DEAR BUBBAS AND BUBBETTES,
“When you are too big to fail, you apparently also become too grand to jail”.
When you finish reading this provocative article, please also take a look at the book reviews below of an enticing new opus by Glenn Greenwald.
It is hard to grasp how profoundly our system has now been perverted by those with mega-budgets which not only buy them such enormous power, but also such incredible legal impunity too.
It is shocking and dismaying because the scale and scope of reform that will be required to try to get back to a real function republic is so enormous today.
Yet hope springs eternal!!
| | WHY GOLDMAN SACHS, OTHER WALL STREET TITANS ARE NOT BEING PROSECUTED
The Justice Department's decision not to prosecute Goldman Sachs in a financial-fraud probe is another sign of the cronyism that has kept Attorney General Eric Holder from taking action against other big Wall Street firms, says Peter Schweizer.
By Peter Schweizer, The Daily Beast, 14 August 2012.
On Thursday the Department of Justice announced it will not prosecute Goldman Sachs or any of its employees in a financial-fraud probe.
The news is likely to raise the ire of the political left and right, both of which have highlighted one of the most inconvenient facts of Attorney General Eric Holder’s Justice Department: despite the Obama administration’s promises to clean up Wall Street in the wake of America’s worst financial crisis, there has not been a single criminal charge filed by the federal government against any top executive of the elite financial institutions. Why is that? In a word: cronyism.
Take Goldman Sachs, for example. Thursday’s announcement that there will be no prosecutions should hardly come as a surprise. In 2008, Goldman Sachs employees were among Barack Obama’s top campaign contributors, giving a combined $1,013,091. Eric Holder’s former law firm, Covington & Burling, also counts Goldman Sachs as one of its clients. Furthermore, in April 2011, when the Senate Permanent Subcommittee on Investigations issued a scathing report detailing Goldman’s suspicious Abacus deal, several Goldman executives and their families began flooding Obama campaign coffers with donations, some giving the maximum $35,800.
That’s not to say Holder’s Justice Department hasn’t gone after any financial fraudsters. But the individuals the DOJ’s “Financial Fraud Enforcement Task Force” has placed in its prosecutorial crosshairs seem shockingly small compared with the Wall Street titans the Obama administration promised to bring to justice.
Will bipartisan outrage boost the decibels in D.C. loud enough for Holder to hear and heed?
Consider the following small-time operators as listed on the Financial Fraud Enforcement Task Force website :
• “Three Connecticut Women Charged with Overseeing ‘Gifting Tables’ Pyramid Scheme.”
Three women in their 50s and 60s were indicted for conspiracy, tax, and wire-fraud charges. “These arrests should send a strong message to all who threaten the financial health of our communities,” one federal agent declared.
• In March, 2012, the DOJ sent a property appraiser in Washington, D.C., to the slammer for 65 months for fraudulently inflated prices in a scheme to “flip” properties. The scheme was a small-time $1 million operation, a sharp contrast with the billions on Wall Street.
• The DOJ’s “get tough” on financial crime strategy included sending two health-care software company executives to the clink for 13 and 15 years.
• A Florida resident was charged and sentenced to 14 months in federal prison for falsifying documents, thereby resulting in the obstruction of an SEC investigation.
• Five people in California were charged with bid-rigging foreclosure auctions. The individuals have been charged with violating the Sherman Act and could face up to 10 years in jail.
• Federal officials went after 10 people in Las Vegas because they tried to “fraudulently gain control of condominium homeowners’ associations in the Las Vegas area so that the HAOs would direct business to a certain law firm and construction company.”
• The owner of a Miami company got 46 months in prison for creating fake loan applications.
• Four people in Tacoma, Wash., were indicted for conspiracy that caused a small bank to fail. Their crime: making false statements on loan applications and to HUD.
To be sure, financial fraud of any kind is wrong and should be prosecuted. But locking up “pygmies” is hardly the kind of financial-fraud crackdown Americans expected in the wake of the largest financial crisis in U.S. history. Increasingly, there appear to be two sets of rules: one for the average citizen, and another for the connected cronies who rule the inside game.
That could be changing, as critiques of Eric Holder’s lack of financial prosecutions have now come from the political left and right; indeed, battling cronyism may represent one of the rare points of common ground in today’s fractious political environment. As progressive Richard Eskow of the Huffington Post recently wrote: “More and more Washington insiders are asking a question that was considered off-limits in the nation's capital just a few months ago: Who, exactly, is Attorney General Eric Holder representing? As scandal after scandal erupts on Wall Street, involving everything from global lending manipulation to cocaine and prostitution, more and more people are worrying about Holder's seeming inaction—or worse—in the face of mounting evidence.”
Will bipartisan outrage boost the decibels in D.C. loud enough for Holder to hear and heed? We’ll see. He’s got at least three months to get moving. “With Liberty and Justice for Some”: How the Law Is Used to Destroy Equality and Protect the Powerful
By Glenn Greenwald
Metropolitan Books; First Edition edition (October 25, 2011) Language:
978-0805092059 Glenn Greenwald
is the author of the New York Times
bestsellers How Would a Patriot Act?
and A Tragic Legacy
. Recently proclaimed one of the "25 Most Influential Political Commentators" by The Atlantic
, Greenwald is a former constitutional law and civil rights attorney and a contributing writer at Salon
. He lives in Brazil and New York City. A SYNOPSIS From "the most important voice to have entered the political discourse in years" (Bill Moyers), a scathing critique of the two-tiered system of justice that has emerged in America
From the nation's beginnings, the law was to be the great equalizer in American life, the guarantor of a common set of rules for all. But over the past four decades, the principle of equality before the law has been effectively abolished. Instead, a two-tiered system of justice ensures that the country's political and financial class is virtually immune from prosecution, licensed to act without restraint, while the politically powerless are imprisoned with greater ease and in greater numbers than in any other country in the world.
