was passed because of the fraudulent use of normal bank deposits for speculative invesments. As the Congressional Research Service notes:

In the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….

This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.

***

The government that permits this to happen is complicit in a vast crime.

As the Great Crash, 1929 documents, there were many fraudulent schemes which occurred in the 1920s and which helped cause the Great Depression. Here’s one example of a pyramid scheme in Florida real estate:

An enterprising Bostonian, Mr. Charles Ponzi, developed a subdivision “near Jacksonville.” It was approximately sixty-five miles west of the city. (In other respects Ponzi believed in good, compact neighborhoods ; he sold twenty-three lots to the acre.) In instances where the subdivision was close to town, as in the case of Manhattan Estates, which were “not more than three fourths of a mile from the prosperous and fast-growing city of Nettie,” the city, as was so of Nettie, did not exist. The congestion of traffic into the state became so severe that in the autumn of 1925 the railroads were forced to proclaim an embargo on less essential freight, which included building materials for developing the subdivisions. Values rose wonderfully. Within forty miles of Miami “inside” lots sold at from $8,000 to $20,000; waterfront lots brought from $15,000 to $25,000, and more or less bona fide seashore sites brought $20,000 to $75,000.”

As DoctorHousingBubble notes:

This Mr. Ponzi of course is the man who gave name to the “Ponzi scheme” that many use today. He laid the groundwork for many of the criminals today in the housing industry. Yet during the boom he wasn’t seen as a criminal but a player in the Florida real estate bubble. Here’s a nice picture of the gentleman:

charles ponzi tm Fraud Caused the 1930s Depression and the Current Financial Crisis charles ponzi Fraud Caused the 1930s Depression and the Current Financial Crisis

James Galbraith recently said that “at the root of the crisis we find the largest financial swindle in world history”, where “counterfeit” mortgages were “laundered” by the banks.

As he has repeatedly noted, the economy will not recover until the perpetrators of the frauds which caused our current economic crisis are held accountable, so that trust can be restored. See this, this andthis.

No wonder James Galbraith has said economists should move into the background, and “criminologists to the forefront.”

Note 1: I asked Professor Black to comment on this essay, and he said the following:

The amount of fraud that drove the Wall Street bubble and its collapse and caused the Great Depression is contested [keep reading to see what Black means]. The Pecora investigation found widespread manipulation of earnings, conflicts of interest, and insider abuse by the nation’s most elite financial leaders. John Kenneth Galbraith’s work documented these abuses. Theoclassical economic accounts, however, ignore or excuse these abuses. The Justice Department did not respond effectively to the crimes that helped spark the Great Depression so we have far fewer facts available to us.

The decisive role that “accounting control frauds” played in driving the current crisis is clear. The FBI warned of an “epidemic” of mortgage fraud in 2004 and predicted that it would cause an economic crisis if it were not stopped. The mortgage lending industry’s own experts reported that “liar’s” loans were “an open invitation to fraudsters” and fully warranted their name — “liar’s” loans — because fraud was endemic in such loans. Lenders and their agents led these lies. They led the lies for an excellent reason — the strategy is a “sure thing” (Akerlof & Romer 1993 — Looting: the Economic Underworld of Bankruptcy for Profit). It guarantees record (albeit fictional) profits, which maximize the CEO’s bonuses. The same strategy for maxmizing fictional income maxmizes real losses in the longer term. When many lenders follow the same fraudulent strategy the result is a hyper-inflated bubble followed by a severe crisis.

Control fraud epidemics also produce “echo” epidemics of fraud in other fields. For example, when lenders are control frauds the CEO establishes perverse incentives (“Gresham’s dynamics”) that corrupt other industries and professions.

By rewarding professionals who are willing to inflate asset values, and refusing to hire honest professionals, control frauds cause the unethical to drive the ethical out of the markets. When one combines deregulation, desupervision, and the perverse incentives of modern executive and professional compensation the result is recurrent, intensifying crises.

Note 2: The Austrian economists point out that it is bubbles which cause crashes. I agree. But as Professor Black points out, fraud is one of the main things which causes bubbles.

Note 3: Of course other factors, such as excess leverage and counterproductive actions by the Federal Reserve, also contributed to the 1930s Depression and the current crisis.

bann01

Stunning Crimes of the Big Banks: Worse than Your Wildest Imagination

Posted on August 1, 2012 by WashingtonsBlog

Preface:  Not all banks are criminal enterprises.  The wrongdoing of a particular bank cannot be attributed to other banks without proof.  But – as documented below – many of the biggest banks have engaged in unimaginably bad behavior.

