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The Second Circuit Makes Sophisticated Insider Trading the Perfect Crime
We know that insider trading is an activity in which cheaters prosper. We know that Wall Street and the City of London are dominated by a fraudulent culture and we know that firm culture is set by the officers that control the firm. We know that the Department of Justice (DOJ) has allowed that to occur by refusing to prosecute any of the thousands of senior bank officers who became wealthy by leading the three most destructive financial fraud epidemics (appraisals, “liar’s” loans, and fraudulent sales of these fraudulently originated mortgages to the secondary market) in history. No one is surprised that Wall Street’s elites have also engaged in widespread efforts to rig the stock markets so that they can shoot fish in the barrel through insider trading. Unlike the three fraud epidemics, one DOJ office, the Southern District of New York, has brought a series of criminal prosecutions against these officers.
Wall Street’s court of appeals (the Second Circuit) has just issued an opinion not simply overturning guilty verdicts but making it impossible to retry the elite Wall Street defendants that grew wealthy through trading on insider information. Indeed, the opinion reads like a roadmap (or a script) that every corrupt Wall Street elite can follow to create a cynical system of cutouts (ala SAC) that will allow the most senior elites to profit by trading on insider information as a matter of routine with total impunity. The Second Circuit decision makes any moderately sophisticated insider trading scheme that uses cutouts to protect the elite traders a perfect crime. It is a perfect crime because (1) it is guaranteed to make the elite traders who trades on the basis of what he knows is secret, insider information wealthy absent successful prosecutions and (2) using the Second Circuit’s decision as a fraud roadmap, an elite trader can arrange the scheme with total impunity from the criminal laws. The Second Circuit ruling appears to make the financial version of “don’t ask; don’t tell” a complete defense to insider trading prosecutions. The Second Circuit does not simply make it harder to prosecute – they make it impossible to prosecute sophisticated insider fraud schemes in which the elites use junior cutouts to create (totally implausible) deniability.
The New York Times article on the decision was entitled “Two Insider Trading Convictions Are Overturned in Blow to Prosecutors.” The title is partially correct. The real blows, however, were to investors, the already crippled integrity of Wall Street, and every honest trader on Wall Street who cannot possibly compete with his rivals who cheat through the “sure thing” of insider trading now that the Second Circuit has written an opinion explaining how to corrupt the entire system with impunity from the criminal laws.
Wall Street’s most recent effort to rig the markets through insider trading is far larger and more audacious than any prior effort, including those by Michael Milken and Boesky. Wall Street elites sought to institutionalize the corruption of officers of a wide range of publicly traded corporations. The goal was to gain a corrupt advantage over honest investors in trillions of dollars in securities trades.
The Second Circuit decision admits that the prosecutors presented evidence established a massive conspiracy designed to allow Wall Street elites to profit by engaging in insider trading, a conspiracy that greatly enriched the defendants that were convicted in the case under appeal.
“At trial, the Government presented evidence that a group of financial analysts exchanged information they obtained from company insiders, both directly and more often indirectly. Specifically, the Government alleged that these analysts received information from insiders at Dell and NVIDIA disclosing those companies’ earnings numbers before they were publicly released in Dell’s May 2008 and August 2008 earnings announcements and NVIDIA’s May 2008 earnings announcement. These analysts then passed the inside information to their portfolio managers, including Newman and Chiasson, who, in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.”
The Second Circuit was not distressed that senior Wall Street officials received information that was clearly insider information that they knew they should not have access to. The insider information they were provided was the crown jewels – two major corporations’ soon to be announced “numbers” – at least one of which was sure to be a major surprise to the markets. A senior trader that knows “the number” in advance, particularly when he knows that the number will be a surprise, can shoot fish in a small barrel with a large shotgun. The insider information allows the senior trader to reduce the risk of loss to trivial levels while increasing the probability of gain to near certainty. The trader makes a fortune by cheating, not through any unusual skill. The senior trader knows that no employee of any publicly traded corporation is permitted to release such secret and proprietary insider information to investors.
