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Friday, April 15, 2011

Wall Street Banks and their Regulators: A Coalition Circumventing Justice?

According to The New York Times, “legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could. Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured. Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems. Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements  he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known. Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.” According to David Skeel, a law instructor at the University of Pennsylvania, “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”
When Elliot Spitzer was the attorney general of New York, he prepared to go after Wall Street banks. He stopped, however, after a lawyer at the U.S. Department of Justice told him to back off because the feds would be moving against the bankers. However, the justice department did no such thing. Not only did the banks not get punished; they got bailouts.  The U.S. Department of Justice has done no better under Barak Obama’s presidency.  Not coincidentally, Goldman Sachs was the single biggest campaign contributor to Obama’s candidacy for president. 
According to The New York Times, bank regulators referred 1,837 cases to the Justice Department in 1995. In 2007-2010, an average of only 72 a year was referred for criminal prosecution.  “The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions.” From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed. The thrift supervisor, however, did not refer a single case to the Justice Department between 2000 and 2010. The Office of the Comptroller of the Currency, a unit of the Treasury Department, referred only three in that decade.
The relationship between the head of Thrift Supervision and the CEO of Countrywide  is particularly revealing.  In March 2007, Countrywide was regulated exclusively by the regulatory agency. That agency was overseen at the time by John M. Reich, a former banker and Senate staff member appointed in 2005 by President George W. Bush, who was on the deregulatory bandwagon. Robert Gnaizda, former general counsel at the Greenlining Institute, a nonprofit consumer organization in Oakland, Calif., said he had spoken often with Reich about Countrywide’s reckless lending. Gnaizda says that when he suggested to Reich how he could build a case against Mozilo, the CEO of Countrywide, Reich “was uninterested. He told me he was a good friend of Mozilo’s.” Reich subsequently refuted Gnaizda’s claim. “I met with Mr. Mozilo only a few times, always in a business environment, and any insinuation of a personal friendship is simply false.” Even a few business meetings can be sufficient, however, to bend the ear of a regulator with a penchant for deregulation.
Mozilo’s flush fingers may have stretched out to the chairman of the Financial Crisis Inquiry Commission, Phil Angelides. The New York Times reports that he told two deputies that Mozilo and Countrywide were off limits, though Angelides denies the claim and points instead to Republican opposition to hearings on Countrywide.

I suspect that whether of the deregulation crowd or Democratic, both parties, being of part and parcel of the establishment, had by the financial crisis of 2008 become too close to the vested interests on Wall Street to effectively regulate its banks and bankers, and thus to be in a position to investigate cases of regulatory failure. In other words, when the financiers and regulators become effectively one, there is scarcely anything the people can do to hold either, or both, accountable. Even having enough information to suspect the collusion is apt to be a rare occurrence, as the powerful are very careful to cover their tracks under the subterfuge of a salubrious public demeanor. 
Click to add a question or comment on prosecutions of bankers in the financial crisis.
Gretchen Morgenson and Louise Story, “In Financial Crisis, No Prosecutions of Top Figures,” The New York Times, April 14, 2011.