An Obama administration task force probing misconduct that fueled the financial crisis is increasing its ranks, adding five financial analysts and 10 new federal prosecutors spread across the country, according to a senior Justice Department official.
Mere days after Greg Smith resigned from Goldman Sachs in a very public way, it is hard to imagine who has not heard of his damning assertions about the company. They paint a picture of a company that changed from a client-centric focus to one lining its pockets at the expense of its clients. Mr. Smith’s assertions beg deeper inquiry of Goldman Sach’s actions as well as the broader investment banking industry.
In the aftermath of the financial crisis, Congress held hearings as to how and why it happened. The Dodd-Frank Act attempts to impose systemic protections from a mechanical standpoint. While in committee, the Bill also attempted to impose behavioral protections by requiring brokerage firms be held as fiduciaries to their customers. The industry’s powerful lobby ensured that requirement didn’t make it out of committee. Instead, Congress directed the U.S. Securities & Exchange Commission to “study” the issue. Currently, the SEC is headed by Mary Schapiro, who is formerly the head of FINRA, the brokerage industry’s trade organization. The current proposals by the SEC include a watered down fiduciary standard.
It is the lack of a fiduciary standard that is at the heart of Mr. Smith’s assertions. There is little doubt that the larger financial crisis stems from the sub-prime mortgage crisis. Goldman Sachs has already pled guilty to civil charges that it defrauded customers. It touted and sold billions of dollars of mortgage-backed securities when it well knew the securities were of poor quality. They themselves had even sold short the same securities. Emails from within Goldman Sachs regarding these sales to customers clearly support Mr. Smith’s portrayal of Goldman Sachs’ attitude toward its customers. Indeed, the emails are very unflattering to Goldman Sachs.
A recurring theme among Occupy Wall St. protesters and some Democratic politicians (see this massively popular Tumblr image mashup) is that no financial industry types have gone to prison for the malfeasance that led to the financial crisis.
As a technical matter, this isn’t true. The number is (at least) two, according to HousingPredictor.com.
- Michael J. McGrath Jr., former president of U.S. Mortgage Corp., got 14 years in prison for orchestrating a conspiracy that defrauded credit unions and Fannie Mae of $136 million.
- Lee B. Farkas, former chairman of Taylor, Bean & Whitaker Mortgage Corp., got 30 years in prison and was ordered to forfeit $38.5 million, for his role in a $3 billion scheme to rip off banks through the sale of fake mortgage assets.
Still, these two arrests would likely seem to most irate protestors like pretty small potatoes. So why is it that so few top executives seem to have gotten their proper comeuppance for the financial crisis? Decoder would put forward three broader questions for consideration:
1. What is the difference between “illegal” and “irresponsible”?
Asked at a Thursday news conference about the lack of Wall St. prosecutions, President Obama said this:
[O]ne of the biggest problems about the collapse of Lehman and the subsequent financial crisis and the whole subprime lending fiasco is that a lot of that stuff wasn’t necessarily illegal, it was just immoral or inappropriate or reckless. That’s exactly why we needed to pass Dodd-Frank, to prohibit some of these practices….
I think part of people’s frustrations, part of my frustration, was a lot of practices that should not have been allowed weren’t necessarily against the law, but they had a huge destructive impact.
While the distinction between hubris/stupidity and illegality may not satisfy many, it’s a key component to the financial crisis. The Motley Fool put it thus:
Blowing up your company isn’t necessarily a crime. Leveraging 30-to-1 isn’t unlawful. Neither is buying securities backed by homeowners unable to repay. Nor is ignoring caution signs. Or disregarding history.
But what about subprime mortgages? Weren’t there tons of evil things going on there that went well beyond stupidity? Yes - but it’s often hard to make the case that executives are to blame. Consider Countrywide, one of the most notorious subprime lenders, whose CEO, Angelo Mozilo, is far from a sympathetic figure. As the New York Times writes:
The problem is that Mr. Mozilo, though he helped create the culture that made such predatory lending acceptable, never made the fraudulent loans himself. Legally, if not morally, he’s off the hook.