The Second Circuit was not distressed that the senior Wall Street officials did not react to being provided what was clearly insider information by demanding to know how their analysts got the information and instructing them that their actions violated the firms’ ethical standards and would lead to their termination if it were ever repeated. The firm’s ethics manuals banned the senior traders from trading on the basis of insider information. Instead, of serving as ethical leaders in training the analysts not to engage in such behavior and instead of following their firm’s ban on trading on the basis of insider information, the senior officers engaged in a cynical financial version of “don’t ask; don’t tell.” The analysts and the senior officials that traded on the inside information understood the wisdom of the old line “ask me no questions and I’ll tell you know lies.” The senior officers proceeded to profit by exploiting this advantage over honest investors while minimizing the risk of a successful prosecution not by being ethical, but by consciously maintaining (not remotely) “plausible deniability.”
I recently wrote a column responding to an article in which a prominent criminal justice scholar was quoted as complaining, in response to the protests of the police killing of Eric Garner during their attempt to arrest him for selling “broken packs” of cigarettes on a NYC street, that politicians had a “responsibility” to explain to the public the necessity of “broken windows” policing strategies. The concept of “broken windows” is that is essential to take formal, aggressive enforcement actions against even minor transgressions in order to prevent a “criminogenic environment” from developing that will produce large numbers of major crime. The SEC is formally claiming to have adopted “broken windows” as its enforcement standards. Confusingly, “broken windows” has been rebranded by some academics as “quality-of-life enforcement.”
“‘Everyone is just demonizing the police,’ said Maki Haberfeld, a professor of police studies at John Jay College of criminal justice. ‘But police follow orders and laws. Nobody talks about the responsibility of the politicians to explain to the community why quality-of-life enforcement is necessary.’”
Garner’s profits from violating an obscure law on the sale of cigarettes in any given week probably amounted under $70. A few days of the defendants’ trades based on insider information produced a $72 million profit – a million time larger. Garner died. The Wall Street guys were able to hire elite criminal defense lawyers. They will walk. Wall Street’s culture is so corrupt that it will treat the now officially “innocent” defendants like heroes and even victims of a rapacious prosecutor. “Broken windows” is a discredited theory when it comes to offenses like that of Garner, but it is vitally and urgently needed as a corrective to Wall Street’s corrupt culture.
But worse will soon come. The Second Circuit’s decision is a “how to” manual on how elites Wall Streeters can become wealthy through insider trading with impunity from the criminal laws. The Second Circuit opinion shows that using a “cutout” is the key to achieve the “sure thing” of enormous wealth through insider trading without financial or legal risk. The Second Circuit lays out the game plan. The little folks in the organization develop the contacts with insiders in publicly traded firms. The analysts function initially like any good intelligence agent recruiting an asset. These assets have insider information of their employers, the publicly traded corporations. The analyst develops a rapport with the employee or exploits an existing tie. The analyst shows the employee a very good time – a taste of how good his life can be if he plays ball. But the analyst doesn’t make any explicit promises or deals. (In the case decided by the Second Circuit others cutouts earlier in the insider trading chain made the corrupt payments to the employees.) The Wall Street senior officers who grow wealthy by trading the insider information will make sure that the analysts are well cared for – discretely and at a later date.
The analyst then has to do one thing and avoid doing a second. Both are simple. The analyst needs to signal to his superior that the information is reliable. The government complaint against SAC show one the innumerable means of sending that signal. The government’s appellate brief contains the text of an email in which an analyst explicitly conveyed the reliable track record of the leakers of the inside information to the senior traders so that they could be sure they had a “sure thing” by investing on the basis of the inside information.
The analyst needs not to explicitly tell the senior officer conducting the trade that the insider information was the product of a deal in which the employee who leaks the insider information was explicitly promised a quid pro quo to the leaker. Again, the government complaint against SAC and the government appellate brief in the case reversed by the Second Circuit show in detail how simple it is to design systems of not making these matters explicit. That is why the Second Circuit ruling imperils prosecutions in every case in which the insider trading scheme was done with even modest cleverness.
The Second Circuit did not treat the elite traders’ use of a series of junior cutouts as what it really is – a cynical abuse of power sure to corrupt the firm, Wall Street professionals the financial industry, and financial markets. Ending the rule of law by making sophisticated insider trading schemes the perfect crime corrupts the industry by generating a “Gresham’s” dynamic in which “bad ethics drive good ethics out of the markets and professions.” The capacity for corruption makes the Second Circuit’s creation of a perfect crime all the more perverse. The sophisticated insider trading schemes using cutouts that the Second Circuit opinion immunizes from prosecution represent a far more dangerous and sophisticated conspiracy that should be subject to far more severe sanctions than simpler forms of insider trading.