Starting with Watergate, continuing on through the Iran-Contra scandal, and culminating with Obama's shielding of Bush-era officials from prosecution, Glenn Greenwald lays bare the mechanisms that have come to shield the elite from accountability. He shows how the media, both political parties, and the courts have abetted a process that has produced torture, war crimes, domestic spying, and financial fraud.
Cogent, sharp, and urgent, this is a no-holds-barred indictment of a profoundly un-American system that sanctions immunity at the top and mercilessness for everyone else. A BOOK REVIEW A SCATHING INDICTMENT
By Tiger CK, October 2011.
In With Liberty and Justice for Some, Glenn Greenwald, a former civil rights litigator has produced a troubling indictment of the American justice system. His basic argument is that the system really has two tiers--one for the elite, who can often escape prosecution for serious crimes and another for the rest of us. The law, he argues, no longer creates a level playing field the way the founders of our constitution intended it to. During the last several decades in particular, the powerful have used the law as a weapon against the poor and the weak.
In a tightly written narrative, Greenwald covers how the law has been used to favor what he calls political and financial elites since the 1970s. He begins with President Ford's decision to pardon Richard Nixon despite his egregious crimes against the constitution and carries forward to the present day. Neither Republicans nor Democrats are spared. He is critical of the worldwide torture and doemstic spying that occurred during the administration of George W. Bush. But he also criticizes Obama for failing to prosecute both former members of the Bush administration and the financial elite on Wall Street.
The book is divided into five sections. The first covers the origin of elite immunity and talks about how the problem of inequality first developed in the public sector. The second covers the spread of elite immunity to the private sector including Wall Street. The third section entitled Too Big to Jail deals with how many on Wall Street and in the banks have escaped prosecution. The fourth entitled Immunity by Presidential Decree deals with presidential pardons; and the final section on the American justice system's second tier deals with how the system works for non-elites.
Greenwald's book is a passionately written one. The pages seethe with the author's moral outrage at the inequalities that exist within the American justice system. And the book will not fail to provoke the same sense of anger in the reader. Some of the problems that Greenwald points to really are inexcusable in a prosperous and democratic society and the author rightly argues that we need to find a way to address them.
I have given this book a high rating because it definitely forced me to rethink some of my fundamental assumptions about the American justice system. At the same time, I did not agree with Greenwald on all of his points. I sometimes found him to be a little bit TOO critical of the government. After September 11, in particular, I believe that the government was faced with unique and shocking circumstances. American officials believed that they had an urgent obligation to find new ways of protecting national security. Although the war on terror led to some acts that were not justifiable, to me these are different in a different category from the government's failure to prosecute Wall Street criminals. In the case of the latter the rich are more or less escaping justice for no good reason. On the whole, however, this book is an important one that raises fundamental questions about how justice is dispensed in America. ANOTHER BOOK REVIEW SOME USEFUL OBSERVATIONS IN THE SERVICE OF A FANTASTIC ARGUMENT
By John Winters
, October 29, 2011
When I say fantastic, I mean of or relating to fantasy. And that fantasy is the idea that the "law" or the "state" ever equally represented people, that it was ever not a tool ultimately under the control of the economically powerful, that it ever functioned to provide liberty and justice for ALL.
As he does on his blog, Glenn fills his book with example after example of the legal double standards in the United States. It is in pointing out these double standards that he's at his most impassioned and readable. But just as his strengths carry over from his blog to the book, so do his weaknesses. The biggest one is that Glenn never really gets beyond the listing of grievances to offer a compelling explanation of why injustice has grown in recent decades (although, to Glenn's credit, he notes it has coincided with a massively growing economic gap). In other words, Glenn describes well, but explains poorly.
His attempt to provide an over arching framework is to cite the pardon of Nixon as a watershed moment, as if the pardon was a consciousness raising moment for political elites who were then emboldened to break the law with impunity. The problem with this historical narrative isn't that Nixon's pardon wasn't exceptional. It was indeed exceptional, but for a completely different reason. It symbolized a brief moment in U.S. history where grassroots pressure resulted in the exposure of crimes at the highest level of government. It was the exposure of the crimes, crimes which LBJ, JFK, and so many other previous presidents (of both parties) engaged in, that was remarkable. Not the fact that political leaders were getting away with the crimes, not the fact that political leaders began to expect to get away with their misdeeds.
Glenn fails to offer any decent explanatory foundation for the problem he identifies because he doesn't grasp enough of the history of power and how it has operated in the United States. An unfortunate consequence of this is the implication that we need to get back to some kind of legal garden of eden that Glenn seems to think we have fallen away from after Gerald Ford bit the forbidden fruit. It appears Greenwald hasn't read Howard Zinn, or has any familiarity with the fact that the powerful have always believed that their political and legal domination are the equivalent of justice for all, even when that "justice" has excluded women, Native Americans, African Americans, etc. Today is no different. There is injustice and inequality that benefit the people who think society and its application of laws are just and equal. The only notable change has been in how the elites reconcile their domination with the myth of equality.
The problem with Glenn's failure to construct an adequate explanatory frame is that it leaves him confused about where to go politically. Because Glenn keeps looking back to a paradisical time when capitalism supposedly rewarded the hard-working and punished the slothful, because he mistakes a presidential pardon with the underlying roots of inequality and injustice, he is left in a situation where he senses that roots of injustice run deep but where he is still implicitly wedded to the notion of "reclaiming" the democratic party. As if the party was ever not dominated by the powerful, who have only occasionally had to make concessions in periods of intense popular upheaval.
