Could we convict major bank and Wall Street figures?

Great Debates
1

With all the shenanigans going on in the banking industry and financial institutions, there’s a real feeling out there (at least on the liberal side) that we could put many/most/all of the people they feel responsible (the banking CEOs, the institutions’ leaders) in prison tomorrow if we wanted to. Exemplified by this quote I just read:

“The only reason.” There’s so much going on behind this belief/assumption that I want to explore it; after all, it’s one thing to drag your heels gathering evidence, and quite another to actually have that evidence and not act on it.

So, if we arrested those high ranking financial world figures tomorrow, and started prosecuting them the day after that, what is, from your perspective and knowledge, the probable result of those trials? What sort of evidence do we have? What sort do we need?

2

I haven’t read any of Black’s books, but I had the impression that the fraud that took place was largely done by low-level mortgage brokers who stretched the truth on the mortgage applications for people who shouldn’t have qualified.

So I’m curious - what did the high-ranking financial world figures do exactly?

3

Actual guilt and evidence to convict are two different things. Recall that Al Capone, a heinous murderer, was convicted only of tax evasion.

The frauds during the housing boom of the 2000’s may have been diffuse and ambiguous. Some recent stock-market frauds were more clearcut: The size of the Mutual Fund Scandal “of 2003” is suggested by the fact that Daniel Calugar “disgorge[d] $103 million in ill-gotten gains,” AIG was fined more than $1 billion, etc. Did anyone go to jail? Henry Blodget, high-paid Merrill Lynch analyst, was issuing Buy recommendations on stocks while describing them as “pieces of shit” to special customers. He paid a large fine and is banned from the securities industry (though he is now a well-paid blogger) … but why did he never go to prison?

4

It’s a long list but not all of the things are technically illegal since many were done with special dispensation from the Bush admin. For example reserve requirements for institutions issuing various types of derivatives were reduced to absurdly low levels. Banks normally have something like a 10% reserve requirement. I don’t recall what it was for things like MBSs, CDOs, CDSs, etc, but it was so low in many cases as to be virtually infinite.

IOW, if you divide 1 by 10% (.1) you get a multiple of 10. If your reserve requirement is only 5% (.05) you get a multiple of 20. These guys I think were working on multiples approaching 100 or more in some cases. Why is that significant? Because when you run the film in reverse, that’s called deleveraging and it makes a financial collapse that much more profound.

However as to the things that were actually criminal, the most obvious example is the fact that the banks putting together MBS’s knew that a lot of the mortgages going into those were shit. But the idea was that you mix the shit in with the good mortgages and no one will ever know. Plus, if people defaulted, it didn’t really matter, because real estate prices would never drop. Right.

The other part of the fraud was on the part of the rating agencies like Moody’s, S&P and Fitch who, though they had no way of ascertaining the quality of the paper going into the MBSs they were being asked to rate, nevertheless slapped AAA ratings on them. THIS is what really caused the biggest problem because people were paying top dollar for MBS paper that was really little more that shit with a pretty bow on top.

Finally last month the US govt got around to suing at least S&P for their role in this fraud, but that is only the tip of shitberg.

5

Based on the fact that Jon Corzine isn’t even facing charges and is now rumored to be starting a hedge fund, I wouldn’t hold my breath.

6

Good luck. First you need evidence - real evidence. Evidence that shows that the law was broken. Finance law is complicated enough to begin with.

Then you need a jury with an IQ above room temperature, willing to sit for a long period of time to hear the evidence. I just sat for jury duty in a case involving the accusation that an adult sent some sort of illicit images to an underaged girl in another state, with the intent of further nefarious desires. The prosecution tossed off every one of us from the tech industry. How the hell are you going to seat a jury that can handle the in-depth analysis of the financial services industry to determine if someone at the top level violated the law?

The better results would have been to allow their firms to fail, and their personal shares in the firms to be worthless, and their bonuses to have been last on the list of restitution, after all others. But Bush and Obama couldn’t do that without pissing off the powers that be.