The elites’ “don’t ask; don’t tell” insider trading scheme was designed solely to make already exceptionally wealthy elites even richer through corrupt “sure things.” The “don’t ask; don’t tell” scheme worked by coercing junior members of the firm (through perverse compensation and promotion or firing pressures) to corrupt employees of publicly traded corporations. The Second Circuit opinion treats the “don’t ask; don’t tell” tactic, the large power differentials between the participants of the scheme, and the elite traders’ use of multiple cutouts as if these factors were exculpatory. The more sophisticated and destructive the insider trading scheme, the more the Second Circuit opinion shields the elite traders made wealthy by the scheme from prosecution. The Second Circuit adopts, celebrates, and shields from accountability Wall Street’s corrupt culture by making sophisticated insider trading the perfect crime.
“[The defendant senior traders] Newman and Chiasson were several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information. With respect to the Dell tipping chain, the evidence established that Rob Ray of Dell’s investor relations department tipped information regarding Dell’s consolidated earnings numbers to Sandy Goyal, an analyst at Neuberger Berman. Goyal in turn gave the information to Diamondback analyst Jesse Tortora. Tortora in turn relayed the information to his manager Newman as well as to other analysts including Level Global analyst Spyridon “Sam” Adondakis. Adondakis then passed along the Dell information to Chiasson, making Newman and Chiasson three and four levels removed from the inside tipper, respectively.”
The Second Circuit’s reasoning has the perverse effect that the more corrupt individuals engaged in the insider trading scheme the more likely the scheme is to be declared lawful as long as the traders use their corrupt colleagues as cutouts. Note that the Second Circuit reasoning does not simply make it harder to prosecute sophisticated insider trading schemes – it holds that the actions of the elite traders who know that they are achieving the “sure thing” of immense insider trading profits on the basis of deliberate leaks of that information are not unlawful and cannot be prosecuted. The Second Circuit has created the perfect crime and publicized how to shape the scheme to insure wealth and impunity through creating widespread chains designed to corrupt the markets, employees of the publicly traded corporations, and the Wall Street firms.
The tone of the opinion is particularly galling. The Second Circuit is not even mildly distressed by the result. It expresses disdain for the idea that Wall Street elites should not be able to enrich themselves with complete impunity from the laws through corrupt arrangements such as those proven at the trial. The opinion consciously deliberately creates a straw man argument designed to hide the fact that insider trading schemes of this make it impossible for honest competitors to prevail through skill and hard work.
“Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.”
Wall Street’s pet Court of Appeals sneers at the concept that there might be reasons to wish that the law did not (under its holding) create a perfect crime that is inherently corrupting. The three judges on the panel were appointed by Presidents Reagan and Bush II. The opinion does not contain even a perfunctory statement of regret that it creates a path to the perfect crime and the further corruption of Wall Street at the expense of honest traders and investors.
There was a real conspiracy to corrupt employees at publicly traded firms and to profit from the resultant insider information that was proven at the trial. The conspiracy produced the desired result, until the government brought it to a halt by prosecuting. The Second Circuit took the exceptional step of not reversing the conviction based on an erroneous jury instruction and allowing the prosecutors to retry the case and present again at the new trial the powerful evidence of conscious disregard by the elite traders made wealthy through trading on insider information. The government’s appellate brief demonstrates that the government presented what I would consider as a white-collar criminologist detailed and compelling evidence that the elite traders knew that they were trading on insider information that was improperly leaked for corrupt purposes. The Second Circuit forbade any retrial. Worse, the Second Circuit appears to be declaring that even a modestly sophisticated use of cutouts by elite traders using insider information creates the perfect crime. They will be made wealthy by the “sure thing” of insider trading and no future prosecutor will be permitted to even prosecute such a perfect crime.
Whatever one thinks of the Second Circuit’s legal reasoning, anyone who cares about the integrity of financial markets should be appalled by the result of their decision that announces a template of how to make insider trading a perfect crime for elites. Republicans and Democrats both purport to care about the integrity of Wall Street firms and the markets and proclaim that they are dedicated to the protection of investors from such forms of cheating. We are about to run a real world test of whether they believe what they say and are willing to take on the powerful Wall Street elites that crafted the corrupt culture of Wall Street. I call on the members of both parties to co-sponsor on an urgent basis a bill to clarify that Congress does intend to make the type of insider trading schemes that were the subject of the Second Circuit’s decision criminal violations of the securities laws.
