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Is That It for Financial Crisis Cases?

Peter J. Henning, a colleague of Linda Beale, poses the question in the NYT:

Is That It for Financial Crisis Cases?

Last week turned out to be a good one for Goldman Sachs. The Justice Department closed a criminal investigation of the firm and its chief executive, Lloyd C. Blankfein, and the firm disclosed that the Securities and Exchange Commission had decided not to pursue a civil fraud case related to a subprime mortgage deal.
When the story of the financial crisis is finally written, this may turn out to be the denouement of the government’s investigations of Wall Street for potential wrongdoing that contributed to the financial crisis in 2008.

Investment banks like Goldman load their disclosure documents with plenty of generic disclaimers that can support a defense that no one sought to mislead buyers. It may not be so much a matter of weak laws as the requirement to show beyond a reasonable doubt that a defendant had the intent to commit a crime, a significant barrier to successfully prosecuting any fraud case.
And proving a perjury case is even more difficult because it must be shown that the defendant intentionally lied, not just that the testimony was incomplete or inaccurate. Whether Goldman’s position was “massive” or not looks to be a matter of degree, making it almost impossible to prove perjury.

The S.E.C.’s decision was a bit more surprising because the enforcement division told Goldman in February that it planned to recommend civil charges against the firm related to its sale of a $1.3 billion mortgage-backed security. Goldman had already settled allegations in 2010 about how it structured a collateralized debt obligation known as Abacus, so even if the S.E.C. had pursued another case, it was unlikely to contain any major new revelations about systemic misconduct.


It does not look as if any other criminal cases against other banks are likely to emerge from the financial crisis now that four years have gone by. The Justice Department has already passed on cases against executives from firms like Countrywide Financialand the American International Group, and nothing else seems to be drawing the attention of prosecutors at this point.

New laws would not make it any more likely that senior executives could be pursued unless they included liability as a “responsible corporate officer” for the conduct of underlings without having to prove an executive’s knowledge or recklessness.
Wall Street would be sure to put up quite a fight if expansive criminal prohibitions were introduced that made it easier to prosecute senior managers for the violations of lower-level employees. The pushback in Congress against the Dodd-Frank Act’s regulation of the financial sector shows that there may not be much appetite for additional government involvement in the financial sector.

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Obama road tests hopey changey 2.0

Yves Smith spells out her strong opinion of our dilemma nationally for the elections of 2012. This particular arena of regulating banks and non banks and and accountability also takes on a wider symbolic meaning in this election cycle. How this plays out in determining national budget spending priorities through the lens of an explosion of money spent on national and state elections makes for a need for voters to pay close attention to actual issues and to gain some knowledge underlying economic understanding…a complicated task for a potentially interested public. We in Mass. have another election to follow closely through Elizabeth Warren, who has a different take on the issues.

Yves Smith at Naked Capitalism has a long post worth a visit to read the whole piece…here is a portion:

…So let’s return to the rebranding of Obama. From the Financial Times:

Barack Obama outlined a plan to toughen penalties against banks that commit fraud in a speech on Tuesday that hardened his attacks on Republicans for “collective amnesia” in backing policies that caused the financial crisis and economic downturn.

Speaking in Osawatomie, Kansas, Mr Obama summoned the spirit of another president, Teddy Roosevelt, who spoke in the same city a century ago about his “new nationalism” and the need for a fairer system that supported the middle class..

Mr Obama was scathing about the banks’ opposition to new financial regulations, saying they were only feared by “financial institutions whose business model is built on breaking the law, cheating consumers or making risky bets that could damage the entire economy”.

“I’ll be calling for legislation that makes [anti-fraud] penalties count – so that firms don’t see punishment for breaking the law as just the price of doing business.”

The misdirection is blindingly obvious. The claim is that the Administration needs new tools to get tough on banks. No, it has plenty of tools, starting with Sarbanes Oxley. As we’ve discussed at length in earlier posts, Sarbox was designed to eliminate the CEO and top brass “know nothing” excuse. And the language for civil and criminal charges is parallel, so a prosecutor could file civil charges, and if successful, could then open up a related criminal case. Sarbox required that top executives (which means at least the CEO and CFO) certify the adequacy of internal controls, and for a big financial firm, that has to include risk controls and position valuation. The fact that the Administration didn’t attempt to go after, for instance, AIG on Sarbox is inexcusable. The “investigation” done by Andrew Ross Sorkin in his Too Big To Fail (Willumstad not having a good handle on the cash bleed, the sudden discovery of a $20 billion hole in the securities lending portfolio, the mysterious “unofficial vault” with billions of dollars of securities in file cabinets) all are proof of an organization with seriously deficient controls.

But more broadly, it’s blindingly obvious this Administration has never had the slightest interest in doing anything more serious than posture. As we wrote in early 2010:

Recall how we got here. Early in 2009, the banking industry was on the ropes. Both the stock and the credit default swaps markets said that many of the big players were at serious risk of failure. Commentators debated whether to nationalize Citibank, Bank of America, and other large, floundering institutions..

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Financial Speculation Taxes

OMB Watch points us to the idea that:

Financial Taxes Can Raise Revenues, May Help Stabilize Markets
The congressional Super Committee, tasked with forging a $1.2 trillion deficit reduction package by Thanksgiving, is currently deliberating on which revenues — if any — to raise and to include in its plan. With Wall Street at the center of the 2008 economic collapse, the committee should look to a pair of revenue options that would fulfill the dual roles of addressing risks to the economy posed by Wall Street and raising much needed revenue: a financial speculation tax and a financial crisis responsibility fee on large financial institutions.

