The Great Financial Crisis: Scot-Free Culprits
Expose Class Solidarity
By Farooque Chowdhury
22 June, 2011
Sacrosanct capitalism searches causes behind the Great Financial Crisis among individuals instead of in the system it owns and operates, and fails to nab the culprits, the individuals involved with the crisis. The act and the failure reiterate the fact mentioned many years ago: the entire capitalist system safeguards capital, and governing machines – finance regulatory, law enforcement or whatever it is – are not class-neutral. The failure to nab culprits, the system’s in-built friend-foe-within, signifies class solidarity of capital’s ruling machine.
Reports by the US governing system, and from media, an ideal sample for study, tell reality of class solidarity. Based on (and liberally quoted from) these reports the old pattern of failure and collaboration is reiterated: as class-tool, state’s first job is to defend dominating interests.
Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (WFC), the 650-page report released in mid-April, 2011, describes finance capital-friendly practices, improper even according to governing standards set by capital, at different levels, and the governing standards were ignored, in different styles and through different work methods and procedures by the speculating capital and its regulators. Higher rate of quicker profit in a stagnant economy made them reckless. The report focuses on a number of players in the speculation game – Washington Mutual, the Office of Thrift Supervision (OTS), Standard & Poor’s, Moody’s Investors Service, Goldman Sachs and Deutsche Bank – while it provides evidence of collaboration that enters the den of criminality.
Senator Levin, co-chairman of the Senate Permanent Subcommittee on Investigations that released the report said: “The report pulls back the curtain on shoddy, risky, deceptive practices on the part of a lot of major financial institutions.” “[T]hose institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies…They gained at the expense of their clients and they used abusive practices to do it.” (New York Times, Apr. 13, 2011) Others including a Time story (the report on 25 blame-worthy, and referred in The Age of Crisis), quite some time back, also made almost similar observations and presented facts.
Almost always ignored, but the foremost fact is: public-deceived. The speculating capitalists, as Marx and Engels retorted, have “expropriated” property, the holiest love capitalists worship, in billions of dollars, although they despise the act of expropriating property if working people initiate. But the superrich get enriched by appropriation and expropriation, which is actually thievery, a regular proud act of capitalists. Inner workings of democracy of capital involved in this Great Gambling have also been re-exposed by these reports.
“At least 10,500 people with criminal records”, noted the Financial Crisis Inquiry Commission, “entered the [mortgage-broker] field in Florida, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion.”
Before committing the first $85 billion to salvage AIG, the government “failed to exhaust all options” said the US Congressional Oversight Panel in one of its monthly reports in mid-2010. As AIG went to the verge of collapse, Fed and the Treasury jumped on to save it with more than $100 billion. The report was not certain that whether taxpayers will ever be repaid in full. The Panel said: AIG had an “insatiable appetite for risk” but “blindness to its own liabilities.”
Is not the appetite the historically proven character of capital?
During hearings of the US Financial Crisis Inquiry Commission (FCIC) in 2010, an AFP report (Jan. 14, 2010) said: the bankers admitted mistakes as they accumulated risks that led up to the crisis. Lloyd Blankfein, Goldman Sachs chairman, said: “accumulation of risk” was “the biggest problem” that financial institutions faced ahead of the crisis. “These are all exercises in risk management.” John Mack, Morgan Stanley chairman, informed that many firms were “too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks.” Brian Moynihan, Bank of America president, admitted the “lot of damage” the banking industry caused. Jamie Dimon, JPMorgan Chase chairman had the same admission: “We made mistakes.” But Blankfein cautioned against overregulation: “Taking risk completely out of the system will be at the cost of economic growth.” After hearing these frank confessions and valuable observations, Phil Angelides, chairman of the FCIC, said: “It sounds …like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars. It doesn’t seem to me that’s a practice that inspires confidence.”
Capital, it seems, involved in speculation has made risk a commodity; it speculated on risk; and the risk-commodity has established a number of relationships that connects individuals, institutions, practices, procedures, regulations. But still it – risk-commodity – is difficult to define. “A commodity is … a mysterious thing…,” says Marx (Capital, I, ch. 1, sec. 4) Monopoly-finance capital, which is now engaged with speculation with risk and illusory financial products, has made financial-commodity, it produces and trades with, more mysterious. It is not a simple commodity. In it “human brains and nerves, and muscles,” as Marx tells, “and in this sense are human labour” (ibid. sec. 2) is spent. State machines, directly and indirectly, formally and informally, serve them, for which the machine has been assembled.