7

I have no idea what sort of evidence William Black has. But if you want to convict someone, you need evidence that he or she violated some specific law. And it is very difficult to believe things like this -

Any prosecutor who could prove in court that someone was responsible for the latest crisis could write his own ticket for the rest of his career.

If the idea that the Illuminati are pulling the strings behind the scenes to protect themselves, fine, but no one is going to buy that without some kind of evidence.

It’s rather reminiscent of the notion that the big oil companies know that there is a secret kind of clean energy, but are hiding the knowledge so as to preserve their profits from fossil fuels. That kind of secret is too big to keep in the 21[sup]st[/sup] century, because the benefits to the whistle-blower far outweigh any pressure that can be brought to bear.

If Black actually has real evidence of real crimes, by all means let’s see it. If it is more a matter of “indict them now and we will worry about the evidence after that”, no thanks, that’s not a precedent I like to see set.

Regards,
Shodan

8

Ultimately it comes down to the fact that being stupid and an asshole isn’t illegal, in and of itself. None of these guys were doing anything actually illegal, even if it was short sighted, selfish, dumb, harmful, <name your pejorative adjective here>, etc…

I tend to agree with Algher in that the real penalties should have been that these guys and the companies they worked for should have totally tanked, and they should have lost their jobs due to that tanking. But that didn’t happen, so now they’re just a little more careful.

9

Incompetence, eh? :smiley:

I think that it takes some serious skills to milk the whole country of billions but that’s me.

I only wonder what are American citizens scared of?

Its elites are screwing the country left and right in your full view and all you can come up with is – incompetence!

Same with Iraq war on a separate thread – the whole fiasco comes down to incompetence of people running things.

But I have my freedom of speech. And, I can carry a gun to shoot another scared American.

I personally think people like you are the biggest obstacle to getting these things in order.

10

Exactly, bailouts result in moral hazard.

11

I used to work in mortgage banking and I can tell you for a fact that the people bundling mortgages in MBSs HAD TO KNOW what they were doing and the reason is simple - underwriting standards. For a lot of these loans there weren’t any.

Normally what happens is a local bank will originate a loan and then resell it to an investor. That investor will want to see documentation that the the borrower can repay the loan before they will buy it. Makes sense right? From what I can gather (I was in the business long before any of this shit happened), these loans were being sold without that documentation.

IOW, loans that were obviously bad on their face were being being bought by investment banks because they KNEW that they could repackage and sell them in MBSs. That was one part of the problem. Another part was many of the same bogus loans were being sold to GSEs like Fannie Mae. Why? I don’t honestly know but again from what I’ve been able to gather, it was the policy of the Bush administration to encourage home ownership so underwriting standards for loans that the GSE’s bought were “relaxed.”

This is the reason why the MBS derivative problem was so devastating. Everyone really believed that real estate was safe because traditionally, buying things like Ginnie Mae backed bonds had great returns and about the same risk as treasuries. I think that mindset got transferred over to the MBS market without people stopping to question how that particular sausage was being made.

12

Does any of that constitute criminal behavior, though?

13

They couldn’t do that without creating the Great Depression II, which would have pissed off pretty much everyone. The “powers that be” would have been among the least pissed, since they’d still be wealthy; it’s the common folk who would be homeless and starving. And many of those powers would in fact be delighted, since that’s exactly what they want; an economic collapse to “starve the beast”.

14

I consider that debatable. Lehman going under didn’t destroy the nation. AIG could have fallen without creating GD II either.

A few more hits would have helped IMHO.

15

bundling shit loans and trying to sell them as investment grade? IDK you tell me.

Certainly the rating agencies slapping AAA rating on them had to be at least willful negligence which I think rises to the level of criminal conduct.

16

What people don’t realize though is that the whole int’l financial system is a house of cards - it’s designed that way, which is perfectly fine as long as it’s properly regulated.