I also call on members of both parties to double the number of FBI agents and federal prosecutors dedicated to elite white-collar crime investigations and prosecutions. Yes, I know it over 13 years late, but we can all see the costs – over $20 trillion in GDP and 10 million jobs – of ending the rule of law when it comes to bankers. The Second Circuit decision will make Wall Street even more corrupt – and that is saying a great deal. Only through prosecuting the corrupt can we block the “Gresham’s” dynamic and make it possible for honest bankers to take control of Wall Street.
Banksters Pretend that
Prosecuting Wall Street Crime
Will Blow Up the Economy
Posted on May 3, 2014 by WashingtonsBlog
Wall Street Criminals Threaten that Economy Will Blow Up If They’re ProsecutedThe Department of Justice is “considering” initiating criminal charges against 2 banks.
In response, the normal cast of characters is saying – as they have for years – that prosecuting banks will cause a meltdown of the economy.
The U.S. attorney for the Southern District of New York recently mocked the silly claims of gloom and doom:
The Global Bankers' Coup
By Ellen Brown
Bail-In and the Financial Stability Board
On December 11, 2014, the US House passed a bill repealing the Dodd-Frank requirement that risky derivatives be pushed into big-bank subsidiaries, leaving our deposits and pensions exposed to massive derivatives losses. The bill was vigorously challenged by Senator Elizabeth Warren; but the tide turned when Jamie Dimon, CEO of JPMorganChase, stepped into the ring. Perhaps what prompted his intervention was the unanticipated $40 drop in the price of oil. As financial blogger Michael Snyder points out, that drop could trigger a derivatives payout that could bankrupt the biggest banks. And if the G20's new "bail-in" rules are formalized, depositors and pensioners could be on the hook.
The new bail-in rules were discussed in my last post here. They are edicts of the Financial Stability Board (FSB), an unelected body of central bankers and finance ministers headquartered in the Bank for International Settlements in Basel, Switzerland. Where did the FSB get these sweeping powers, and is its mandate legally enforceable?
Those questions were addressed in an article I wrote in June 2009, two months after the FSB was formed, titled "Big Brother in Basel: BIS Financial Stability Board Undermines National Sovereignty." It linked the strange boot shape of the BIS to a line from Orwell's 1984: "a boot stamping on a human face—forever." The concerns raised there seem to be materializing, so I'm republishing the bulk of that article here. We need to be paying attention, lest the bail-in juggernaut steamroll over us unchallenged.
The Shadowy Financial Stability Board
Alarm bells went off in April 2009, when the Bank for International Settlements (BIS) was linked to the new Financial Stability Board (FSB) signed onto by the G20 leaders in London. The FSB was an expansion of the older Financial Stability Forum (FSF) set up in 1999 to serve in a merely advisory capacity by the G7 (a group of finance ministers formed from the seven major industrialized nations). The chair of the FSF was the General Manager of the BIS. The new FSB was expanded to include all G20 members (19 nations plus the EU).
Formally called the "Group of Twenty Finance Ministers and Central Bank Governors," the G20 was, like the G7, originally set up as a forum merely for cooperation and consultation on matters pertaining to the international financial system. What set off alarms was that the new Financial Stability Board had real teeth, imposing "obligations" and "commitments" on its members; and this feat was pulled off without legislative formalities, skirting the usual exacting requirements for treaties. It was all done in hasty response to an "emergency." Problem-reaction-solution was the slippery slope of coups.
Buried on page 83 of an 89-page Report on Financial Regulatory Reform issued by the US Obama administration was a recommendation that the FSB strengthen and institutionalize its mandate to promote global financial stability. It sounded like a worthy goal, but there was a disturbing lack of detail. What was the FSB's mandate, what were its expanded powers, and who was in charge? An article in The London Guardian addressed those issues in question and answer format:
Who runs the regulator? The Financial Stability Forum is chaired by Mario Draghi, governor of the Bank of Italy. The secretariat is based at the Bank for International Settlements' headquarters in Basel, Switzerland.