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Interlude / Self-Indulgent Advt

I want one of these positions:

The Office of Complex Financial Institutions (which the agency has assigned the acronym CFI) “will perform continuous review and oversight of bank holding companies with more than $100 billion in assets as well as non-bank financial companies designated as systemically important by the new Financial Stability Oversight Council,” the FDIC said. This division will also be in charge of using the FDIC’s new liquidation powers over “bank holding companies and non-bank financial companies that fail.”

If one because it will make me feel less guilty about turning down an opportunity at Fannie Mae earlier this summer.

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Senate passes HR 4173 finance reform conference report

by Linda Beale
crossposted with Ataxingmatter

Senate passes HR 4173 finance reform conference report
[updated to add information on Geithner’s opposition to Warren 7:12 pm]

On a 60-39 vote, the US Senate passed the Dodd-Frank H.R. 4173 financial reform conference report today. While the bill imposes some new restrictions and creates a consumer protection agency, most of the impact will come (if it comes) through regulation as the new systemic risk council oversees bank issues and decides whether activities of banks pose sufficient risk to be regulated or eliminated. Capital requirements and leverage requirements, for example, are not directly set in the bill. The US is likely to settle with the capital and leverage standards set by Basle III, the discussions going on now at the Bank for International Settlements regarding updating of the 2004 standards. In those talks, thje banks lobbying are making inroads on the fairly tough standards originally proposed in December, as officials yield to fears (cited by the banks) that tough capital and leverage requirements will dampen the economic revival. See, e.g., Damian Paletta and David Enrich, Banks Gain in Rules Debate: Regulators Seen Diluting Strictest New ‘Basel’ Curbs; Credit Crunch Fears Remain, Wall St. Journal, July 15, 2010, at A1.

Query whether we have learned anything from this crisis at all. Officials remain at the mercy of banks–bailing them out, providing cheap cost of funds through implicit and explicit guarantees, and letting, even encouraging, them to get back to the old securitization games that allowed them to generate liquid and easy credit without adhering to prudential banking standards since the lender was not the one holding on to the loans over the long term. Banks argue for remaining entangled with their profitable proprietary trading and derivatives businesses, since they know that the synergies of being able to use cheap depositor funding for their investment-banking activities means high profits for them, even if it may mean socialization of losses down the road. See Simon Nixon, Barclays Capped by Regulatory Risk, Wall St. J., July 13, 2010, at C10

Interestingly, Tim Geithner has come out against having Elizabeth Warren appointed as head of the new consumer protection agency created by the reform bill. Nasiripour, Tim Geithner Opposes Nominating Warren to Head new Consumer Agency, Huffington Post, Jul. 15, 2010. Having watched Prof. Warren in action and read the scathingly honest output of her term at the head of the bailout watchdog commission, I can’t think of a better person to head the agency. One suspects that Geithner is concerned about a gradual erosion of the power of the Wall Street clique (Geithner, Summers and Bernancke) with the forceful Warren on the job with the ear of the President. Personally, I think that power needs to be eroded, so Geithner’s concern makes Warren an even better choice.

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There’s an election in 2012

Went to Massacghusetts for the weekend, where I learned that Martha Coakley supports child rapists* and Scott Brown (R-MA Sen.) is a decent legislator who stands by his convictions, including his opposition to the Financial Services Reform Act, which principled action he takes because the act institutionalizes Too Big to Fail. (This is also Russ Feingold’s argument against the bill, I believe.)

Up until then, the only thing I had heard about Mr. Brown’s opinion of the bill was that the $19 billion in taxes on TBTF institutions—which would be a drop in the bucket, but at least a marginal disincentive to some “Great Recession”-causing activities—was removed to make it more palatable to him.

If, instead, it were true that Mr. Brown’s opposition was principles, he would stand by his conviction that the bill would do more harm to the economy than good, instead of accepting a reduced cost to BofA and a greater if-a-crisis-occurs cost for MA taxpayers.

Oops.

Ah, well. Martha Coakley railroaded Louise Woodward** and reached a similar type of agreement with Cheryl Amirault LeFave.

UPDATE: Linda Beale, in a post that will eventually appears here as well, sums up the reality of Brown’s position:

Brown’s vote was a costly one. He was one who fought to permit banks to own hedge funds–essentially a decision to allow them to continue to gamble with other people’s money. And he nixed the proposal to have the banks pay for the cost of increased regulation due to their risky behavior. Why in the world shouldn’t the banks pay? I suppose they must have contributed a good deal to Brown’s campaign chest. There’s no other reason for failing to assess the banks their fair share of the added monitoring costs.

Brown (Senator-BofAState Street [correction h/t Linda Beale]) it is.

*This is apparently because the grand jury she empaneled chose not to indict Keith Winfield, at the time a police officer in Somerville.

**Oops. Sorry. This was not an objection raised by my correspondent. Whether the evidence of innocence is rather clearer here than in the Amirault cases is left as an exercise.

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Financial reform law still in the works this week

Reuters reminds us financial reform law still in the works:

Although a final vote is expected within days on the White House’s top domestic priority, lawmakers have yet to settle disputes on regulating over-the-counter derivatives; curbing risky trading by banks; and the power of state authorities.

There will need to be resolution on these topics before the Senate can approve a massive Democratic bill designed to make the financial system less prone to crises like that of 2007-2009.

Analysts say that could occur as soon as Wednesday or Thursday. Delays could postpone full approval to next week, however.

Major votes on amendments looked unlikely on Monday or Tuesday, due to primary elections involving senators Blanche Lincoln and Arlen Specter, both Democrats. Party leaders were expected to avoid close votes on controversial measures while the two were away on the campaign trail.

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