By Jeff McCord is a former US Senate staffer, Securities Investor Protection Corp (SIPC) executive and has been a free-lance journalist for Dow Jones publications. His academic background in economics includes post-graduate work at the London School of Economics and George Washington University.
THE THIRD BATTLE OF MANASSAS AND WHAT WALL STREET PROTESTORS SHOULD ASK FOR
Although the mainstream media has widely reported the photogenic and growing Wall Street protest movement, and many bloggers have cheered on the demonstrators, no one can explain what these idealists hope to achieve. Yes, they’ve drawn attention to pervasive greed among elites, growing income inequality and widespread unemployment, among other ills. And, the protestors chose Wall Street as the appropriate point of departure for an evolving national movement. So, it is fitting that their goals be directed toward Wall Street and its allies on both ends of Pennsylvania Avenue.
So, what should the demonstrators demand? And what do Civil War battles fought near the Virginia town of Manassas have to do with it? History can wait. Let’s first make a list of demands. To do so, consider the views of people with the gray hair, financial experience, academic credentials and real world orientation to know of what they speak.
Demand Return of Old Time Religion
As readers of Ron Susskind’s “Confidence Men” and daily newspapers are aware, some of the problems we now face stem from tragic changes and lapses in the financial regulatory system. With that in mind, here’s stab at a laundry list of changes — including a return to that old time religion that worked well for the sixty years between the Great Depression and President Clinton’s signing of the Gramm Bliley Act on November 12, 1999 that deregulated much of banking:
- The Feds should start enforcing the laws already on the books against misrepresentation in the sale of financial instruments including mortgage back securities and derived products and abusive mortgage lending practices aimed at unsophisticated consumers. Such conduct was illegal before the financial meltdown and remains illegal today. Yet, the protestors are not the only ones in America who believe violators of these laws still hold senior executive positions and still earn bloated rewards – even as Main Street crashed. Some identifiable perps can and should be prosecuted for misdeeds to set an example for the future and (at the very least) suggest all may well be equal under the law in the United States. The five year federal statute of limitations for prosecutions remains open from 2007 onward. I refer readers to Nobel winner Paul Krugman and his recent column: “Confronting the Malefactors.” http://www.nytimes.com/2011/10/07/opinion/krugman-confronting-the-malefactors.html?hp
- As the lion of the Federal Reserve, Paul Volcker, and others have been saying for several years, it is time to restore the Glass Steagall Act’s separation of commercial banking from investment banking. Congress and the Clintonites (in unholy alliance with then Senator Phil Gramm, R-TX and now Governor Rick Perry’s adviser-mentor) made a serious and very expensive blunder in gutting Glass Steagall. Here’s what Volcker, the real “Maestro” of the Fed, said in 2009 testimony (that remains valid): “I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for [for others in] our capital markets. Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. So should in my view a heavy volume of proprietary trading with its inherent risks. . . . [These non-commercial banking activities have created] deep-seated, almost unmanageable, conflicts of interest with normal banking relationships – individuals, businesses, investment management clients seeking credit, underwriting and unbiased advisory services.”
- President Obama should talk the talk and walk the walk of real change. He could do worse than studying and acting upon the words of Joseph Stiglitz and Paul Volcker (even if his re-election campaign is asking Wall Street barons for contributions.) Even this late in his term (and within our evolving “Great Contraction” of an economic crisis), the President can use his bully pulpit to again inspire people and re-ignite the populist magic that drew tens of thousands (including my family and me) to his final 2008 campaign speech held late at night in Virginia – an event I called the third battle of Manassas, because the rally was held a couple miles from the fields where two great Civil War armies clashed. In other words, the President could again call for systemic reforms and hire advisors who can help plan and execute them. I refer to the experts on the overarching goals and rhetorical themes of such a campaign:
Columbia University Professor and Nobel Prize winner Joseph Stiglitz:
“The financial sector’s inexcusable recklessness, given free rein by mindless deregulation, was the obvious precipitating factor of the crisis. The legacy of excess real-estate capacity and over-leveraged households makes recovery all the more difficult. . . . The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system.”
Paul Volcker, again: “There are some on ‘Wall Street’ who would like to return to ‘business as usual’. After all, for a time, and for some that system was enormously remunerative. However, it placed at risk not only the American economy, but also large parts of the world economy. The challenge is not to paper over or tinker around the edges of the broken system.”
