WALL STREET'S GET OUT OF JAIL FREE CARD ... "INTENT"

If you ever wanted to know why no one from the financial sector and Wall Street is behind bars look no further than this 60 Minutes piece on mortgage fraud and Countrywide. Simply put, committing fraud isn't enough to get you prosecuted. You have to show that fraud was also intended (can you imagine a criminal defendant saying, "I didn't mean to kill him, he just happened to be in the way of my bullets"?).

Also, in the FYI category, none of this was confined simply to Countrywide either. It was prevalent and encouraged throughout the industry (and by Wall Street), and is indicative of corporate entitlements and protections that you and I don't get.

I've said it before, and I'll say it again, we can fix a lot of this if we understood Bill Black's "control fraud" better, and used RICO statutes to go after our financial institutions as criminal enterprises ...

- Mark

FINANCIAL TERRORISTS REQUEST NATIONAL SECURITY PROTECTIONS?

During the height of the market crisis in 2008 the Federal Reserve demanded unusual security procedures before sharing or supplying critical A.I.G. bailout related documents. The Securities and Exchange Commission (SEC) said that if it agreed to go along with the request it would store the information it received where national security related files are kept.

Imagine ... demanding national security status in exchange for information needed to secure public funds, to save a private firm no less. Incredible. While it's not novel to tie economics into national security, this request provides an entirely new twist to the national security state (it actually makes a joke of it). But it appears we now know why the request was made.

According to this New York Times article, A.I.G. effectively gave up it's right to sue Wall Street firms once it took bailout money. Wall Street titans like Goldman Sachs, and their financial partners in crime, effectively got a blanket waiver from lawsuits from A.I.G. Why did this happen? Because Wall Street's biggest firms were really trying to cover their butts, and we're using their buddies in Washington to help them do so.

One way for Wall Street's biggest firms to cover their butts and avoid lawsuits (and even jail time) was to get A.I.G. - the insurer of their toxic crap - to give up their right to sue on behalf of shareholders. So Wall Street's friends at the Federal Reserve and the Treasury Department made A.I.G. an offer they couldn't refuse: Waive your right to sue and take our money with full payouts, or go under.

As I've pointed out before (many times), I think it's time we start thinking about invoking the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO) to get some answers. Think about it. The only reason you would want to have your market information classified along national security lines AFTER the fact is because you've got something incriminating to hide (proprietary information, after all, doesn't need national security status). Any good prosecutor will tell you that a request to secure security status for documents suggests two things. Somebody has something to hide, and panic. Panic is good, if you're a good prosecutor.

To get a RICO case going on a Wall Street firm (which has been done before) the SEC would have to show a "pattern of racketeering activity" that was committed by an "ongoing criminal organization." What's more criminal than duping investors with toxic assets and then stealing taxpayer money?

- Mark

DIVINING GOLDMAN'S FUTURE ... BRING ON RICO?

Since the Securities and Exchange Commission (SEC) decided to file a civil suit against Goldman Sachs it appears that both Goldman Sacs and Wall Street may be in for a rough patch.

First up, we have former President Clinton telling ABC's Jake Tapper that he got bad advice on regulating complex financial instruments (derivatives) from his former Treasury Secretaries, Robert Rubin and Larry Summers (not to mention from Alan Greenspan). He even noted that he was wrong to take the advice of those advising him against regulating derivatives (which would include Greenspan).

While President Clinton did the Washington thing, and had his assistant call back later to say that his advisors served him and the nation well, his comments help us understand the mind-set that's emerging in Washington. It looks like a few "criminal" scapegoats may be hung out to dry before November.

MSNBC's Dylan Ratigan captures the moment with questions he raises about Goldman Sachs' explanations for the complex deals that lost billions for their customers, but helped John Paulson's firm earn $15 billion. In a few words Ratigan asks why Goldman didn't reveal that the same person (John Paulson) who created the investment vehicle Goldman's customers purchased was also the same person placing big bets that the product would fail. This is akin to buying a house that catches fire and burns to the ground, only to find out later that others who had access to your house before the sale had purchased insurance on your house.

All of this is significant because as a criminal case the SEC can become very aggressive in the "discovery phase" leading up to the trial by requesting information and issuing subpoenas that could prove quite damaging. Perhaps more importantly, as Martin Hutchinson points - and as I've suggested many times before - with the right evidence the SEC could invoke the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). To get a RICO case going on a Wall Street firm (which has been done before) the SEC would have to show a "pattern of racketeering activity" that was committed by an "ongoing criminal organization."

While this would be a pretty big event, labeling a firm like Goldman Sachs - who the Europeans haven't been too happy with lately - as a criminal organization would give the Obama administration some red meat to throw at the American public. Perhaps more importantly, it would go a long way in creating the right environment for much needed regulatory reform.

