Thursday, October 22, 2009

The Great Recession and White-Collar Crime

I've been arguing for over a year now that when the forensics were done on this Great Recession, white-collar crime would be the source of it. And while much of what was done on Wall Street that ended up wrecking the economy was "technically legal," much of the overt illegal behavior has never been pursued or prosecuted. As usual, Matt Taibbi, writing in last week's issue of Rolling Stone, nails it.

Although the SEC issued more than 50 subpoenas to Wall Street firms [following Bear Stearns' collapse in March '08], it has yet to identify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in a matter of days. "I've seen the SEC send agents overseas in a simple insider-trading case to investigate profits of maybe $2,000," says Brent Baker, a former senior counsel for the commission. "But they did nothing to stop this."

The SEC's halfhearted oversight didn't go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.

Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.
And while "naked short-selling" may have been legal, the bottom line is that it was counterfeiting with a new label (and counterfeiting is still counterfeiting). Yet the worse part of Taibbi's story isn't the government's blind eye to this kind of white-collar crime, but its role in consolidating an even larger role in the financial system itself, all the way to the pinnacle of power, right inside the White House.

What really happened to Bear and Lehman is that an economic drought temporarily left the hyenas without any more middle-class victims — and so they started eating each other, using the exact same schemes they had been using for years to fleece the rest of the country. And in the forensic footprint left by those kills, we can see for the first time exactly how the scam worked — and how completely even the government regulators who are supposed to protect us have given up trying to stop it.

This was a brokered bloodletting, one in which the power of the state was used to help effect a monstrous consolidation of financial and political power. Heading into 2008, there were five major investment banks in the United States: Bear, Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs. Today only Morgan Stanley and Goldman survive as independent firms, perched atop a restructured Wall Street hierarchy. And while the rest of the civilized world responded to last year's catastrophes with sweeping measures to rein in the corruption in their financial sectors, the United States invited the wolves into the government, with the popular new president, Barack Obama — elected amid promises to clean up the mess — filling his administration with Bear's and Lehman's conquerors, bestowing his papal blessing on a new era of robbery.

Change we can't believe in. No wonder Obama was basically ignored when he went to Wall Street a few weeks back to "lecture" them on their practices. While the public works itself into a lather over compensation bonuses, the real criminals continue to run loose through the caldrons of power.

Here are some other gems from Taibbi's screed.
  • Credit-default swaps enabled banks to lend more money without having the cash to cover potential defaults; one type of CDO let Wall Street issue mortgage-backed bonds that were backed not by actual monthly mortgage payments made by real human beings, but by the wild promises of other irresponsible lenders. They even called the thing a synthetic CDO — a derivative contract filled with derivative contracts — and nobody laughed. The whole economy was a fake.
  • The month after Bear's collapse, both [Bernanke and Geithner] testified before the Senate that they only learned how dire the firm's liquidity problems were on Thursday, March 13th — despite the fact that rumors of Bear's troubles had begun as early as that Monday and both men had met in person with every key player on Wall Street that Tuesday. This is a little like saying you spent the afternoon of September 12th, 2001, in the Oval Office, but didn't hear about the Twin Towers falling until September 14th.
  • The counterfeit nature of our economy is troubling enough, given that financial power is concentrated in the hands of a few key players — "300 white guys in Manhattan," as a former high-placed executive puts it. But over the course of the past year, that group of insiders has also proved itself brilliantly capable of enlisting the power of the state to help along the process of concentrating economic might — making it less and less likely that the financial markets will ever be policed, since the state is increasingly the captive of these interests.
  • The nation's largest financial players are able to write the rules for own their businesses and brazenly steal billions under the noses of regulators, and nothing is done about it. A thing so fundamental to civilized society as the integrity of a stock, or a mortgage note, or even a U.S. Treasury bond, can no longer be protected, not even in a crisis, and a crime as vulgar and conspicuous as counterfeiting can take place on a systematic level for years without being stopped, even after it begins to affect the modern-day equivalents of the Rockefellers and the Carnegies. What 10 years ago was a cheap stock-fraud scheme for second-rate grifters in Brooklyn has become a major profit center for Wall Street. Our burglar class now rules the national economy. And no one is trying to stop them.
Read the entire article. It's amazing that Rolling Stone, hardly the outsider, "gonzo journalism" magazine it used to be, is the only Big Media outlet publishing this stuff. Even worse, no Big Media outlet is covering Taibbi's analysis. The lack of interest in this story is astonishing.

UPDATE: Actually, Frank Rich summarizes why Big Media ignores stories like this: the power-elite (who own Big Media after all) know the public would much rather consume a diet of trivia and pablum, via cable news networks, with stories like Balloon Boy.
Richard Heene [Balloon Boy's father] is the inevitable product of this reigning culture, where “news,” “reality” television and reality itself are hopelessly scrambled and the warp-speed imperatives of cable-Internet competition allow no time for fact checking...If Heene’s balloon was empty, so were the toxic financial instruments, inflated by the thin air of unsupported debt, that cratered the economy he inhabits. The press hyped both scams, and the public eagerly bought both. But between the bogus balloon and the banks’ bubble, there’s no contest as to which did the most damage to the country. The ultimate joke is that Heene, unlike the reckless gamblers at the top of Citigroup and A.I.G., may be the one with a serious shot at ending up behind bars.

1 comment:

Klaus said...

Congratulations, you now know what many of us have known for some time. What is lacking is a solution to the problem. Also missing are names of individuals who are profiting. It is apparent now that Mr. Obama is part of the crowd, however is it by choice or have they given him the ultimatum. The shadow government has run things for some time now and their ability to keep secrets from the public is impressive. Can you provide any details as to who is behind the despotism sweeping our once great nation?