The Real Reason the SEC Has Been Shredding Documents For Decades...
SEC Attorney Reveals that Agency Has Shredded Documents for Decades to Cover Up Wall Street's monstrous Fraud...
What should we make of the new revelations by Securities and Exchange Commission attorney Darcy Flynn (background here, here and here) that the SEC has been shredding documents for decades?
As many commentators have noted, the SEC did this to cover up fraud on Wall Street.
The Entire Government Strategy Is To Cover Up Fraud
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are:
The entire strategy is to keep people from getting the facts.
Top Government Officials Created the Conditions In Which Fraud Would Flourish
It is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud.
Here are just a few of many potential examples:
- The government-sponsored rating agencies committed massive fraud
- The Treasury department allowed banks to "cook their books"
- Business Week wrote on May 23, 2006:
"President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."
- Tim Geithner was complicit in Lehman's accounting fraud, and pushed to pay AIG's CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was "very much in the center of the action" regarding the secret bail out of Bear Stearns without Congressional approval. William Black points out: "Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth"
- The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
- Freddie and Fannie helped to create the epidemic of mortgage fraud
- The government knew about mortgage fraud a long time ago. For example, the FBI warned of an "epidemic" of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud. Indeed, Alan Greenspan took the position that fraud could never happen
- Bernanke might have broken the law by letting unemployment rise in order to keep inflation low
- Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not
- Arguably, both the Bush and Obama administrations broke the law by refusing to close insolvent banks
- Congress may have covered up illegal tax breaks for the big banks
Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith's, definitive study of the Great Depression, The Great Crash, 1929:
- Of course, deregulation by Larry Summers, Robert Rubin, Phil Gramm and many other high-level politicians and regulators also helped to grease the skids for fraud
In other words, the fraud started at the very top with Greenspan, Bush, Paulson, Negraponte, Bernanke, Geithner, Rubin, Summers and all of the rest of the boys.The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of "an epidemic of mortgage fraud." But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ....
This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.
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The government that permits this to happen is complicit in a vast crime.
As William Black told me today:
In criminology jargon: they created an intensely criminogenic environment. I have no knowledge whether the national security aspects played any role, but the anti-regulatory dogma was devastating.
Fraud caused the Great Depression and it has caused the current financial crisis. But fraud is not not being prosecuted, and so it will occur again and again, and prevent a sustainable economic recovery.
Numerous economists have been saying this for years. :
Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals - and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. Indeed, William Black notes that we've known of this dynamic for "hundreds of years".Now mainstream journalists are starting to catch on.
Market Watch senior columnist Brett Arends writes:
No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide, along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.Gretchen Morgenson and Louise Story point out in the New York Times that:As the financial storm brewed in the summer of 2008 ... Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.
Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.
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“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.”
(This appears to be true on both sides of the Atlantic.)
And Frank Rich reports in a much-discussed piece in the New Yorker:
What haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression. There has been no legal, moral, or financial reckoning for the most powerful wrongdoers. Nor have there been meaningful reforms that might prevent a repeat catastrophe. Time may heal most wounds, but not these. Chronic unemployment remains a constant, painful reminder of the havoc inflicted on the bust’s innocent victims. As the ghost of Hamlet’s father might have it, America will be stalked by its foul and unresolved crimes until they “are burnt and purged away.”
After the 1929 crash, and thanks in part to the legendary Ferdinand Pecora’s fierce thirties Senate hearings, America gained a Securities and Exchange Commission, the Public Utility Holding Company Act, and the Glass-Steagall Act to forestall a rerun. After the savings-and-loan debacle of the eighties, some 800 miscreants went to jail. But those who ran the central financial institutions of our fiasco escaped culpability (as did most of the institutions). As the indefatigable Matt Taibbi has tabulated, law enforcement on Obama’s watch rounded up 393,000 illegal immigrants last year and zero bankers. The Justice Department’s ballyhooed Operation Broken Trust has broken still more trust by chasing mainly low-echelon, one-off Madoff wannabes.
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Those in executive suites at the top of that chain have long since fled the scene with the proceeds, while bleeding shareholders, investors, homeowners, and cashiered employees were left with the bills. The weak Dodd-Frank financial-reform law that rose from the ruins remains largely inoperative ....
Nobel prize-winning economist George Akerlof demonstrated that if big companies aren't held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout.
Moreover, last month:
The government has not only turned the other cheek, but aided and abetted the fraud.Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (representing up to 70% of all stock trades) and high proportions of other trades as well). This not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, and this.
Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country's derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance to manipulate the market.
Fraud disproportionally benefits the big players (and helps them to become big in the first place), increasing inequality and warping the market.
[And] Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.
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Finally, failure to prosecute mortgage fraud is arguably worsening the housing crisis. See this.
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And this environment is ongoing today. .
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Even when the government has prosecuted financial crime (because public outrage became too big to ignore), the government has settled for pennies on the dollar [as a way to quietly bail out the big banks].
Corruption At the Top Leads to Lawlessness By The People
Corruption at the top leads to lawlessness by the people.
By Reuven Brenner
Between 1826 and1830, Spain, Mexico and Brazil defaulted on their debt. Between the 1890s and 1900, Argentina, Brazil , Venezuela and Portugal defaulted on theirs. To get back some of their investment, the French and German fleets went down to Caracas in 1902, and bombarded it for a week. Then they put a chain up and charged a tax on each ship going into Caracas harbor. Between 1931 and 1940, Brazil, Mexico, Chile and Peru have again defaulted on their debt.