Countrywide Financial, IndyMac and Washington Mutual were considered as “constituents” by OTS officials. It supervised them; it relied on bank executives to remedy problems; and it was reluctant to interfere with “even unsound … practices” at Washington Mutual, said the WFC. Two risk managers at the bank were marginalized and one of them was fired as the manager informed the regulator that loss estimates provided by the executives were outdated. In 2004-’08, the regulatory office identified more than 500 serious deficiencies at Washington Mutual. But the bank was not forced to improve its lending operations. In Sept. 2008, as the Federal Deposit Insurance Corporation (FDIC) moved to downgrade the bank’s safety and soundness rating, the OTS director, referring to the FDIC chairperson, angrily e-mailed to a colleague: “I cannot believe the continuing audacity of this woman.” Washington Mutual failed within weeks, informs the WFC.
In 2007, the WFC said, Goldman with its power to drive prices to its desired direction tried to build its bet against housing, actually an act of manipulation: drive down the cost of shorting the mortgage market by squeezing those making negative bets, try to put on the squeeze, so that it can add to its negative bets in a cheaper way and protect itself against the housing collapse.
Greg Lippmann, a trader focused in the WFC, was vocally negative about housing as early as 2005 and brought his idea of shorting the market to professional investors. He described risky mortgage securities as “pigs”. Once he was asked to buy one such mortgage security. His response: he “would take it and try to dupe someone”. He persuaded Deutsche Bank to let him build a large short position that reached $5 billion by 2007. Lippmann considered the bank’s operation a “CDO (collateralized debt obligation) machine” and characterized such securities as “Ponzi scheme.” Lippmann claimed that he persuaded the AIG to stop writing insurance on mortgage securities. He informed the committee that the head of the Deutsche that put together CDOs was upset when Lippmann persuaded AIG to exit the business in 2006 as it would be harder to keep these lucrative factories humming without AIG to insure the instruments.
According to WFC, Deutsche and other banks made $5 million to $10 million for every deal like Gemstone, a CDO these banks created. In 2006 and 2007, banks created about a trillion dollars of CDO deals, a casino economy appliance that ignited the lending lust.
As examples of not looking deeply into acts of profiteering with risk and bundling questionable loans and selling, creating illusory profits, etc. the New York Times cites a number of incidents: Merrill Lynch understated its risky mortgage holdings by hundreds of billions of dollars. Mozilo, the chief executive of Countrywide Financial, publicly praised his company’s practices, which were at odds with derisive statements he made privately in e-mails as he sold shares. The stock subsequently fell as its losses became known. Lehman Brothers executives assured investors in the summer of 2008 that its financial position was sound, although they counted as assets some holdings pledged to others. Bear Stearns executives may have pocketed revenues that should have gone to investors. “But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse.” Brad Bondi and Martin Biegelman, two assistant directors of the commission, specifically named Countrywide and Mozilo while outlining their recommendations for investigative targets and hearings in a memo. They noted that subprime mortgage executives like Mozilo received hundreds of millions of dollars in compensation even though their companies collapsed. A message reached the officials: Countrywide was off limits. Phil Angelides, the commission’s chairman, told his deputies that Countrywide should not be a target or featured at any hearing. Chris Seefer, an investigating FCIC official, said: Countrywide had not been given a pass. Angelides said a full investigation was done on the company, and that a hearing was planned to feature Mozilo. It was canceled because Republican members of the commission did not want any more hearings. Accounting firm Ernst & Young helped Lehman “engage in massive accounting fraud.” E&Y was sued in 2010. But to date, Lehman or any of its executives has not been sued. (Apr. 14, 2011)
Mozilo tired with the demands of the OCC found an easy escape route: Countrywide changed charters to go under the purview of OTS, a “considerate” regulator. According to Connie Bruck of The New Yorker, the OTS actually lobbied Countrywide to make the switch. West Virginia tried to sue Capital One for credit card abuse in 2005; the company applied for a national charter with the OCC; and Capital One escaped West Virginia’s jurisdiction. The state lost authority to pursue the case. The OCC stopped Georgia as it tried to enforce predatory lending laws. New York regulators were intervened while pursuing discriminatory lending investigations. The FCIC head told John Dugan, former OCC head, “You tied the hands of the states and then sat on your hands.”
The case with the Bank of America has been settled by the SEC, and none of its executives were charged for their unholy acts. A civil fraud lawsuit against the former chief executive and the former chief financial officer has been filed. The case is pending. Last spring, new mortgage-related subpoenas to eight large banks have been issued. But no case has been brought on this matter. (NYT, Apr. 14, 2011)
Giant banks paid big bonuses immediately after their bailout. That money was not brought back. Those bonus figures were only made public to make the beneficiaries shameful. (ibid.) But big money and shame are not hostile to each other.