You Won’t Believe What They’ve Done …

Here are just some of the improprieties by big banks:

  • Engaging in mafia-style big-rigging fraud against local governments. See this, this and this
  • Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here,here, here, here, here, here, here and here
  • Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this. This would be like selling your car, and collecting money from 10 different buyers for the same car
  • Committing massive fraud in an $800 trillion dollar market which effects everything from mortgages, student loans, small business loans and city financing
  • Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this
  • Engaging in unlawful “Wash Trades” to manipulate asset prices. See this, this and this
  • Participating in various Ponzi schemes. See this, this and this
  • Bribing and bullying ratings agencies to inflate ratings on their risky investments

The executives of the big banks invariably pretend that the hanky-panky was only committed by a couple of low-level rogue employees. But studies show that most of the fraud is committed by management.

Indeed, one of the world’s top fraud experts – professor of law and economics, and former senior S&L regulator Bill Black – says that most financial fraud is “control fraud”, where the people who own the banks are the ones who implement systemic fraud. See this, this and this.

But at least the big banks do good things for society, like loaning money to Main Street, right?

Actually:

  • The big banks have slashed lending since they were bailed out by taxpayers … while smaller banks have increased lending. See this, this and this

We can almost understand why Thomas Jefferson warned:

And I sincerely believe, with you, that banking establishments are more dangerous than standing armies ….

John Adams said:

Banks have done  more injury to religion, morality, tranquillity, prosperity, and even wealth of the nation than they have done or ever will do good.

And Lord Acton argued:

The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.

bann01

 

Janet Tavakoli

Janet Tavakoli

President, Tavakoli Structured Finance

GET UPDATES FROM JANET TAVAKOLI

Like

311

"Fraud As a Business Model"

Posted: 09/06/11 03:57 PM ET

Bank Of America , Goldman Sachs , Foreclosure Fraud , JPMorgan Chase , Third World America , Bailouts , Federal Housing Finance Agency , Fhfa-Sues-Banks , Business News

There were many factors that contributed to our recent financial bubble: deregulation, cheap money from the Fed, failure to enforce remaining regulations, crony capitalism, hubris, speculation, leverage, and fraud among other problems. While fraud wasn’t the only issue, it was and is a significant contributor to the credit bubble. Restraining fraud is a necessary but not sufficient condition for a sound financial system. Congressional investigations in recent years have put ample evidence of fraud in the public domain.
To illustrate just one type of malicious mischief, Senator Carl Levin (D. Mich.), Chairman of a senate investigative panel, issued a memo stating that Goldman "magnified the impact of toxic mortgages." The Wall Street Journal reviewed data showing that a $38 million subprime-mortgage bond created in June 2006 was referenced in more than 30 debt pool causing around$280 million in losses to investors by 2008. In other words, Goldman kept repackaging, reselling or protecting (buying credit default protection on) losers. It took the wrong kind of nerve for Goldman’s CEO to say he was doing "God’s work."

Arianna Huffington pointed out that the financial system is rigged and that offenders get off lightly:

Until the Securities and Exchange Commission sued Goldman Sachs for fraud in April of 2010, it was easy to forget that we have a regulatory agency designed to protect the public from the pillaging of corporate America. Six months earlier, the SEC has arranged a settlement with JPMorgan that showed how rigged the system is. The banking giant agreed to pay a $25 million penalty and cancel $647 million in fees owed by Alabama’s Jefferson County as the result of a complicated derivatives deal that blew up in the county’s face. As part of the settlement, JPMorgan neither admitted nor denied wrongdoing–despite overwhelming evidence that it had engaged in plenty of wrongdoing.

Third World America P. 153

On Friday, September 2, 2011, The U.S. Federal Housing Finance Agency (FHFA), the regulator for taxpayer-subsidized mortgage lending guarantors Fannie Mae and Freddie Mac, filed lawsuits against 17 of the world’s largest banks over suspect mortgage loans which helped exacerbate the U.S. housing crisis. Both Fannie Mae and Freddie Mac were placed in conservatorship in September 2008 after they nearly collapsed. The FHFA claims banks misrepresented the value of the mortgage loans and mortgage securities they underwrote, arranged, and sold.