Draghi was director general of the Italian treasury from 1991 to 2001, where he was responsible for widespread privatization (sell-off of government holdings to private investors). From 2002 to 2006, he was a partner at Goldman Sachs on Wall Street. He was succeeded in 2011 by Mark Carney, who also got his start at Goldman Sachs, working there for 13 years before going on to become Governor of the Bank of Canada in 2008 and Governor of the Bank of England in 2012. In 2011 and 2012, Carney attended the annual meetings of the controversial Bilderberg Group.
What will the new regulator do? The regulator will monitor potential risks to the economy . . . It will cooperate with the IMF, the Washington-based body that monitors countries' financial health, lending funds if needed.
The IMF is an international banking organization that is also controversial. Joseph Stiglitz, former chief economist for the World Bank, charged it with ensnaring Third World countries in a debt trap from which they could not escape. Debtors unable to pay were bound by "conditionalities" that included a forced sell-off of national assets to private investors in order to service their loans.
What will the regulator oversee? All 'systemically important' financial institutions, instruments and markets.
The term "systemically important" was not defined. Would it include such systemically important institutions as national treasuries, and such systemically important markets as gold, oil and food?
How will it work? The body will establish a supervisory college to monitor each of the largest international financial services firms. . . . It will act as a clearing house for information-sharing and contingency planning for the benefit of its members.
"Information-sharing" can mean illegal collusion. Would the information-sharing here include such things as secret agreements among central banks to buy or sell particular currencies, with the concomitant power to support or collapse targeted local economies?
What will the new regulator do about debt and loans? To prevent another debt bubble, the new body will recommend financial companies maintain provisions against credit losses and may impose constraints on borrowing.
What sort of constraints? The Basel Accords, imposed by the Basel Committee on Banking Supervision (also housed at the BIS) had not necessarily worked out well. The first Basel Accord, issued in 1998, had been blamed for inducing a recession in Japan from which that country had yet to recover; and the Second Basel Accord and its associated mark-to-market rule had been blamed for bringing on the 2008 crisis. (For more on this, see The Public Bank Solution.)
The Amorphous 12 International Standards and Codes
Most troubling, perhaps, was this vague parenthetical reference in a press release issued by the BIS, titled "Financial Stability Forum Re-established as the Financial Stability Board":
As obligations of membership, member countries and territories commit to . . . implement international financial standards (including the 12 key International Standards and Codes) . . . .
This was not just friendly advice from an advisory board. It was a commitment to comply, so you would expect some detailed discussion concerning what those standards entailed. But a search of the major media revealed virtually nothing. The 12 key International Standards and Codes were left undefined and undiscussed. The FSB website listed them, but it was vague. The Standards and Codes covered broad areas that were apparently subject to modification as the overseeing committees saw fit. They included money and financial policy transparency, fiscal policy transparency, data dissemination, insolvency, corporate governance, accounting, auditing, payment and settlement, market integrity, banking supervision, securities regulation, and insurance supervision.
Take "fiscal policy transparency" as an example. The "Code of Good Practices on Fiscal Transparency" was adopted by the IMF Interim Committee in 1998. The "synoptic description" said:
The code contains transparency requirements to provide assurances to the public and to capital markets that a sufficiently complete picture of the structure and finances of government is available so as to allow the soundness of fiscal policy to be reliably assessed.
Members were required to provide a "picture of the structure and finances of government" that was complete enough for an assessment of its "soundness" — but an assessment by whom, and what if a government failed the test? Was an unelected private committee based in the BIS allowed to evaluate the "structure and function" of particular national governments and, if they were determined to have fiscal policies that were not "sound," to impose "conditionalities" and "austerity measures" of the sort that the IMF was notorious for imposing on Third World countries? Suspicious observers wondered if that was how once-mighty nations were to be brought under the heel of Big Brother at last.
For three centuries, private international banking interests have brought governments in line by blocking them from issuing their own currencies and requiring them to borrow banker-issued "banknotes" instead. Political colonialism is now a thing of the past, but under the new FSB guidelines, nations could still be held in feudalistic subservience to foreign masters.
Consider this scenario: the new FSB rules precipitate a massive global depression due to contraction of the money supply. XYZ country wakes up to the fact that all of this is unnecessary – that it could be creating its own money, freeing itself from the debt trap, rather than borrowing from bankers who create money on computer screens and charge interest for the privilege of borrowing it. But this realization comes too late: the boot descends and XYZ is crushed into line. National sovereignty has been abdicated to a private committee, with no say by the voters.
