Posts Tagged ‘SEC’

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It’s been more than seven years and yet we’re still haunted by the spectacular crash that took place on Wall Street.

The big banks have been fined but no one, at least at or near the top, has been prosecuted let alone gone to jail.

The question is, why?

We know why the Eric Holder and the Justice Department didn’t go after the top executives: they were afraid of undermining the fragile recovery.

What about the Securities and Exchange Commission (which, remember, was set up during the first Great Depression to stem the fraud and abuses on Wall Street)?

We now know, thanks to Jesse Eisinger (based on a treasure-trove of internal documents and emails released by James A. Kidney, a now-retired SEC lawyer) that in the summer of 2009 lawyers at the SEC were preparing to bring charges against senior executives at Goldman Sachs (over a deal known as Abacus) but they never took the case to trial.

He thought that the staff had assembled enough evidence to support charging individuals. At the very least, he felt, the agency should continue to investigate more senior executives at Goldman and John Paulson & Co., the hedge fund run by John Paulson that made about a billion dollars from the Abacus deal. In his view, the SEC staff was more worried about the effect the case would have on Wall Street executives, a fear that deepened when he read an email from Reid Muoio, the head of the SEC’s team looking into complex mortgage securities. Muoio, who had worked at the agency for years, told colleagues that he had seen the “devasting [sic] impact our little ol’ civil actions reap on real people more often than I care to remember. It is the least favorite part of the job. Most of our civil defendants are good people who have done one bad thing.” This attitude agitated Kidney, and he felt that it held his agency back from pursuing the people who made the decisions that led to the financial collapse.

While the SEC, as well as federal prosecutors, eventually wrenched billions of dollars from the big banks, a vexing question remains: Why did no top bankers go to prison? Some have pointed out that statutes weren’t strong enough in some areas and resources were scarce, and while there is truth in those arguments, subtler reasons were also at play. During a year spent researching for a book on this subject, I’ve come across case after case in which regulators were reluctant to use the laws and resources available to them. Members of the public don’t have a full sense of the issue because they rarely get to see how such decisions are made inside government agencies.

Goldman ended up paying a fine of $550 million in 2010, and agree to another $5-billion fine in a separate case with the Justice Department earlier this month. But no Goldman executive has ever been brought up on charges.

Kidney’s own view is that

the SEC, its chairman at the time, Mary Schapiro, and the leadership of the Division of Enforcement were more interested in a quick public relations hit than in pursuing a thorough investigation of Goldman, Bank of America, Citibank, JP Morgan and other large Wall Street firms.

Although the emails and documents I produced to Pro Publica stemming from my role as the designated (later replaced) trial attorney for the Division of Enforcement are excruciatingly boring to all but the most dedicated securities lawyer, even a lay person can observe that the Division of Enforcement was more anxious to publicize a quick lawsuit than to follow the trail of clues as far up the chain-of-command at Goldman as the evidence warranted.  Serious consideration also never was given to fraud theories in any of the Big Bank cases stemming from the Great Recession that would better tell the story of how investors were defrauded and who was responsible, due either to dereliction or design.

All of which gives lie to the idea that the Obama administration has been tough on Wall Street. According to Kidney,

The large fines obtained by the Department of Justice, while a short-term pinch, are simply a cost of doing business.  Relying on fines to penalize rich Wall Street banks, which, after all, specialize in making money and do it well, if not always honestly, is like fining Campbell Soup in chicken broth.  It costs something, but doesn’t change anything in the way of operations or personnel.

Despite billions in fines representing many more billions in fraud, the enforcement agencies of the United States have been unable to find anyone responsible criminally or civilly for this huge business misconduct other than a janitor or two at the lowest rung of the companies.  Nor have they sought to impose systemic changes to these banks to prevent similar frauds from happening again.

Yessir, according to the Obama administration, Goldman Sachs, JP Morgan, Bank of America, Citibank and other institutions made their contributions to tearing down the economy, but no one was responsible.  They are ghost companies.

And that’s why we’re still haunted, more than seven years later, by the crash of 2008.

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Last night, on the BBC program Business Matters, I argued that the Securities and Exchange Commission’s settlement of the insider-trading case with SAC Capital Advisors was just a slap on the wrist—a fine of $1.8 billion that still allows Steven A. Cohen to keep the bulk of his estimated $8-9 billion wealth.

But it was a necessary slap on the wrist in the sense that it was intended to restore faith in markets, not unlike the law establishing insider trading as a crime when the SEC was created back in 1934. Cleaning up financial markets then, five years into the First Great Depression, was designed to rebuild confidence not only in financial markets but in capitalism more generally.

And it worked—alongside the other programs of the first and second New Deals, and of course the recovery created by World War II.

But, I added, I’m not sure it’s enough now. Yes, the SEC is seeking to levy large fines (on Steven Cohen’s SAC and probably on Jamie Dimon’s JPMorgan Chase). However, the people who have been most affected by the financial meltdown—who lost their homes and jobs, and are struggling to put food on the table and send their kids to college—have every right to say, “Been there, done that. We’ve tried investigations, fines, and regulations before and look at the mess we’re in again, in the midst of the Second Great Depression.”

And so maybe, they’ll be singing along with The Who:

And I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again

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Today is the second anniversary of Occupy Wall Street. To judge by the lack of coverage of the OWS movement in recent days, you’d think the movement was a failure.

But you’d be wrong. Wrong because it put the issue of economic inequality on the political map in the United States. “We are the 99 percent!” continues to resonate, especially given the return to the unequalizing pattern of growth that caused the crash of 2007-08 and marks the New Gilded Age.

And wrong because, as Allison Kilenny explains, many of the former Occupards continue to work to change things around—in activities like Occupy the SEC and Occupy our Homes.

There has been little talk of a mass gathering to celebrate the two-year anniversary of OWS, but that’s not unusual (anniversary protests are notoriously underwhelming).

But the lack of organizing may also stem from some of the best and brightest organizers having moved on to instead channel the spirit of Occupy elsewhere: in the battle to keep schools from closing, to lend solidarity to striking fast food workers, to fight to keep people in their homes and to hold officials accountable.

The “Occupy is dead” trope is ridiculous precisely because all of the elements that led to the movement’s birth are still in place—if not worse now. The rich are richer, the corrupt live without fear of going to jail, and everyone knows institutions aren’t coming to save us.

Occupy’s spirit of resistance may be scattered, but it can never die. Not as long as a sense of injustice lives.

That sense of injustice is what galvanized the initial OWS movement in the first place. Now, two years later, much work remains to be done.

Update

Speaking of ongoing work, Lisa Pollack provides a sympathetic commentary on (and an actual copy of) Occupy Finance, produced by the Alternative Banking Group of Occupy Wall Street. This is from the introduction:

This book is our reckoning. Some of us have long experience in the world of finance, having worked in banks or hedge funds or as financial advisors. Others of us are teachers, lawyers, students, or Teamsters who started out with a limited understanding of “securitization,” “credit default swaps,” and “collateralized debt obligations” but have taught ourselves about these instruments because we recognize their importance within our current economy. We have found that you do not need a PhD in math or economics to understand what is happening. We have also learned that it is imperative for us to know as much as we can about the workings of the financial system because some of the most interesting facts never get reported. Contrary to what the 1% would have us believe, the way things are is not the way they once were, not the way they have to be, and most importantly—not the way they should be. . .

We know that the way it is is not the way it has to be. Economic arrangements, however complex, opaque, and interconnected, are created by human beings and can be changed by them—by us. Taking on this responsibility is daunting, but also exhilarating. It is the first step in the direction of economic justice.