So far the banks being sued include Bank of America Corp along with its Countrywide Financial Corporation and Merrill Lynch & Company divisions, Goldman Sachs Group Inc., JP Morgan & Chase & Co, Citigroup Inc., Deutsche Bank AG, Barclays PLC, Nomura Holdings Inc., Morgan Stanley, Ally Financial Inc., Credit Suisse Group Inc., First Horizon National Corp, General Electric Co, the HSBC North America Holdings unit of HSBC Holdings, The Royal Bank of Scotland Group PLC and Société Générale SA. The FHFA is just getting started.

Critics of Fannie Mae, Freddie Mac, and their previous regulator, OFHEO, say that they were sophisticated investors, and they should have known better. William K. Black is a former bank regulator who played a role in hundreds of successful prosecutions after the Savings and Loan Crisis. He told the Wall Street Journal: "It’s a great myth that you can’t defraud sophisticated financial parties." Particularly when loans are fraudulent and material information was not disclosed.

The Financial Crisis Inquiry Commission published evidence from the testimony of officials of Clayton Holdings(among others), a due diligence firm, that underwriters and rating agenciesignored evidence of suspect loans and did not disclose this information to investors.

The FHFA’s complaint involves tens of billions of dollars in potential recoveries that will benefit taxpayers. Yet, as Arianna Huffington points out, banks continue to find ways to get Americans to subsidize problems that the banks themselves were chiefly responsible for creating. Consumers struggle to keep up with payments as the unemployment rate rises along with prices for food, energy and healthcare. Meanwhile, job creation hovers near zero.

When consumers fail to keep up, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties–all of which makes it less likely consumers will be able to pay off mounting debts.
Third World America Pp. 77 & 78.

Money is being put in taxpayers’ pockets in the form of "recoveries" while being extracted again in the form of subsidies and cheap funding to shaky banks that continue to award record pay and record bonuses as they gouge consumers. We can expect more of the same if we continue to let banks off with a slap on the wrist for malfeasance–along with a taxpayer subsidized fine–while banks neither admit nor deny wrongdoing.

Banks won’t change until we follow the law and take "prompt corrective action." Banks that committed widespread fraud should be placed in receivership. Bank of America was cited by William K. Black and L. Randall Wray in their October 2010 post as the place to start, and I agree.

On December 8, 2010, I presented an analysis to the Federal Housing Finance Agency (FHFA) in Washington D.C. of key causes of our current financial crisis: "Repairing the Damage of Fraud as a Business Model." The phrase "fraud as a business model" comes from a comment referenced in the presentation made by Richard Cordray, then the Attorney General of Ohio and the current Director of the Consumer Financial Protection Bureau, when he discussed foreclosure fraud.

Repairing the Damage of “Fraud as a Business Model”

bann01var docstoc_docid=”93692611″;var docstoc_title=”Repairing the Damage of “Fraud as a Business Model””;var docstoc_urltitle=”Repairing the Damage of “Fraud as a Business Model””;

Obama Prosecuting Fewer Financial Crimes Than Under Reagan or Either Bush

Posted on November 16, 2011 by WashingtonsBlog

Ronald Reagan, George W. Bush, George H.W. Bush, and Clinton Each Prosecuted Financial Crime More Aggressively than Obama

Top economists and financial experts agree that our economy will never recover unless Wall Street fraud is prosecuted. See this and this.

But the government has more or less made it official policy not to prosecute fraud, and instead to do everything necessary to cover up for Wall Street.

Indeed, Business Insider writes today:

A new study out from Syracuse University shows that the number of federal prosecutions for fraud at financial institutions has been steadily decreasing since 1999. [via ThinkProgress]

economix 15trac custom1 Obama Prosecuting Fewer Financial Crimes Than Under Reagan or Either Bush

This is particularly interesting given that in the wake of the 2008 financial crisis, public sentiment towards banks and other financial firms have been generally negative and prone to suspicion.

Alexander Eichler at the Huffington Post points out:

The falling number of fraud prosecutions is striking given what many claim is a strong pattern of financial-sector misconduct in recent years, culminating in a housing crisis characterized by alleged rampant mortgage fraud and improper foreclosure, as well as the weakening of the national and global economy.

Barry Ritholtz notes:

In such a target rich environment,. how on earth is it possible that Bank Fraud prosecutions are dropping? It is an outrage!