2. In cases of actual illegality, has the federal government put enough resources into prosecuting malfeasance?
As a comparison, the NYT looked back at the savings and loan crisis of the 1980s, which ended with more than a thousand felony convictions (remember, a single person can get multiple convictions).
[T]he federal government threw enormous resources at those investigations. There were a dozen or more Justice Department task forces. Over 1,000 FBI agents were involved. The government attitude was that it would do whatever it took to bring crooked bank executives to justice.
The executives howled that they were being unfairly persecuted, but the cases against them were often rooted in a simple concept: theft. And as prosecutors racked up victories in court, they became confident in their trial approach, and didn’t back away from taking on even the most well-connected thrift executives
Why can’t they do that today? That’s a serious question. Encumbering factors include a lack of FBI resources, given terrorism concerns, and a lack of legal expertise on the part of public prosecutors outside New York on complicated financial questions. The latter point is particularly relevant given the well-paid legal defenses marshaled by financial executives.
3. To what extent are government figures liable?
On TIME’s list of 25 people to blame for the financial crisis, several government figures are named along with top financial executives - including former Federal Reserve Chairman Alan Greenspan, presidents Bill Clinton and George W. Bush, and former Senate Banking Committee Chair Phil Gramm (R) of Texas.
Peeling back financial regulations, keeping interest rates “too low” (a subjective measure, to be sure), and falling asleep at the regulatory switch (a la the Securities and Exchange Commission) all had a role to play in the financial crisis. How much liability should we apportion to government figures?
“Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution. But only after much pain.”
An Italian radio program’s story about Iceland’s on-going revolution is a stunning example of how little our media tells us about the rest of the world. Americans may remember that at the start of the 2008 financial crisis, Iceland literally went bankrupt. The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.
As one European country after another fails or risks failing, imperiling the Euro, with repercussions for the entire world, the last thing the powers that be want is for Iceland to become an example. Here’s why:
Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return. The accounts, called IceSave, attracted many English and Dutch small investors. But as investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy…
What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.
Of course the international community only increased the pressure on Iceland. Great Britain and Holland threatened dire reprisals that would isolate the country…
In the March 2010 referendum, 93% voted against repayment of the debt. The IMF immediately froze its loan. But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis. Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country.
But Icelanders didn’t stop there: they decided to draft a new constitution that would free the country from the exaggerated power of international finance and virtual money.
To write the new constitution, the people of Iceland elected twenty-five citizens from among 522 adults not belonging to any political party but recommended by at least thirty citizens. This document was not the work of a handful of politicians, but was written on the internet.
Refusing to bow to foreign interests, that small country stated loud and clear that the people are sovereign.
That’s why it is not in the news anymore.
Lloyd lawyers up: The Goldman Sachs CEO has hired the services of Reid Weingarten, an accomplished defense attorney who’s worked for former executives from WorldCom Inc. and Enron — this news caused a predictable dip in the value of Goldman’s shares, which closed down 4.7% on Monday. The obvious market concern is that Blankfein will be dealing with inquiries from the Senate subcommittee charged with investigating wrongdoings of the 2008 financial crisis, and whether his hiring a top-flight attorney suggests looming legal trouble. source
The House Oversight Committee’s investigation into the government commission that was supposed to figure out the cause of the the financial crisis appears to have backfired on the Republicans who lead the committee.
Rep. Darrell Issa (R-CA) and his investigators had been looking into the Financial Crisis Inquiry Commission because, Issa said, it went over budget and commissioners and staffers “may have conflicts of interest created by their previous roles in the public and private sectors.”
Issa said he was troubled by “extensive ties of some of the senior staff at a putatively bipartisan commission to partisan Democrat politics” and said the FCIC “served as nothing more than a cheering section for the Administration and congressional Democrats in their efforts to defend a partisan and ineffective financial regulatory reform bill.”
Instead, the documents reviewed by congressional investigators, according to the Democrats’ report on that matter, reveal that Republican commissioners and staffers were improperly sharing the FCIC’s work with outside parties. Dems also say that emails show that one Republican commissioner was trying to use his position on the commission to bolster the GOP’s chances of repealing financial services reform.