The problem comes when you have excess leverage and explaining why involves getting into things like the money multiplier. It’s not a difficult concept but it can be a little mind bending if you’re not used to it. The bottom line is that for every theoretical dollar floating around out there, there is probably only 20 or maybe 30 cents of actual money. The rest is created through the magic of fractional reserve banking. And that’s fine. As I said, that’s how it’s supposed to work.

What happened in the financial crisis though was, with the new derivatives market, you had leverage that wasn’t on the order of 3 or 10 times but 100 or 1000 times. So it’s one thing when 2 or 3 people come after that one real dollar sitting in a bank vault, it’s something else when you have a 100 or more, from all over the world coming after it.

That’s why the federal reserve had to extend hundreds of billion if not trillions in loans to foreign sovereign banks in the wake of the crisis. They had to “create” the money that was “supposed” to be there and wasn’t.

17

But, but, but… making bondholders take any kind of a haircut is That Which Shall Not Even Be Considered.

18

Let’s see…

They purchased loans that they KNEW were fraudulent, packaged them into MBS securities — in some cases hand-picking the crappiest loans they could find - and sold them to customers like pension funds and municipalities as solid investments that were "as good as cash-- in some cases paying off the ratings agencies to agree with them. Then these bankers and their hedge fund buddies “bet against” these same securities and made a boatload of money when they went south. Their customers…and the economy in general— lost their shirts while these guys kept their ill-gotten gains.

Unfortunately there is a sentiment in the Treasury and Justice departments that prosecution of these crimes would further undermine consumer confidence in the economy so these crimes have gone unpunished for the most part. Some of the banks have been fined for these trangressions but the fines are ridiculously small…because the feeling is that the banking system isn’t healthy enough to survive penalties that are proportionate to the offenses— not to mention that these banks have been so heavily capitalized by the Treasury that these fines are, in effect, being paid with taxpayer dollars.

19

You’re basically saying that these guys did something through selfishness and greed that caused an economic downturn and caused a bunch of people a bunch of hardship and therefore, somehow, must be illegal in some way, and they must be thrown in jail.

If that’s what you’re getting at, you entirely missed the point of what I was saying. What I’m saying is that they likely didn’t do anything that was actually illegal- point to a criminal law and explain how what they did was in violation of that law. If it was that easy, they’d already have been tried, and assuming they were found guilty, sentenced.

The other point I was trying to make is that the negative feedback for the sort of behavior for those guys is career loss, reputation loss, their firms cratering, restructuring of the financial system, etc… all stuff that’s pretty awful for financial guys.

This didn’t happen because of the bailouts. That’s why bailouts are the moral hazard that Human Action spoke of. The bailouts in essence removed the penalty for doing financially risky stuff, and sent a message that if you fuck up on a large enough scale, you’ll get bailed out, which pretty much tells the financial guys to go big or go home.

And… I don’t think it was incompetence as much as I think it was the same idiotic group-think / herd behavior / tulip-mania behind the internet crash 8 years before- mistaken assumptions about the trajectory of the economy and business that eventually reach an unsustainable fever pitch and then quickly crater.
Here’s my take on what happened- for whatever reason, the lending rules were relaxed, and a lot of houses were being sold to people who wouldn’t have qualified under the old 30 year note, 20% down type criteria. That’s the root of the problem, ultimately.

Then on top of that, the mortgages were batched up into mortgage-backed securities and sold to institutional investors. Which wouldn’t have been an issue at all, had the underlying mortgages been sound in the first place, but they weren’t.

Had the original mortgages not been sketchy, this probably never would have been an issue, which is more or less paraphrasing what deltasigma said.

20

My guess is politics was a factor - but not crime or corruption. At the levels we’re talking about, people rewrite the laws to make what they’re doing legal. The money that was paid to politicians would have legal donations not illegal bribes. And as a result of that money, the laws would have been changed enough so that what was done was technically legal.