After hundreds of pages, the reader is left convinced that the law is indeed largely formulated by and at the behest of the powerful. But this observation is hardly new. Crack open any text by Marx or Bakunin, and you'll get a much more compelling expose, one that links up with an explanatory map capable of guiding activists who want to change the world for the better.
DEAR BUBBAS AND BUBBETTES,
In case you had any lingering beliefs that there is still a nugget of credibility in the American justice system, or in the ability of the current administration to stand up to the greedsters who seem to control everything, here is yet more proof that the whole charade has become a laughable farce. These firms and those that run them and abuse their customers and the entire American economy are simply untouchable.
Then again, this does make lots of cynical political sense because these are the very same folks who are solicited for campaign contributions every day, so they buy their immunities, and they get their expected special invitations to the White House, private sessions with the President, trips on Presidential planes with high officials to foreign countries, etc, etc. They are demonstrably not ordinary citizens, and therefore ordinary laws and credible enforcement do not apply to them anymore.
You will still, of course, as a common garden variety untermench, go to jail for stealing a basket of fruit, and if it is your third offense in California, it could well mean you will spend the rest of your life in prison. But if you are among the untouchables, you can ruin the lives of millions, and confiscate all of their fruit, vegetables and marbles too, and you are simply not accountable to anyone anymore. At the very worst your institution will pay a fine, wink, smile, walk away and the charade ends right there. It can’t get much better than that, even in Zimbabwe!!
So say yet another tearful bye-bye to our liberal democratic republican illusion. It’s been fun while it lasted. Enjoy.
U.S. NOT SEEKING GOLDMAN CHARGES
By Reed Albergotti and Elizabeth Rappaport, WSJ, 9 August 2012.
After a yearlong investigation, the Justice Department said Thursday that it won't bring charges against Goldman Sachs Group Inc. or any of its employees for financial fraud related to the mortgage crisis.
In a statement, the Justice Department said "the burden of proof" couldn't be met to prosecute Goldman criminally based on claims made in an extensive report prepared by a U.S. Senate panel that investigated the financial crisis.
"Based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report," the statement read.
The Justice Department reserved the right to bring charges in the future if new evidence emerges.
In a statement Thursday, Goldman said: "We are pleased that this matter is behind us."
In April 2011, the U.S. Senate's Permanent Subcommittee on Investigations published a scathing report on the financial crisis, highlighting Goldman as a culprit. Lawmakers accused the firm of breeding a greedy culture and running conflict-ridden businesses, and they said Goldman put its own interest ahead of clients.
Sen. Carl Levin, D., Mich., chairman of the Senate's subcommittee, said Goldman executives lied to Congress about the firm's bets against the housing market. The accusation triggered a Justice Department probe of possible perjury.
A spokeswoman for Mr. Levin's office didn't respond to a request for comment Thursday.
The report concluded that even as securities firms flooded the market with securitized mortgages and advised clients to buy them, firms privately used words like "crap" and "flying pig" to describe the financial instruments.
The department's probe was launched when Goldman's reputation already had been battered by civil-fraud charges filed against the New York company by the Securities and Exchange Commission. The SEC accused Goldman of fraud related to a mortgage-bond deal called Abacus 2007-AC1.
Goldman was accused of failing to inform investors that hedge-fund firm Paulson & Co. had helped choose underlying securities in the deal and was betting against it.
Goldman agreed to pay $550 million to end the SEC's civil-fraud suit. The company said marketing materials for the Abacus deal contained "incomplete information."
The announcement comes amid criticism of the Justice Department from some lawmakers for what they contend are disappointing results in efforts to bring criminal cases against firms and individuals for crisis-related wrongdoing.
Justice Department officials have defended the agency's track record, and some legal experts have noted the difficulty of targeting specific individuals and firms given the enormity of the financial crisis.
In the statement Thursday, the Justice Department said prosecuting financial fraud and "protecting the integrity of our banking system" is and will continue to be the department's "top priority."
The criminal investigation was led by the New York field office of the Federal Bureau of Investigation, according to a person familiar with the matter.
The probe also included the U.S. Attorney's Office for the Southern District of New York and the Special Inspector General for the Troubled Asset Relief Program.
In case you wondered how our noble little liberal democratic republican experiment really jumped the rails, reap this and laugh out loud. And it’s precisely the banster/pranksters from these incredible entities that keep getting selected to run the top positions in our government. Game, set and match!!
THE SCAM WALL STREET LEARNED FROM THE MAFIA
How America's biggest banks took part in a nationwide bid-rigging conspiracy - until they were caught on tape
By Matt Taibbi, Rolling Stone, 5 July 2012.
Illustration by Victor Juhasz
Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won't hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government's massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony "Tony Ducks" Corallo.
But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.
The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America.
The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.
In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia, which has long made manipulation of public bids for things like garbage collection and construction contracts a cornerstone of its business. What's more, in the manner of old mob trials, Wall Street's secret machinations were revealed during the Carollo trial through crackling wiretap recordings and the lurid testimony of cooperating witnesses, who came into court with bowed heads, pointing fingers at their accomplices.
The new-age gangsters even invented an elaborate code to hide their crimes. Like Elizabethan highway robbers who spoke in thieves' cant, or Italian mobsters who talked about "getting a button man to clip the capo," on tape after tape these Wall Street crooks coughed up phrases like "pull a nickel out" or "get to the right level" or "you're hanging out there" – all code words used to manipulate the interest rates on municipal bonds. The only thing that made this trial different from a typical mob trial was the scale of the crime.
USA v. Carollo involved classic cartel activity: not just one corrupt bank, but many, all acting in careful concert against the public interest. In the years since the economic crash of 2008, we've seen numerous hints that such orchestrated corruption exists. The collapses of Bear Stearns and Lehman Brothers, for instance, both pointed to coordinated attacks by powerful banks and hedge funds determined to speed the demise of those firms. In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – "an open-and-shut case of anti-competitive behavior," as one former regulator described it.