After the Bear Stearns collapse, in-depth search for fraud throughout the mortgage palace was suggested by some law enforcement insiders. The FBI expressed concerns about mortgage improprieties in 2004, identified about two dozen areas the fraud was assumed going unrestrained, and made a plan to investigate major banks and lenders. Robert S. Mueller III, FBI director, approved the plan. [Time, May 9, 2011 carries a report on Muller and surrounding situation.] “We were focused on the whole gamut: the individuals, the mortgage brokers and the top of the industry,” said Kenneth W. Kaiser, the former assistant director of the criminal investigations unit. “We were looking at the corporate level.” Days after the memo was sent, prosecutors at some Justice Department offices began to complain that shifting agents to mortgage cases would hurt other investigations. “We got told by the DOJ not to shift those resources,” he said. About a week later he was told to send another memo undoing many of the changes. Some of the extra agents were not deployed. A spokesman for the bureau said that a second memo was sent out that allowed field offices to try to opt out of some of the changes in the first memo. The FBI scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the DOJ also rejected proposal to create a task force for mortgage related investigations. As a result, these cases remained understaffed and poorly funded. A broader financial crimes task force was formed much later. (ibid.) “[T]he FBI has seen a radical cut in the number of agents available to investigate financial crime. …During the savings and loan crisis, 1,000 FBI agents worked the financial-crimes scene. Today, just 240 do.” (Morgan Housel, “Why So Few Ended Up in Jail After the Financial Crisis?”, Fool.com, Apr. 26, 2011)
Civil actions by the government were limited. The SEC’s broad guideline in 2009, never made public, made it cautious about pushing for hefty penalties from banks that had received bailout money. “The agency was concerned about taxpayer money in effect being used to pay for settlements.” (NYT, Apr. 14, 2011)
Setting up a financial fraud task force to scrutinize the mortgage industry was considered by the DOJ. Michael B. Mukasey, a former federal judge in New York who had been the head of the Department, discussed the issue with his deputies. He decided against a task force. Last year, the FCIC asked Mukasey that whether he was aware of requests for more resources for investigating fraud, Mukasey said, he did not recall internal requests. Mukasey’s spokesperson said that he had no knowledge of the FBI memo. A year later, several lawmakers decided that the government needed more people tracking financial crimes; Congress passed a bill, providing a $165 million budget increase to the FBI and DOJ for investigations in the area. But only about $30 million in new money was provided. (ibid.)
In July 2008, the SEC staff received a phone call from Scott Alvarez, general counsel at the Federal Reserve in Washington, to discuss an SEC investigation into improprieties by the largest US brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities that UBS, Goldman Sachs and similar companies operated propagating them as highly liquid investments. Investors holding hundreds of billions of dollars of these securities could no longer cash those in as the crisis spread. As the SEC investigated these events, some SEC officials argued that the banks should make all investors whole on the securities, because banks had marketed them as safe investments. But Alvarez suggested that the SEC soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the SEC, cautioning that banks might run short on capital if they had to pay billions of dollars required to make all auction-rate clients whole. The SEC wound up requiring eight banks to pay back only individual investors. For institutional investors including pension funds that bought the securities, the SEC told the banks to make only their “best efforts.” (ibid.)
The FDIC sued Killinger, Washington Mutual’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. This is one of the few exceptions. The SEC extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built. (ibid.) Probably, somewhere some understanding failed.
Regulators failed to compile information that could have helped frame criminal cases. Weak regulation made it difficult to pursue fraud. The SEC slowed down the investigative work on other cases. In 2009, the DOJ announced a task force to focus on financial crimes. But the department received no additional resources. Lawyers opined that Countrywide exemplifies the difficulties of mounting a criminal case without assistance and documentation from regulators. The FCIC decided not to make an in-depth examination of the company. Non-prosecution of Countrywide, the largest mortgage lender in the US, puzzles legal experts. Last month, the office of the US attorney for Los Angeles dropped its investigation of Mozilo after the SEC extracted a settlement from him in a civil fraud case. Mozilo paid $22.5 million in penalties, without admitting or denying the accusations. (ibid.)
Citing data from Syracuse University’s Transactional Records Access Clearinghouse the NYT said: in 1995, bank regulators referred 1,837 cases to the DOJ. In 2006, it was 75. The following four years saw it slide to 72 a year on average. The declining trend began under Clinton. The Bush administration maintained it. Prosecutions for Enron, WorldCom, Tyco and others were exceptions. From the summer of 2007 to the end of 2008, OTS-overseen banks with $355 billion in assets failed. But OTS has not referred a single case since 2000. The Office of the Comptroller of the Currency has referred only three in the last decade. Mostly small banks face civil enforcement actions. There is no stiff penalty. No senior executives have been charged or imprisoned, and no collective government effort has emerged. (ibid.)