***

I bitched about this when George W. Bush was President, and I will continue until we get someone in the White House who understands what the RULE OF LAW actually means . . .

There were also many times more financial prosecutions under President Reagan than there are currently.

No wonder Occupy Wall Street is demanding:

Enforce the Laws for the 99%

No wonder top financial crime expert Bill Black says that we have to fire Eric “Place” Holder and all other government officials who are blocking prosecution of the criminals who caused the economic crisis.

bann01

 

Corrupt Government Officials Should Be In Jail … Alongside Corrupt Banksters

Posted on July 26, 2012 by WashingtonsBlog

Those who Benefited from Wall Street Fraud Must be Prosecuted … Including Rogue Government Officials who Aided and Abetted the Crimes

Wall Street fraud caused the Great Depression and the current financial crisis. Top economists and financial experts agree that our economy will never recover unless Wall Street fraud is prosecuted.

Yet the government has more or less made it official policy not to prosecute fraud, and instead to do everything necessary to cover up for Wall Street.  For example, the Obama administration is prosecuting fewer financial crimes than under Reagan or either Bush.

For example, we pointed out in 2010:

The government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are.

But it is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud.

Here are just a few of many potential examples:

  • Tim Geithner was complicit in Lehman’s accounting fraud, (and see this), and pushedto pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval. William Blackpoints out: “Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth”
  • The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
  • The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud. Indeed, Alan Greenspan took the position that fraud could never happen
  • Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….

This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.

***

The government that permits this to happen is complicit in a vast crime.

In other words, the fraud started at the very top with Greenspan, Bush, Paulson, Negraponte, Bernanke, Geithner, Rubin, Summers and all of the rest of the boys.

As William Black told me today:

In criminology jargon: they created an intensely criminogenic environment.

The government’s special inspector general in charge of oversight of the Troubled Asset Relief Program (the “TARP” bank bailouts) – Neil M. Barofsky – told me that regulators should be prosecuted if the evidence shows that they lied either to Congress or the Department of Justice to cover up illegal conduct.

Government regulators have become so corrupted and “captured” by those they regulate that Americans know that the cop is on the take.  (Even top justice officials are incredibly cozy with Wall Street fraudsters.)

Institutional corruption is killing people’s trust in our government and our institutions, which is one of the reasons the economy is faltering again.

Indeed, polls show that very few Americans believe that the U.S. government has the “consent of the governed”, a higher percentage of Americans liked King George during the Revolutionary War than like Congress today, and people are publicly discussing whether it’s a good or bad idea to “hang bankers”.

I noted 7 years ago:

I am NOT calling for the overthrow of the government. In fact, I am calling for thereinstatement of our government. I am calling for an end to lawless dictatorship and a return to the rule of law. Rather than trying to subvert the constitution, I am calling for its enforcement.

***

The best way to avoid all types of revolution would be for the government to start following the rule of law. I passionately hope it will do so.

While conservatives tend to view government as the problem, and liberals tend to view corporations as the problem, the real problem is the malignant, symbiotic relationship between corrupt officials and criminal  corporate leaders.  Without the cancerous relationship, neither side could cause so much damage.  If America returns to the rule of law, we might have a fighting chance.

The justice system may be the only thing which stands between peace and violence.   All of those who benefited from Wall Street fraud must be prosecuted … including corrupt government officials whoaided and abetted their crimes, helped cover them up, or have blocked prosecution.

Iceland should be a role model:

Iceland has prosecuted the fraudster bank heads (and here and here) and their former prime minister, and their economy is recovering nicely… because trust is being restored in the financial system.

Indeed, even evangelical leader Pat Robertson agrees:

Pat Robertson discussed the banking crisis and glowingly spoke about how Iceland jailed many of the bankers who devastated their nation’s economy by taking out fraudulent loans. Robertson hailed the Nordic nation for its actions and said that Americans should deal with the financial crisis in the same way.

***

“They are putting people in jail.  Prime ministers are being indicted. They are going after banks. The people said the banks are ripping us off. We don’t like what they did, and they brought our country to ruin. Suddenly, Iceland is turning around and they look like a big success story!”

***

“We could start putting all of those bankers in jail. There was not one banker prosecuted and so many people were lying, and so-called “no-doc loans” and liars’ loans, and none of them have been held accountable.