More recently, a major international investigation has been launched into the manipulation of Libor, the interbank lending index that is used to calculate global interest rates for products worth more than $3 trillion a year. If and when that case is presented to the public at trial – there are several major civil suits in the works here in the States – we may yet find out that the world's most powerful banks have, for years, been fixing the prices of almost every adjustable-rate vehicle on earth, from mortgages and credit cards to interest-rate swaps and even currencies.
But USA v. Carollo marks the first time we actually got incontrovertible evidence that Wall Street has moved into this cartel-type brand of criminality. It also offered a disgusting glimpse into the enabling and grossly cynical role played by politicians, who took Super Bowl tickets and bribe-stuffed envelopes to look the other way while gangsters raided the public kitty. And though the punishments that were ultimately handed down in the trial – minor convictions of three bit players – felt deeply unsatisfying, it was still a watershed moment in the ongoing story of America's gradual awakening to the realities of financial corruption. In a post-crash era where Wall Street trials almost never make it into court, and even the harshest settlements end with the evidence buried by the government and the offending banks permitted to escape with no admission of wrongdoing, this case finally dragged the whole ugly truth of American finance out into the open – and it was a hell of a show.
1. THE SCAM
This was no trial scene from popular lore, no Inherit the Wind or State of California v. Orenthal James Simpson. No gallery packed with rapt spectators, no ceiling fans set whirring to beat back the tension and the heat, no defense counsel's resting a sympathetic hand on the defendant's shoulder as opening statements commence. No, the setting for USA v. Carollo reflected the bizarre alternate universe that exists on Wall Street. Like so many court cases involving big banks, the proceeding looked more like a roomful of expensive lawyers negotiating a major corporate merger than a public search for justice.
The trial began on April 16th in a federal court in Lower Manhattan. The courtroom, an aerie like setting 23 stories up, offered a panoramic view of the city and the East River. Though the gallery was usually full throughout the three-plus weeks of testimony, the spectators were not average citizens come to witness how they had been robbed blind by America's biggest banks. Instead, there were row after row of suits – other lawyers eager to observe a long-awaited case, one that could influence the outcome in a handful of civil suits pending across the country. In fact, the defendants themselves, whom the trial would reveal as easily replaceable cogs in a much larger machine of corruption, were barely visible from the gallery, obscured by the great chattering congress of prosecution and defense attorneys.
Only the presence of the mostly nonwhite and elderly jury, which resembled the front pew of a Harlem church, served as a reminder that the case had any connection to the real world. Even reporters from most of the major news outlets didn't bother to attend. The judge in the trial, the right honorable and amusingly cantankerous Harold Baer, acknowledged that the case was not likely to set the public's pulse racing. "It is unlikely, I think, that this will generate a lot of media publicity," Baer sighed to the jury in his preliminary instructions.
Once opening statements began, it was easy to see why the press might stay away. One of the main lines of defense for corrupt Wall Street institutions in recent years has been the extreme complexity of the infrastructure within which these crimes are committed. In order for prosecutors to win convictions, they have to drag ordinary Americans, people who watch and enjoy reality TV, up the steepest of learning curves, coaching them into game shape with regard to obscure financial vehicles like swaps and CDOs and, in this case, Guaranteed Investment Contracts.
So it was no surprise that both the prosecution and the defense began their opening remarks to the jury by apologizing for the hellishly dull maze of "convoluted" and "boring" and "tedious" financial transactions they were about to spend weeks hearing about. Only Wendy Waszmer, the feisty federal prosecutor with straight brown hair and an elfin build who presented the government's case, succeeded in cutting through the mountainous dung heap of acronyms and obfuscations and explaining what the case was about. "Even though some aspects of municipal bond finance are complex, the fraud here was simple," she told the jurors. "It was about lying and cheating cities and towns in a bidding process that was in place to protect them."
The "simple fraud" Waszmer described centered around public borrowing. Say your town wants to build a new elementary school. So it goes to Wall Street, which issues a bond in your town's name to raise $100 million, attracting cash from investors all over the globe. Once Wall Street raises all that money, it dumps it in a tax-exempt account, which your town then uses to pay builders, plumbers, the chalkboard company and whoever else winds up working on the project.
But here's the catch: Most towns, when they raise all that money, don't spend it all at once. Often it takes years to complete a construction project, and the last contractor isn't paid until long after the original bond is issued. While that unspent money is sitting in the town's account, local officials go looking for a financial company on Wall Street to invest it for them.
To do that, officials hire a middleman firm known as a broker to set up a public auction and invite banks to compete for the town's business. For the $100 million you borrowed on your elementary school bond, Bank A might offer you 5 percent interest. Bank B goes further and offers 5.25 percent. But Bank C, the winner of the auction, offers 5.5 percent.
In most cases, towns and cities, called issuers, are legally required to submit their bonds to a competitive auction of at least three banks, called providers. The scam Wall Street cooked up to beat this fair-market system was to devise phony auctions. Instead of submitting competitive bids and letting the highest rate win, providers like Chase, Bank of America and GE secretly divvied up the business of all the different cities and towns that came to Wall Street to borrow money. One company would be allowed to "win" the bid on an elementary school, the second would be handed a hospital, the third a hockey rink, and so on.
How did they rig the auctions? Simple: By bribing the auctioneers, those middlemen brokers hired to ensure the town got the best possible interest rate the market could offer. Instead of holding honest auctions in which none of the parties knew the size of one another's bids, the broker would tell the prearranged "winner" what the other two bids were, allowing the bank to lower its offer and come in with an interest rate just high enough to "beat" its supposed competitors. This simple but effective cheat – telling the winner what its rivals had bid – was called giving them a "last look." The winning bank would then reward the broker by providing it with kickbacks disguised as "fees" for swap deals that the brokers weren't even involved in.