With the majority of Americans upset over lingering economic conditions, and the Republicans poised to defend Wall Street, going after Goldman might be part of a larger strategy that could even pit middle of the road Republicans against their Tea Party brethren. While it's never a good thing to use public policy as a political tool, it would be naive to assume it doesn't happen as a matter of course.

As well, with Wall Street acting the way they have over the past 15 years - and with the damage they have caused - it would be politically irresponsible for the Obama administration not to pursue this path.

- Mark

ASKING WHY ...

The NY Times has an in depth op-ed article in Monday's paper that makes it very clear that President Obama's efforts on the economic front have done very little to change the market infrastructure that brought us to an economic cliff. What's at stake? According to the authors, the "restoration of the American people’s — and the world’s — faith in American capitalism and in our nation."

The authors, Sandy B. Lewis and William D. Cohan, argue that in spite of a smattering of good news the "storm is not over, not by a long shot." In an effort to help us understand why the storm is not over they take a look at the rules and the infrastructure of our economy and ask some very basic questions. Those of you who have followed this blog, listened to my radio program, or read my book, will be familiar with these questions, and the subsequent discussion.

1. Why are we so desperately anxious to restore the previous banking model as the status quo?

2. Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?

3. Why isn’t Mr. Obama talking more about the importance of living within our means and not spending money we don’t have on things we don’t need?

4. Why is the morphine drip still in the veins of the financial system? Is there to be any limit on bailouts?

5. Why has Mr. Obama surrounded himself largely with economic advisers who are theoreticians and academics — distinguished though they may be — but not those who have sat on a trading desk, made a market, managed a portfolio or set a spread?

6. Why isn’t the Obama administration working night and day to give the public a vastly increased amount of detailed information about what happens in financial markets? (this means explaining and exposing everything from CDOs to CDSs, and their Frankenstein-like "synthetic" instruments).

7. Why are we not looking to change our current civil and criminal racketeering statutes, which are playing a perverse role in investigations of the crisis?

Some of the proposals and the discussion that follow these questions are enlightening. I especially like this one: "Instead of getting guaranteed salaries or huge bonuses, [corporate executives/CEOs] should have the bulk of their net worth completely at risk for a long stretch of time — 10 years come to mind — for the decisions they make while in charge."

Put another way, CEO pay should be stretched out over periods that would take into consideration what happens to firms after the CEO leaves. I also like the author's discussion which suggests that we develop RICO-like statutes for market players.

The article is long, but worth the read.

- Mark

A STEP IN THE RIGHT DIRECTION ...

From the NY Times ...

Angelo R. Mozilo, the man who built Countrywide Financial, has finally been charged with securities fraud and insider trading by the Securities and Exchange Commission. In addition to generating $140 million in profits from 2005-007 by selling stock in the company - as the company's share price was tanking - the suit alleges that Mozilo misled investors about growing risks in the company’s lending practices. Mozilo was doing all of this at the same time that he was going to the federal government for bailout money, which they were then calling "loans."

If the feds get this right, they should be able to make Mozilo the first of many poster boys for what went wrong in the mortgage lending markets. I say that as long as they're going after him for fraud they should also consider using RICO statutes to catch him for criminal intent too.

Sure, RICO laws are used mostly for the mob. But what else do you call the shake down that the finance and mortgage industry are putting on the American taxpayer?

- Mark

TAX BONUSES AND/OR USE RICO STATUTE

With more than $18.4 billion in bonuses paid out to executives of failed financial institutions, and with President Obama calling these bonuses "shameful," the NY Times has an article discussing the merits of getting some of this money back. Unfortunately, while the article discusses taxing bonuses retroactively, it ends meekly by saying that this tactic "would hurt New York and other financial centers."

Incredible.

My comment at this point is "Who Cares?" Definitely not those who have seen their nest eggs collapse, or who have lost their homes.

We need to keep in mind that these guys knew what they were doing. Even the ones who weren't malicious understood what was going on. If they didn't, they don't deserve bonuses and, more to the point, should be looking for new a new line of work.

To argue that clawing back at bonuses with retroactive taxes would be bad for business is akin to suggesting that we shouldn't confiscate the ill-gotten goods of drug traffickers because "finders keepers." Where criminal activity and criminal negligence are involved, possession is not 9/10ths of the law.

Some might be inclined to argue that nothing illegal was done by executives who secured bonuses for helping run their companies into the ground. Think again.

As one of my acquaintances from the investment world pointed out, if we look at RICO statutes (1970, Racketeer Influenced & Corrupt Organizations Act; inspired by the Mob) we could pursue a criminal conspiracy to defraud. What's key here is conspiratorial "intent." Only in this case, because finance and corporate law is so opaque, I say let's circumvent the courts. They're overburdened as it is.

If we can grant retroactive tax breaks for a specific industry (and we have) we can also pursue, for lack of a better term, a Financial Industry "Bonus" Tax after the fact.

- Mark