Marilyn Barnewall, dubbed by Forbes Magazine the "dean of American private banking," wrote in an April 2009 article titled "What Happened to American Sovereignty at G-20?":
It seems the world's bankers have executed a bloodless coup and now represent all of the people in the world. . . . President Obama agreed at the G20 meeting in London to create an international board with authority to intervene in U.S. corporations by dictating executive compensation and approving or disapproving business management decisions. Under the new Financial Stability Board, the United States has only one vote. In other words, the group will be largely controlled by European central bankers. My guess is, they will represent themselves, not you and not me and certainly not America.
The Commitments Mandated by the Financial Stability Board Constitute a Commercial Treaty Requiring a Two-thirds Vote of the Senate
Are these commitments legally binding? Adoption of the FSB was never voted on by the public, either individually or through their legislators. The G20 Summit has been called "a New Bretton Woods," referring to agreements entered into in 1944 establishing new rules for international trade. But Bretton Woods was put in place by Congressional Executive Agreement, requiring a majority vote of the legislature; and it more properly should have been done by treaty, requiring a two-thirds vote of the Senate, since it was an international agreement binding on the nation.
"Bail-in" is not the law yet, but the G20 governments will be called upon to adopt the FSB's resolution measures when the proposal is finalized after taking comments in 2015. The authority of the G20 has been challenged, but mainly over whether important countries were left out of the mix. The omitted countries may prove to be the lucky ones, having avoided the FSB's net.
This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.
Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are Web of Debt, Public Bank Solution, and Public Banking Institute.
Corruption Is Now Officially Legal in the U.S., But Must Be Done Right
By Eric Zuesse
On December 10th, Wall Street's federal appeals court, the 2nd Circuit Court of Appeals, ruled that if inside information about what is going to happen to a corporation is taken advantage of by an investor, it's okay, so long as the source of the inside-tip isn't directly paid for passing it along.
In other words, if you have friends who have inside information that they received from their friends, they are free to pass it along to you, and you are free to pass inside information that you possess along to them to pass along to others, but neither of you is permitted to pay the other for any inside tip -- the information can legally be acted on only if the tipper is not paid for the tip.
The three-judge panel consisted entirely of Republican-appointed judges. Their ruling, in the case, U.S. v. Newman, 2nd U.S. Circuit Court of Appeals, No. 13-1837, provides insiders a way to sure-thing 'investing' in which groups of friends who trust each other and include high corporate executives and/or investment professionals such as stockbrokers, can legally be virtually certain that their 'investing' will be profitable for them and unprofitable for the individuals they're trading against (either selling to or buying from). If you receive advance-word of negative information and sell to someone who doesn't, or advance-word of favorable information and buy from someone who doesn't, then that's okay, according to the three Republican judges, but only if the original passer of the tip isn't being paid for passing it.
In other words, trading favors is okay, even if it provides unfair advantage against outside investors.
This ruling establishes two classes of investors: one is insiders who trade favors but don't pay each other for providing inside tips, they instead do it instead like members of a club; the other is suckers who rely on the fairness of America's investment markets and on the Government's enforcement against corruption of the investment markets.
Here is the Court's ruling.
We have no sense of value other than dollars
The legislatures and courts are unjust
The 'elite' are on a rampage
Militarized Police are the only solution
As we’ve repeatedly noted, this is wholly untrue.
Indeed, prosecuting the individual Wall Street executives who knowingly committed criminal fraud won’t harm the economy. After all, the main driver of economic growth is a strong rule of law. And numerous Nobel prize winning economists have said that prosecuting Wall Street white collar is necessary for a prosperous economy.
Proof that prosecuting criminal fraud doesn’t hurt the economy comes from Iceland:
[The U.S. and Europe have thwarted white collar fraud investigations … let alone prosecutions.] On the other hand, Iceland has prosecuted the fraudster bank heads (and here and here) and their former prime minister, and their economy is recovering nicely … because trust is being restored in the financial system.