The end result of this (at least) decade-long conspiracy was that towns and cities systematically lost, while banks and brokers won big. By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals. Lowering a bid by just one-100th of a percent, called a basis point, could cheat a town out of tens of thousands of dollars it would otherwise have earned on its bond deposits.
That doesn't sound like much. But when added to the other fractions of a percent stolen from basically every other town in America on every other bond issued by Wall Street in the past 10 to 15 years, it starts to turn into an enormous sum of money. In short, this was like the scam in Office Space, multiplied by a factor of about 10 gazillion: Banks stole pennies at a time from towns all over America, only they did it a few hundred bazillion times.
Given the complexities of bond investments, it's impossible to know exactly how much the total take was. But consider this: Four banks that took part in the scam (UBS, Bank of America, Chase and Wells Fargo) paid $673 million in restitution after agreeing to cooperate in the government's case. (Bank of America even entered the Justice Department's leniency program, which is tantamount to admitting that it committed felonies.) Since that settlement involves only four of the firms implicated in the scam (a list that includes Goldman, Transamerica and AIG, as well as banks in Scotland, France, Germany and the Netherlands), and since settlements in Wall Street cases tend to represent only a tiny fraction of the actual damages (Chase paid just $75 million for its role in the bribe-and-payola scandal that saddled Jefferson County, Alabama, with more than $3 billion in sewer debt), it's safe to assume that Wall Street skimmed untold billions in the bid-rigging scam. The UBS settlement alone, for instance, involved 100 different bond deals, worth a total of $16 billion, over four years.
Contracting corruption has been around since the construction of the Appian Way. The difference here is the almost unimaginable scope of the crime – and the fact that it's mobsters from Wall Street who are getting in on the action. Until recently, such activity has traditionally been the almost-exclusive domain of the Mafia. "When I think of bid rigging, I think of the convergence of organized crime and the government," says Eliot Spitzer, who prosecuted two bid-rigging cases in his career as a New York prosecutor, one involving garbage collection, the other a Garment District case involving the Gambino family. The Mafia moved into bid rigging, he says, because it observed over time that monopolizing public contracts offers a far more lucrative business model than leg-breaking. "Organized crime learned their lessons from John D. Rockefeller," Spitzer explains. "It's much more efficient to control a market and boost the price 10 percent than it is to run a loan-sharking business on the street, where you actually have to use a baseball bat and collect every week."
What Spitzer saw was gangsters moving in the direction of big business. When I ask him if he is surprised by the current bid-rigging case, which looks more like big business moving in the direction of gangsters, he laughs. "The urge to become a monopolist," he says, "is as old as capitalism."
2. THE TAPES
The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked together at GE, which was competing for bond business against banks like Chase, Wells Fargo and Bank of America. Carollo was the boss of Goldberg and Grimm, who handled the grunt work, submitting bids. Between August 1999 and November 2006, the three executives participated in countless rigged bids by telephone, conspiring with middleman brokers like Chambers, Dunhill and Rubin. We know this because prior to the start of the Carollo trial, 12 other individuals, including several brokers from CDR, had already pleaded guilty in a wide-ranging federal investigation.
How did the government manage to make a case against so many Wall Street scam artists? Hubris. As was the case in Jefferson County, Alabama, where Chase executives blabbed criminal conspiracies on the telephone even though they knew they were being recorded by their own company, the trio of defendants in Carollo wantonly fixed bond auctions despite the fact that their own firm was taping the conversations. Defense counsel even made an issue of this at trial, implying to the jury that nobody would be dumb enough to commit a crime by phone when "there was a big sticker on the phones that said all calls are being recorded," as Grimm's counsel, Mark Racanelli, put it. In fact, Racanelli argued, the conversations on the tapes hardly suggested a secret conspiracy, because "no one was whispering."
But the reason no one was whispering isn't that their actions weren't illegal – it's because the bid rigging was so incredibly common the defendants simply forgot to be ashamed of it. "The tapes illustrate the cavalier attitude which the financial community brought toward this behavior," says Michael Hausfeld, a renowned class-action attorney whose firm is leading a major civil suit against Bank of America, Wells Fargo, Chase and others for this same bid-rigging scam. "It became the predominant mode of transacting business."
How and when the government got hold of those tapes is still unclear; the prosecution is not commenting on the case, which remains an open investigation. But we do know that in November 2006, federal agents raided the offices of CDR, the broker firm that was working with Carollo, Goldberg and Grimm. Caught redhanded, many of the firm's top executives agreed to turn state's witness. One after another, these hangdog, pasty-faced men were led up to the stand by prosecutors and forced to recount how they'd been snatched up in the raid, separated and blitz-interviewed by FBI agents, and plunged into years of nut-crushing negotiations, which resulted in almost all of them pleading guilty. Prosecutors would eventually accumulate 570,000 recorded phone conversations, and to decipher them they worked these cooperating witnesses like sled dogs, driving them in for dozens of meetings and grilling them about the details of the scam.
The state's first witness, confusingly, was a CDR broker named Doug Goldberg (no relation to the defendant Steven Goldberg). Almost every executive involved in the trial was absurdly young; many were just out of college when the bid-rigging scam started in the late Nineties. Doug Goldberg graduated from USC in 1993, and his fellow CDR executive Evan Zarefsky still looks to be about 15 years old, suggesting a suit-and-tie version of Napoleon Dynamite. The extreme youth of some of the conspirators was an obvious subtext of the trial, underscoring the fact that far more senior executives from bigger banks like Chase and Bank of America had been permitted by the government to evade testifying.