***

Iceland is leading the way and their GDP is growing, and all of a sudden, they were in a terrible mess, terrible mess, and look what is happening!”

bann01

Studies Show CEOs Not Subject to Same Rule of Law as You

By: masaccio Friday August 10, 2012 8:58 am

Now here’s a serious crime. Photo by Boris SV via Flickr

Recent academic papers begin the formal work of proving that CEOs and giant corporations face a completely different legal system than the rest of us, one in which their vast resources are used to insure that they can safely ignore laws and rules applicable to small fry. One study looked at the influence of corporate lobbying on fraud detection.Corporate Lobbying And Fraud Detection, 46 Journal of Financial and Quantitative Analysis 1865 by Frank Yu of Barclays Global Investors and Xiaoyun Yu of Indiana University available here. From the abstract:

We find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.

This quantifies earlier anecdotal data. For example, look at the collapse of Lincoln Savings and Loan. Five senators intervened to stop an investigation, and the business collapsed two years later at a cost of at least $3 billion. The delay sought by the Keating Five increased the losses, particularly to small savers who bought Lincoln Certificates of Deposit.

Yu and Yu show that this hideous perversion never stopped, and not only includes direct campaign contributions but also lobbying. They show that firms increase their lobbying expenses after they commit fraud. During the time they are committing fraud, executives of lobbying firms sell their stock about four times more than firms that aren’t lobbying.

Sarah Fulmer and April Knill of Florida State build on that study in their recent paper Political Contributions and the Severity of Government Enforcement, available here, with abstract. Fulmer and Knill examine data on PAC contributions by corporations and CEOs and SEC data on enforcement to show that

…accused executives whose firms have contributed to political campaigns via a PAC are banned as an officer for three fewer years, serve probation for five fewer years, prison for six fewer years and are 75% less likely to be given both prison time and an officer ban (the most severe form of criminal and civil penalties)…

Fulmer and Knill point to Judge Rakoff’s refusal to rubber-stamp the SEC settlement with Citigroup over cheating its investors in a late-stage RMBS deal. They also mention an earlier repulsive settlementbetween the SEC and Citigroup CFO Gary Crittenden.

On an analysts conference call, Crittenden said Citi had reduced its subprime exposure by 45% to $13 billion, not mentioning the other $40 billion in super-senior tranches. Crittenden settled for a meaningless $100K and there was no discussion of the fraud on investors.

The SEC Inspector General began an investigation to determine whether, as alleged by Senator Charles Grassley, Robert Khuzami, the SEC Chief of Enforcement, had a secret meeting with Crittenden’s lawyer and good friend of Khuzami, and subsequently told his staff to lighten up. The IG eventually cleared Khuzami. The reporter, Allison Frankel, said the IG report shows the cozy club approach to settlements at the SEC. Friends call friends, there are discussions about whether Crittenden would have to resign from his Church positions and the impact of a fraud settlement on Citi.

Marcy Wheeler sees that club in action again in the efforts to cover up the Standard Chartered fraud.

First, you hire Sullivan and Cromwell and act contrite. Then, you pay a consultant to conduct a review and claim the violations involved just $14 million in transactions as opposed to $250 billion shown in your bank records. … Then you bury all the embarrassing details showing willful flouting of the rules, so the proles don’t learn how craven banks really are.

Then there is the latest whitewash of Goldman Sachs. The Department of Justice won’t prosecute for the allegations made in the report of the Senate Permanent Subcommittee on Investigations, and the SEC won’t file charges over its subprime mortgage portfolio.

One channel for creating these relationships is the personal connections created as people rise through the ranks of government and move into white collar defense in the private sector. Political contributions and lobbying are another channel. Everyone knows that your rise to wealth is dependent on following the rules of connection, and eventually you get to the point where you can do the contributing and lobbying, and use those connections for your personal benefit and the benefit of your clients, which enables you to get even richer.

That has now culminated in the capture of the Department of Justice by financial interests. Attorney General Eric Holder is a rich guy from Covington and Burling. He bundled contributions for Obama and served as a co-chair of the campaign. Three other top Justice Department officials played major roles in fundraising and came from white-collar defense firms. It’s worth noting that the right wing is all over these connections. No links from me, but google “holder west perrelli mason” and see for yourself.

The prosecutors, the rich, the politicians: all buddies in the rarefied atmosphere of wealth and power. How could such great guys possibly be a lying cheat? And if there is a slip-up, they cover up.

bann01

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s