Concerned with Countrywide’s reckless lending, Robert Gnaizda, former general counsel at a nonprofit consumer organization, advised John Reich, a former banker and Senate staff member appointed by George W Bush, to set up a hot line for whistle-blowers inside Countrywide to communicate with regulators. Countrywide switched oversight to the thrift supervisor, and that agency was overseen at the time by John Reich. “John was uninterested. He told me he was a good friend of Mozilo’s.” Reich said that he did not recall the conversation with Gnaizda. (ibid.)
William Black, law professor, University of Missouri, said: “There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.” David Skeel, law professor, University of Pennsylvania, said: “It goes to the whole perception that Wall Street was taken care of, and Main Street was not.” Henry Pontell, criminology, law and society professor, University of California, Irvine said: “When regulators don’t believe in regulation and don’t get what is going on at the companies they oversee, there can be no major white-collar crime prosecutions. If they don’t understand what we call collective embezzlement, where people are literally looting their own firms, then it’s impossible to bring cases.” (ibid.)
In a capital dominated world system, capital’s profit making motive is “not” crime! Capital loots instead of making investment into manufacturing as profit from manufacturing is lower than loot! The situation “makes” loot legal! The need to sue for loot “doesn’t” arise as loot drives economic activity! Prosecuting capital is not the job of capital’s governing machine! Capital’s crimes are “not” crimes and capital’s corruptions are “not” corruptions until its crimes and corruptions corrode capital.
But these also are ignored as higher profit comes in quicker speed although this produces perilous moments of meltdown. It corrupts the political system, which is essential for its existence. “The financial services industry”, Paul Krugman writes, “has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. … The vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole. … But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion. … At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. (NYT, “The Madoff Economy”, Dec.19, 2008)
The profiteering from risk-activity by the capital made more than seven million Americans jobless and about 25 million Americans unemployed/underemployed. It pushed out more than two million families from their homes in the last three years. During that period, more than 10 million were in the foreclosure process. It was a harmony of chaos and catastrophic failure made by capital with deep uncertainty in the lives of the people. McClatchy Newspaper reported: attorneys for hundreds of injured workers informed that AIG was dragging out insurance payments that their clients need to cover home mortgages, failing to pay full compensation benefits and refusing to pay medical bills. (June10, 2010) An insurer spreading and accelerating uncertainty among people! The report said: AIG, the company linked to major financial firms around the world and through which more than $90 billion in federal money flowed out the back door to some of the same Wall Street banks whose risky behavior fueled the nation’s financial crisis, is now being accused of short-changing its customers.
Dominating definitions of legality made the capital’s accounting tricks legal (i.e., Lehman’s repo 105 accounting method) although those were unethical. Its ethics and legality do not collide as one stands on the other. Probably this led Morgan Housel to write: Not only was this stuff legal, but lucrative. Many executives walked away rich. … This was heads they win, tails you lose, and in either case, jail remains elusive. You can almost hear them laughing now. (Fool.com, April 26, 2011)
“[T]hree years after our [in the US] horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail …” (Charles Ferguson, director, Inside Job documentary, while accepting the Oscar for best documentary in 2011, quoted by Housel) Morgan Housel informs in his column: “After the savings and loan crisis of the early ’90s, 800 financial executives went to prison. Not only have most bank execs avoided prosecution this time around, but many are still gainfully employed by the banks that ran the economy into the ground.” (Fool.com, Apr. 26, 2011) The NYT queried: “It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?” The NYT replied: “Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. (Apr. 14, 2011)
The system is concerned with stabilizing and shoring up its institutions, a day dream in long term. The capital involved with the crisis has established a relationship between victors, on the Wall Street, and victims, on the Nowhere Street, a relationship between deceived and deceiver, dominant and dominated, powerful and powerless, plundered and plunderer, a relationship determined by plunderocracy, a relationship of plunder, enjoy and marginalize the majority, a relationship carrying many contradictions, a relationship creating crisis of credibility of the governing system. While covering the bail out bill in the Congress Time told this credibility crisis in related story “The Bail Out Defeat: A Political Credibility Crisis”. The credibility crisis has still not come out with its full face and force. Recent surveys on mass psychology show part of that face.
All aspects of the Great Financial Crisis have still not been identified, debated and discussed. This is needed as the crisis is making impact, on the one hand, on the lives of the people, and on the other hand, on capitals, and classes that own these capitals, and dominate the present geoeconomy and geopolitics. These will make far-reaching impact on the ruling classes and peoples’ struggles in many lands.
Dhaka-based freelancer Farooque Chowdhury contributes on socioeconomic issues. One of his books is The Age of Crisis.
Comments are not moderated. Please be responsible and civil in your postings and stay within the topic discussed in the article too. If you find inappropriate comments, just Flag (Report) them and they will move into moderation que.