Right off the bat, in fact, Doug Goldberg explained that while at CDR, he had routinely helped the cream of Wall Street rig bids on municipal bonds by letting them take a peek at other bids:
Q: Who were some of the providers you gave last looks to?
A: There was a whole host of them, but GE Capital, FSA, J.P. Morgan, Bank of America, Société Générale, Lehman Brothers, Bear. There were others.
Goldberg went on to testify that he repeatedly rigged auctions with the three defendants. Sometimes he gave them "last looks" so they could shave basis points off their winning bids; other times he asked them to intentionally submit losing offers – called cover bids – to allow other firms to win. He told the court he knew he was being recorded by GE. When asked how he knew that, he drew one of the trial's rare laughs by answering, "Either they told me or some of them, like Société Générale, you can hear the beeping."
Because of the recordings, he went on, he and the defendants used "guarded language."
"I might tell him, if I'm looking for an intentionally losing bid, 'I need a bid,' or something like that," he said.
Q: With whom specifically did you use this guarded type of language?
A: With Steve Goldberg and others.
Q: In your dealings with Steve Goldberg, what, if any, language or other signal did he use that you understood as a request for a last look?
A: He might ask me where I "saw the market," or he might ask me for, as I mentioned, an "indication of where the market is," an "idea of the market."
The broker went on to detail how he had worked with the GE executives to manipulate a number of auctions. In several cases, he was pushed to make deals with GE by his boss at CDR, Stewart Wolmark, who seemed smitten with GE's Steve Goldberg; jurors listening to the tapes couldn't miss the pair's nauseatingly tight, cash-fueled bromance. In December 2000, for instance, Wolmark helped Goldberg win a rigged bid for a bond in Onondaga County, New York. After the auction, he calls his buddy Steve:
WOLMARK: Hey, congratulations. You got another one.
GOLDBERG: Yeah. Yeah, thank you. Thank you.
WOLMARK: You're hot!
GOLDBERG: I'm hot? Hot with your help, sir.
Later on, Wolmark basically tells Goldberg he owes a service to his fellow gangster.
"I deserve the big lunch now," Wolmark chirps.
"Yeah," says Goldberg. "I owe you something, huh?"
A few months later, in March 2001, Wolmark and Goldberg do another deal, this time for a $219 million construction bond for the Port Authority of Allegheny County, Pennsylvania. Wolmark rings up his payola paramour and scolds him for not calling him during a recent trip to Vegas, where Goldberg doubtless spent a nice chunk of the money Wolmark had helped him steal from places like Onondaga County.
"Good time in Vegas, you can't even call me back?" Wolmark laments.
"I don't have time to sleep in Vegas," Goldberg says suggestively.
"There's sleeping," Stewart Wolmark chides, "and there's Stewart."
From there, the clothes just start flying off as the pair jump into a steamy negotiation over the monster Allegheny deal. "I'm all set with $200 million," Goldberg says. "Everything's ready to go."
Then Wolmark asks if GE is ready to pay CDR its bribe. "You got some swaps coming up?"
Goldberg assures him they do. Wolmark then passes the deal off to his own Goldberg, Doug, who handles the actual auction.
When prosecutors tried to explain these telephone auctions at trial, projecting the transcripts of the calls on a huge movie screen set up across the courtroom from the jury, you could see the sheer bewilderment on the jurors' faces. The men on the tapes seemed to be speaking a language from another planet – an insanely dry and boring planet, where there's no color and no adverbs, maybe, and babies are made by rubbing two calculators together. One of the jurors, an older white man, spent the first few days of the trial yawning repeatedly, fighting a heroic battle to stay awake in the face of all the mind-numbing jargon about Guaranteed Investment Contracts. "Who needs Lunesta," joked one lawyer who attended the proceedings, "when you can hear a lawyer talk about GICs right out of the gate?"
The language of the auctions was a kind of intellectual camouflage. If you didn't listen closely, you'd have thought the two Goldbergs were a couple of airmen exchanging weather balloon data, rather than two Wall Street executives plotting a crime to rip off the good citizens of Allegheny County. In that deal, Steve Goldberg of GE originally bid "503, 4" on the $219 million bond, only to be guided downward by Doug Goldberg of CDR. The broker explained in court:
Q: Can you explain what you understood Mr. Goldberg to say when he was saying 503, 4? What was he bidding?
A: That was the rate he was willing to bid on this investment agreement.
Q: How much was it?
A: 5.04 percent.
Q: What did you do as a response to his bid of 5.04 percent?
A: I brought his bid down to 5.00 percent.
In other words, even though GE was willing to pay an interest rate of 5.04 percent, Allegheny County ended up earning just 5.00 percent on its $219 million bond. How much money that amounted to is difficult to calculate, given the way the bond account diminished each year as the county used it to pay contractors; even Doug Goldberg couldn't put a number on the scam. But if the account was full at the start of the deal, GE may have cheated the county out of as much as $87,600 a year to start.
In any case, GE certainly chiseled the Pennsylvanians out of a sizable sum, because soon after, the company paid CDR a kickback of $57,400 in the form of "fees" on a swap deal. The whole deal pleased CDR's higher-ups. "I went to Stewart Wolmark and told him that not only did Steve Goldberg win but that I was able to reduce his rate down four basis points," said Doug Goldberg. "Stewart was very happy and excited."
Over and over again, jurors heard cooperating witnesses translate the damning audiotapes. In one lurid sequence, the bat-eared, bespectacled CDR broker Evan Zarefsky explained how he helped the GE defendant Peter Grimm win a bid for a bond put out by the Utah Housing Authority. The pair had apparently reamed Utah so many times that it had become a sort of inside joke between the two of them. From a call in August 2001:
GRIMM: Utah, let's see, how we look on that?
