There was a tough column in The New York Times yesterday on how the feds’ are going after the minnows and avoiding the sharks over the financial crisis.
That the piece comes from Andrew Ross Sorkin, who’s about as inside as they come on Wall Street (for better or for worse), I think is significant.
First, Sorkin punctures Attorney General Eric Holder’s touting of “Operation Broken Trust,” which Holder says is “sending a strong message” and which has brought 343 criminal cases and 189 civil ones. Wow, huh?
Well, not really. Sorkin shows why, and beautifully (emphasis mine):
It all sounded quite important, and the program’s slogan is pretty catchy. But after you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”?Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.)
That’s because in the two years since the peak of the financial crisis, the government has not brought one criminal case against a big-time corporate official of any sort.
Instead, inexplicably, prosecutors are busy chasing small-timers: penny-stock frauds, a husband-and-wife team charged in an insider trading case and mini-Ponzi schemes.
Well put.
And then there’s this (emphasis mine):
But 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.
Rabble-rouser! Sorkin is saying that fraud at major companies caused the financial crisis. He’ll get no quibble from us on that.
But which major companies? Bankrupt subprime biggies, funders, and enablers like New Century, Ameriquest, Lehman Brothers, and AIG? Woulda-been failures like Bear Stearns, Countrywide, Merrill Lynch or Washington Mutual? Bailout boys: Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America, Wells Fargo? Foreign banks Deutsche Bank, UBS, Credit Suisse? Ratings agencies Moody’s and Standard & Poor’s?
If fraud is now on the table as a factor causing the crisis, as it should be, it would be helpful to know which of these brand-name companies contributed to it.
And even if names are not named, it would be helpful for him to talk generally about which type of fraud he means. Was it the street-level predatory lending by the likes of the Countrywides and Ameriquests? The look-the-other-way financing and encouragement by Wall Street of the street-level predatory lending? Was it the screw-you CDO sales by Goldman and Deutsche Bank? Was it the SIV accounting at Citigroup and Bank of America that hid massive risk from shareholders? What about the ratings for sale business at the ratings agencies? Repo 105 and bogus marks at Lehman? Snooker-the-rubes crooks at JPMorgan Chase?
Etc. etc.
Still, until now, I haven’t gotten the impression from Sorkin’s columns that he thought fraud was a major cause of the crisis. That he now says it was, and explicitly, is significant.
Ah heck. You've known me long enough to now if you're going to mention wallstreet and fraud, you're going to get a couple of William Black links from me.
Worthwhile video one on the Goldman fraud, Citigroup pushing non-conforming mortgages on Freddy and Fannie, accounting control fraud:
http://finance.yahoo.com/tech-ticker/%22rotten-to-the-core%22-bill-black-and-barry-ritholtz-react-to-goldman-fraud-charges-469554.html
but that video was done in April 2010 and THEN they were complaining about the lack of criminal prosecution and accountability. What is taking so long?
Video two:
http://globaleconomicanalysis.blogspot.com/2010/08/former-bank-regulator-william-black-us.html
The government is looking the other way. They have changed the basic rules of accounting (FASB's suspension of mark to market accounting) in order to enable fraud and ignore losses on the balance sheet. Their HAMP program was supposed to help home owners modify their loans but "The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative – it’s explicitly extend-and-pretend, and also fairly cynical."
Of course wide spread wall street fraud precipitated the crisis, but Obama's (and Bush's) economic team has been at the center of all that fraud so they want to prop it up, not let it crash.
If this is a recent realization by Sorkin, he's years behind the times.
#1 Posted by Thimbles, CJR on Wed 8 Dec 2010 at 10:38 AM
I also give much attention to Bill Black, and some to Sorkin. Here is what always lingers in my mind: There are two different accounts for what has happened happening.
One account is that fraud and criminality are the cause, which suggests that but for fraud and criminality, we'd be ..ok? fine?
The other account is that, even sans outright fraud and criminality, the systemic requirement to constantly pursue profits in finance ("That which can be securitized will be securitized") and so compelled managers/investors to seek additional profits exceeding those previously collected, is itself destabilizing.
So it is one thing to say: Had there been no fraud in origination of mortgages, and then no inaccurate reviewing by Moody's etc., we'd be ok; it is another to say that even had everyone been honest, risks still would have been taken, leveraged, and compounded, and we'd still be where we are.