In response to the sky-is-falling spouting banking apologists, professor of law and economics – and chief S&L prosecutor – William Black explains:
First, no banker is “too big to jail.” They are easily replaceable and removing a fraudulent bank CEO from power is the single most productive act that regulators and prosecutors can accomplish. [The Department of Justice’s chief of criminal prosecutions] Breuer and Attorney General Eric Holder were involved in a con when they claimed that their failure to prosecute the senior bank officers leading the frauds was in any way related to “too big to fail.” Hilariously, they even applied the “rationale” for non-prosecution to former bank officers – as if a bank would fail “because” its former officers were prosecuted. It is a testament to the weakness of the reportage that this claim was not treated with ridicule.
Second, valid fraud prosecutions do not “cause” a business to fail. The fraud causes them to fail. They should fail when their “profits” arise from fraud. In particular, they should fail in the case of accounting control fraud because their “profits” are the fictional product of accounting fraud. The markets and the economy are greatly improved when fraudulent enterprises are destroyed. ***
Third, very little is actually “destroyed,” when we place a fraudulent bank in receivership, fire the crooked CEO, and sell the bank to an acquirer of integrity and competence. The new bank will, net, be greatly improved because it has been freed from control by the fraudulent leadership that was “looting” the bank (George Akerlof and Paul Romer, 1993, “Looting: The Economic Underworld of Bankruptcy for Profit”).
Fourth, there is rarely a need to prosecute a bank. In virtually every case in which the bank’s frauds cause serious harm senior officers of the bank will have led the fraud and profited from it. Everyone in law enforcement realizes that any effective deterrence will come from prosecuting those officers and not only removing their fraud proceeds but also imposing fines that will leave the officers bankrupt.
Fifth, the bank’s controlling officers are in an immense conflict of interest when their frauds are detected. They control the bank and its resources. Their first priority is to prevent their own prosecution. Their second priority is to prevent any substantial “claw back” of their compensation. Their third and fourth priorities are to do the same for less senior officers. This isn’t altruism (though it certainly has an aspect of class-based affinity). Fraudulent CEOs realize that it is risky to allow the prosecutors to gain any leverage over more junior officers who may “flip” and testify against the CEO. The fraudulent officers controlling the bank, therefore, will gladly trade seemingly huge fines in exchange for obtaining their top four priorities.
[Finally, the government’s policy of not prosecuting Wall Street criminals] produceswhat Akerlof and Romer warned was the “sure thing” of CEO “looting” through accounting control fraud plus the assurance that the CEO will not be prosecuted, forced to surrender his fraud proceeds, or forced to pay fines that bankrupt him.Unsurprisingly, the result has been unprecedented accounting control fraud by elite banksters.***
None of this explains why they don’t prosecute bankers (much less ex bankers)
Indeed, the whole if-y0u-prosecute-the-economy-dies scam is like the 2008 bailouts. As we wrote at the time:
Congressmen Brad Sherman and Paul Kanjorski and Senator James Inhofe all say that the government warned of martial law if Tarp wasn’t passed.
As Karl Denninger wrote yesterday:
[S]ounds like “Bail me out or I will crash everything.”
Isn’t that analagous to walking into a bank, opening one’s coat to reveal an explosives-laced belt, and saying “gimme all the money or everyone dies!”
I noted in November:
In the 1974 comedy Blazing Saddles, Cleavon Little plays the new sheriff in an old Western town. The sheriff is African-American, and when he rides into town for the first time, the [racist] townspeople pull out their guns and are about to shoot him.
But he quickly puts a gun to his own head, pretends he’s scared of his own gun, and says “BACK OFF OR THE AFRICAN-AMERICAN GUY GETS IT!!!” The townspeople are dumb and fall for it, suddenly terrified that he’ll kill himself. Here’s the scene.
That’s what Wall Street is doing with the bailout.
The fat cats on Wall Street are saying “give us a lot of money, and buy all of our bad debt for a lot more than its worth, or Wall Street will get it and we’ll go into a depression!”
Are Americans stupid enough to fall for it?
In a recent interview, William K. Black uses the exact same Blazing Saddles sheriff-bank analogy.
Any way you look at it, the too big to fails are not needed and they are dragging our economy into a black hole. Like the sheriff in Blazing Saddles … they are playing us for fools.
[Yves Smith] shared another analogy with me: a man with 15lbs. of Semtex strapped to his waist. She says “any surprise people in the vicinity are very attentive to his desires?”
Indeed, it’s the old protection racket.