ZAREFSKY: Good old Utah!
Grimm complains about how much he'll have to pay to win the deal. "These levels are really shitty," he says.
From there, Grimm rattles off numbers, ultimately settling on a bid of 351 – 3.51 percent. Zarefsky, in almost motherly fashion, guides the manic Grimm downward, telling him, in code, that his bid is 10 basis points too high. "You actually got like a dime in there," Zarefsky says. "You want to come down a dime?"
So Grimm comes back with a bid of 3.41 percent, which turned out to be the winning bid. Utah lost out on 10 basis points, GE bilked the state out of untold sums, and CDR got another nice kickback.
This, basically, is how a lot of the calls went. The provider would tentatively offer a number, and the broker would guide him to a new bid. "You have a little bit of room there," he might say, or "That's gonna put you about a nickel short." Guiding the bidders to the lowest possible bid was called "figuring out the level" or being "in the market"; obtaining information about other bids was called "giving an indicative" or "seeing the market."
The brokers and providers used a dizzying array of methods for rigging deals. In some cases, the broker helped the "winner" by simply excluding other bidders, who may or may not have been in on the scam. In one hilarious sequence that sounds like something out of a wiretap of a Little Italy social club, CDR executive Dani Naeh tells GE's Steve Goldberg that he's not sure he can guarantee a win on a bid for a New Jersey hospital bond. There were too many triple-A-rated companies interested in the bond, Naeh explains, and he couldn't control their bids the way he could those of the lesser, double-A-rated companies he usually did business with. "It would be easier for us to contact other providers who were rated double-A and ask them to submit an intentionally losing bid," Naeh testified. He sounded exactly like a mobster, talking about "our guys" and "our friends."
In some of the calls, jurors could hear the entirety of the dirty deals negotiated, including the bribe paid back to the broker. In one deal involving a bond for the Port of Oakland, California, Steve Goldberg of GE starts to ask his pal Stewart Wolmark of CDR what kind of kickback the broker wants for rigging the deal. Such conversations about payoffs were so commonplace that Wolmark doesn't even have to wait for Goldberg to finish the question:
GOLDBERG: What are we building in here for the...
In his testimony, Wolmark explained that he was asking for a swap deal in return for rigging the bid. "He wanted to know what we were going to get paid on the back end," Wolmark explained.
In the call, Wolmark and Goldberg start haggling over the price of CDR's kickback. Wolmark tells Goldberg he only wants what's fair. "Listen, I'm not a chazzer," Wolmark says.
Fans of the movie Scarface will remember Tony Montana's inspired translation of this Yiddish term: "Thas a pig that don' fly straight."
Wolmark reassures Goldberg that as pigs go, he's a straight flier. "You see the kind of mensch I am," he says.
Negotiations ensue. Goldberg tells Wolmark that he can pay him more on the bribe – the swap deal – if Wolmark can help GE save money on the Port of Oakland deal. "I'd like to see if we can pull a nickel out of that swap," Wolmark says. Translation: He wants to boost CDR's take on the kickback by five basis points.
"If I could get to the right level," Goldberg answers, referring to the Port of Oakland deal. Translation: Goldberg will help Wolmark get his "nickel" on the swap deal if Wolmark can help GE "get to the right level" on the bid.
3. THE POLITICIANS
The Carollo case provides far more than a detailed look at the mechanics and pervasiveness of bid rigging; it offers a clear and unvarnished blueprint of the architecture of American financial and political corruption. In an attempt to discredit the CDR witnesses, defense counsel hounded them about other revelations that surfaced in the government's investigation, particularly those that involved bribery, illegal campaign contributions and pay-for-play schemes.
The defense's cross-examinations were surreal. It was certainly true that some of the government's cooperating witnesses had dubious résumés, so it may have made sense to highlight their generally duplicitous history of tax evasion or lying to investigators. But in their zeal, defense counsel went far beyond simply discrediting the witnesses, spending an inordinate amount of time eliciting even more details about the grotesque corruption scheme their own clients had taken part in. The result was a rare and somewhat confusing spectacle: high-octane lawyers from Wall Street working to rip the lid off Wall Street corruption in open court.
Defense counsel showed us, for instance, how CDR employees were routinely directed by their boss, David Rubin, to make political contributions to select candidates, only to be reimbursed by Rubin for those contributions later on. This kind of corporate skirting of campaign finance limits is something we've always suspected goes on, but we rarely get to see direct evidence of it.
More interesting, though, were the stories about political payoffs. In 2001, CDR hired a consultant named Ron White, a Philadelphia bond attorney who happened to be the chief fundraiser for then-mayor John Street. CDR gave White two tickets to the 2003 Super Bowl in San Diego plus a limo – a gift worth $10,000. As his "guest," White took Corey Kemp, the city treasurer for Philadelphia, who, 16 days later, awarded CDR a $150,000 contract to advise the city on swap deals. But that wasn't the end of the gravy train: CDR doled out those swap deals to selected banks, who in return kicked back $515,000 to CDR for steering city business their way.
So a mere $10,000 bribe to a politician – a couple of Super Bowl tickets and a limo – scored CDR a total of $665,000 of the public's money. If you want to know why Wall Street has been enjoying record profits, here's your answer: Corruption is a business model that brings in $66 for every dollar you invest.
Even more startling was the way that a notorious incident involving former New Mexico governor and presidential candidate Bill Richardson resurfaced during the trial. Barack Obama, you may recall, had nominated Richardson to be commerce secretary – only to have the move blow up in his face when tales of Richardson accepting bribes began to make the rounds. Federal prosecutors never brought a case against Richardson: In 2009, an inside source told the AP that the investigation had been "killed in Washington." Obama himself, after Richardson bowed out, praised the former governor as an "outstanding public servant."