4. The President and Congress should restore to the American people the legal rights to hold accountable those who defraud and otherwise abuse them. With respect to Wall Street and corporate financial practices, that will require politicians with the guts to override a few Supreme Court decisions. On this one, I defer to the little-known (outside securities law circles) but eminently qualified James Cox, professor of law at Duke University. He is currently a member of the Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB) and former member of the New York Stock Exchange Legal Advisory Committee and the National Association of Securities Dealers Legal Advisory Board. In June, he told the Senate Judiciary Committee the following: http://judiciary.senate.gov/pdf/11-6-29%20Cox%20Testimony.pdf
“No principle is more ingrained in western civil and criminal law than that individuals and entities that wrongfully harm another should bear the consequences of their misconduct. However, a perusal of law reports reflects that this principle does not apply when the misconduct is securities fraud.
A few cases — (each influenced by Central Bank and Stoneridge [two Supreme Court decisions that together eliminated private liability for those who knowingly aid and abet securities fraud] — illustrate this outlier characteristic. Corporations whose executives knowingly prepared false documents to conceal from their customer’s auditors that $17 million dollars in the customer’s revenues were fraudulent “roundtrip transactions” and did so to retain the customer as a client are not responsible to investors who purchased the customer’s shares at prices inflated due to the fraudulent roundtrip transactions. Stoneridge Investment Partners, LLC. v. ScientificAtlanta, Inc., 552 U.S. 148 (2008).
The president of a newspaper subsidiary who fraudulently inflates the number of
subscribers and revenues for the subsidiary is not liable to those who purchased the parent company’s shares at prices inflated as a consequence of the president’s reporting chicanery having been incorporated into the consolidated financial statements issued by the parent. Pugh v. Tribune Co., 521 F.3d 686 (7 th Cir. 2008).
The outside lawyer who on 17 different occasions engineered on behalf of the
client [Refco, the once giant derivatives dealer] fraudulent sham transactions for the purpose of concealing in various offering documents that the client firm had massive trading losses and was unable to repay millions of dollars due on margin was not liable as a primary participant to investors who suffered significant losses upon the ultimate bankruptcy of Refco. Pacific Investment Management Company LLC v. Mayer Brown LLP, 603 F.3d 144 (2010).
The above cases are leading cases in this area, but they are not aberrations. Indeed, each of the above cases is consistent with [the June 13, 2011] Supreme Court decision, Janus Capital Groups, Inc., v. First Derivative Traders, 2011 WL 2297762 (S. Ct. 2011). The issue in Janus Capital was whether the investment advisor who prepared the prospectus issued by Janus Investment Fund was responsible for misstatements contained in the prospectus. The divided (5 to 4) court held that the advisor „did not “make” any of the statements in the Janus Investment Fund prospectus.‟ The court supports its conclusion with the analogy to the relationship of speechwriter and a speaker where the court concludes that “[e]ven when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And, it is the speaker who takes credit – or blame – for what is ultimately said.” However, the analogy fails.
When a speech is delivered it is delivered by a human being; a corporation is not such a being and can only act through individuals and then can act only through the symbiosis of the entity structure or structures by which the entity operates.”
People who look at Janus will be reminded of the same Court’s Citizens United ruling. In both radical decisions, the Justices subverted human civil justice by granting business enterprises the rights of human beings.
“Protestors Give Obama and Congressional Dems Second Chance”
Be that as it may, the above list of demands is only a start. President Obama, once a community organizer himself, could still wear FDR’s mantle. As Paul Krugman says:
“Democrats are being given what amounts to a second chance. The Obama administration squandered a lot of potential good will early on by adopting banker-friendly policies that failed to deliver economic recovery even as bankers repaid the favor by turning on the president. Now, however, Mr. Obama’s party has a chance for a do-over. All it has to do is take these protests as seriously as they deserve to be taken.”
No doubt, those camping in the park near Wall Street and in the shadow of Trinity Church would agree that, as a start, the federal government should enforce existing laws against defrauding the public, and restore to citizens the legal rights to hold accountable those who did and do defraud them. That part is simple.
The hard part is actually delivering the Rooseveltian change candidate Obama dangled before us at the third battle of Manassas. And that battle has not yet been won, although he was elected President the next day.
Civil War history buffs know that the Confederate States of America won the first and second battles of Manassas. Hopefully, the citizens of the United States of America will win the third one with the help of the Wall Street protestors and President Obama.