The debt crises between the two world wars started with the 1929 default of Bolivia, but it was in Central Europe in 1931 that the biggest collapse took place. The German run came next, with devastating effects.
The crisis was caused by German fears of political instability (in 1930 both Nazis and communists performed well during the elections), and resulted in a massive capital flight. British and American bankers thought that the situation would calm, did not withdraw their loans, and then saw their accounts frozen.
Germany's inability to repay war reparations led to the breakdown of the multilateral system of free trade. The United States introduced tariff restrictions in the Hawley-Smoot Act, which further deteriorated the situation around the world.
The Germans blamed the banks and - what's new? - Jewish financiers for conspiracy. It then advocated default in the name of race and patriotism. After the Nazis came to power, they used the foreign assets locked in Germany to induce Switzerland and Britain to adopt less hostile policies toward the new German government. Frozen debt (call it blackmail) turned out to be an effective tool in preventing the West from getting its act together.
In Vietnam , the local currency debts of the South Vietnamese regime were repudiated when the communists took control in 1975. The new rulers considered the debts illegitimate. The Russian communists took a similar line in 1917.
Argentina defaulted again in 1982. Inflation ran rampant for many years, and the government, to borrow in its own currency, had to promise to pay interest rates above the inflation rate. It did so by printing more money. The government decided to abrogate the contracts. In 2002, Argentina defaulted again.
Ecuador's announcement in March 1987 that it was suspending interest payments for the rest of the year on its US$8.2 billion foreign debt was the continuation of a sequence of misjudgments. It began in August 1982, when Mexico announced it could not pay debts. It then continued with Brazil in February 1987, which first suspended interest payments on $67 billion of medium and long-term debt, then froze repayment of $15 billion it owed foreign banks.
The total losses from loans to developing countries from 1970s to 1990s, mainly to governments and as "foreign aid", have been estimated in the $1 trillion range.
Lessons from these events are relevant today because they point to the roles "intellectuals' jargons and theories" - real junk (racism having been just one of them) - have played. Today misguided Keynesian theories and the jargon of aggregates wreak havoc.
To show how, 17th-century Spain offers another good example. Spain's empire during the 16th and 17th centuries supplied its kings with silver and gold, and helped fight for European dominance in the Netherlands, France and Italy.
When spending was more than revenues, credit was either raised by banks in southern Germany and Genoa, or swapped from short-term high interest rate loans for "eternal" bonds with lower interests. Why did the bankers do that? No, not because hope is eternal.
The bankers were given offers they could not refuse. In 1576, when conquering Antwerp, the Spanish troops forced the Augsburg house of Fugger to advance a "loan" of 8 million Rhenish guilden (about $500 million to $800 million today, though such comparisons are tenuous). This Spanish paper did not pay debts.
Neither did others. By 1598, the King of Spain gave the church's hierarchy the role to renegotiate the debt. The king thought that only they could rationalize default by using theological arguments, making a financial issue sound like a moral one, which the lenders could not oppose.
The idea of using the veil of language to make the other side pay was borrowed by both the Nazis and Latin American dictators. However, by then "morality" had to do with race and patriotism rather than the traditional religious vocabulary.
Today, macroeconomics and its jargon, with its strange, simplistic view of both monetary and fiscal policy, with utter disregard to institutional details, are the new religion. The fact that economics departments at universities teach it as "science" should have long been taken with grains of salt: astrology was perceived as science too for 100 years, before disappearing in a puff.
By now, morality, ethics, or any notion of honor has lost their association with religion, race, or patriotism. Policies became rationalized by armies of subsidized academics and think tanks. Subsidies to universities and "academic" publications have turned the resulting output into what I often call "the sciences of political lies".
These subsidies themselves have been an unintended consequence of the 1958 National Defense Education Act of 1958. The government threw so much money to the quick expansion of US universities that it vastly exceeded the talent pool. Aldous Huxley quickly identified the devastating long-term impact on universities back in 1963:
A large number of young people take up scientific research as a career these days, but few are impelled into it by a passionate curiosity as to the secrets of nature. For the vast majority it is a job like any other job. It is not generally realized outside of academic circles how far a mediocre research worker can get.Getting rid of the incomprehensible aggregate jargons used today to both describe the situation and look for remedies for the present crisis would quickly bring attention to details about present institutional arrangements and be forced to ask: What's behind these big numbers? How much bureaucracy? How much money really goes to the destitute, the sick, to education - and how much to the "poverty, health and education bureaucracies" (including their generous pension plans)? Is the way the central banks and the banking sector operate today, a source of stability or instability? Why is "democracy" as practiced now unable to correct mistakes more quickly?
In commerce and industry there are those who are exceptionally endowed with brilliance, ruthlessness or luck and achieve proportionate success; then come the vast majority who somehow manage to get through, and the minority who go under.
The proportion of scientists who actually go under is probably much lower and the weeding process is correspondingly less effective. Indeed, the relative security and stability of the research career are probably more attractive to mediocrities than the romance of inquiry to the brilliant ones.
What the US has to do is simple in principle - which does not imply that it is easy to execute. It must create massive equity bottom up. Only old-fashioned "entrepreneurial capitalism" can do the trick. To achieve that the language of the debate must be drastically changed. The tools and jargons of macroeconomics and of monetary policies pursued simply mislead.
Reuven Brenner holds the Repap Chair at McGill University 's Desautels Faculty of Management.
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