Where one comes down on that affects policy. We're still in an experiment, so to speak, as Dodd-Frank lumbers into effect. But it isn't as if one's theory of cause cannot be played for some interest over another.
#2 Posted by Dave Raithel, CJR on Wed 8 Dec 2010 at 03:53 PM
Kenneth Galbraith:
http://www.salon.com/news/politics/war_room/2010/12/08/whose_side_is_white_house_on
"In economic policy it was said earlier we have a lack of narrative. This afternoon, Gregory King asked why the people didn't know that the Republican Party is uniformly and massively opposed to job programs, to state and local assistance, and to every legislative measure that might aid and promote economic recovery from the worst crisis and recession in modern times. Why is that that they didn't know? Could it have anything to do with the fact that the White House didn't tell them?
And why was that?
The president deprived himself of any chance to develop a narrative from the beginning by surrounding himself with holdover appointments from the Bush and even the Clinton administrations: Secretary Geithner, Chairman Bernanke, and, since we're here at Harvard, I'll call him by his highest title, President Summers. These men have no commitment to the base, no commitment to the Democratic Party as a whole, no particular commitment to Barack Obama, and none to the broad objective of national economic recovery that can be detected from their actions.
With this team the president also chose to cover up economic crime. Not only has the greatest wave of financial fraud in our history gone largely uninvestigated and unpunished, the government and this administration with its stress tests (which were fakes), its relaxation of accounting standards, which permitted banks to hold toxic assets on their books at far higher prices than any investor would pay, with its failure to make criminal referrals where these were clearly warranted, with its continuation in office -- sometimes in acting capacities -- of some of the leading non-regulators of the earlier era, has continued an ongoing active complicity in financial fraud. And the perpetrators, of course, prospered as never before: reporting profits that they would not have been able to report under honest accounting standards and converting taxpayer support into bonuses; while at the same time cutting back savagely on loans to businesses and individuals, and ramping up foreclosures, much of that accomplished with forged documents and perjured affidavits.
Could the president and his administration have done something? Yes, they could have. Where was the Federal Deposit Insurance Corporation? Why did they choose not to implement the law -- the Prompt Corrective Action law -- which requires the federal government to take into receivership financial institutions when there is a significant risk of large taxpayer losses to the insurance fund? Where were the FBI and the Department of Justice? Did the President do anything? No. Is he doing anything now? No. Why not? The most likely answer is that he did not want to. My understanding, in fact, is that there was one meeting where this issue was raised, and the president stated that his economic team had assured him they had the situation under control."
It goes on, and it's worth a read, but I wanted to quote the relevant portion.
#3 Posted by Thimbles, CJR on Wed 8 Dec 2010 at 11:14 PM
Yeah, Ryan, all them companies. And yeah, all those types of fraud. All of the above. All criminal. Much of it already publicly documented. Still, Sorkin's joining. Remember not to slam the door on newcomers just 'cause they're not up to speed yet. You & Dean ought to have him buy you lunch on the Times' dime. I'll go to, if Mike Hudson's not available. Or, better yet, fly Bill Black in. Einhorn can only take him so far.
#4 Posted by edward ericson jr., CJR on Thu 9 Dec 2010 at 02:42 PM
I'm wondering if Ferguson's documentary "Inside Job" is not important in changing the view of msm people like Sorkin. It has a rather small audience but people who write about the financial crisis have to have seen it.
And when you see it, you cannot pretend anymore that Sorkin's pals on Wall Street "may well be a little sneaky but that's it, nothing illegal".
So I think that now all these "financial corporate journos" have to readjust what they write somewhat to not look completely stupid.
#5 Posted by Joesixpack, CJR on Thu 9 Dec 2010 at 08:45 PM
I'm wondering if Ferguson's documentary "Inside Job" is not important in changing the view of msm people like Sorkin. It has a rather small audience but people who write about the financial crisis have to have seen it.
And when you see it, you cannot pretend anymore that Sorkin's pals on Wall Street "may well be a little sneaky but that's it, nothing illegal".
So I think that now all these "financial corporate journos" have to readjust what they write somewhat to not look completely stupid.
#6 Posted by Joesixpack, CJR on Thu 9 Dec 2010 at 09:03 PM