Now, in the Carollo trial, defense counsel got Doug Goldberg, the CDR broker, to admit that his boss, Stewart Wolmark, had handed him an envelope containing a check for $25,000. The check was payable to none other than Moving America Forward – Bill Richardson's political action committee. Goldberg then went to a Richardson fundraiser and handed the politician the envelope. Richardson, pleased, told Goldberg, "Tell the big guy I'm going to hire you guys."
Goldberg admitted on the stand that he understood "the big guy" to mean Wolmark. After that came this amazing testimony:
Q: Soon after that, New Mexico hired CDR as its swap and GIC adviser on a $400 million deal, right?
Q: You learned later that that check in that envelope was a check for $25,000, right?
A: Yes. I learned it later.
Q: You also learned later that CDR gave another $75,000 to Gov. Richardson, right?
Q: CDR ended up making about a million dollars on this deal for those two checks?
Q: In fact, New Mexico not only hired CDR, they hired another firm to do the actual work that they needed done?
A: For the fixed-income stuff, yes.
What we get from this is that CDR paid Bill Richardson $100,000 in contributions and got $1.5 million in public money in return. And not just $1.5 million, but $1.5 million for work they didn't even do – the state still had to hire another firm to do the actual job. Nice non-work, if you can get it.
To grasp the full insanity of these revelations, one must step back and consider all this information together: the bribes, yes, but also the industry wide, anti-competitive bid-rigging scheme. It turns into a kind of unbroken Möbius strip of corruption – the banks pay middlemen to rig auctions, the middlemen bribe politicians to win business, then the politicians choose the middlemen to run the auctions, leading right back to the banks bribing the middlemen to rig the bids.
When we allow Wall Street to continually raid the public cookie jar, we're not just enriching a bunch of petty executives (Wolmark's income in 2008, two years after he was busted in the FBI raid, was $2,464,210.18) – we're effectively creating an alternate government, one in which money lifted from the taxpayer's pocket through mob-style schemes turns into a kind of permanent shadow tax, used to maintain the corruption and keep the thieves in place. And that cuts right to the heart of what this case is all about. Wall Street is tired of making money by competing for business and weathering the vagaries of the market. What it wants instead is something more like the deal the government has – regularly collecting guaranteed taxes. What's crazy is that in order to justify that dream of regular, monopolistic tribute, they've begun to see themselves as a type of shadow government, watching out for the rest of us. Amazingly enough, this even became a defense at trial.
4. THE DEFENSE
There were times, sitting in the courtroom, when I wondered, How did this case even go to trial? What defense attorney would look at the thousands of recorded phone calls, the parade of cooperating witnesses, the stacks of falsified documents, and conclude that airing all of this in court was a smart play? Listening to tape after damning tape played in open court while the defendants cringed in a corner seemed increasingly like a gratuitous ass-kicking, one that any smart defense lawyer would have made a deal to avoid.
But as the weeks passed, I started to get a feel for the defense strategy, which made a kind of demented sense. The lawyers for Carollo, Goldberg and Grimm didn't even bother trying to argue the facts of the case. Instead, in one cross-examination after another, they kept hitting the same theme. Despite the fact that the rigged bids resulted in lower returns, wasn't it true that the cities and towns still received, technically speaking, the highest bid? If a town received a 5.00 percent return on a $219 million bond instead of 5.04 percent, who's to say that wasn't a good price?
John Siffert, the gray-faced and unlikable attorney for Steve Goldberg, put it this way in his cross-examination of CDR executive Stewart Wolmark. Asking about the Allegheny deal, he boomed: "Isn't it fair to say that you believed that by lowering... Steve's bid to 5 percent, Steve's bid was still a fair price to pay?"
Wolmark's answer was both quick and sensible: "I don't determine the fair price," he replied. "The market does." GE was supposed to pay the highest price the market would pay. It wasn't a competitive auction, as required by law.
But Siffert had made his point, and his rhetoric got right to the heart of the defense, which was going to center around the definition of the word "fair." The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartelstyle scheming, are all legitimate market processes that lead to legitimate price discovery. In this lunatic worldview, the bidrigging scheme was a system that created fair returns for everyone. If a bunch of Pennsylvanians got a 5.00 percent return on their money instead of 5.04 percent, and GE and CDR just happened to split the extra .04 percent, that was a fair outcome, because that's what the parties negotiated. True, the Pennsylvanians had no idea about the extra .04 percent, and true, they had hired CDR precisely to make sure they got that extra 0.4 percent. But hey, it's not like they were complaining: Until someone told them they were being brazenly cheated, they were happy with their bond service. And besides, it's not like ordinary people understand this stuff anyway. So how is it the place of some busybody federal prosecutor to waltz in here and say what's a fair price?
Walter Timpone, who represented Carollo, tried to lay this outrageous load of balls on the jury using a faux-folksy analogy. "When your refrigerator breaks down, if you're not mechanically inclined, you're at the mercy of that repair person," he told the jury. "And if he repairs the refrigerator, makes it work well, charges you a fair price, you're likely to call on him again when the stove breaks." What he was essentially telling jurors was: This shit is complicated, so best just to leave it to the experts. Whether they're fixing a fridge or fixing a bond rate, they get to set the price, because we're all morons who are dependent on them to make our world work. Timpone, in his lawyerly way, was actually telling us an essential economic truth: You're at the mercy of that repair person.
This incredible defense, which the attorneys for all three defendants led with, perfectly expresses the awesome arrogance of the modern-day aristocrats who run our financial services sector. Corrupt or not, they built this financial infrastructure, and it's producing the prices they genuinely think are fair for us – and for them. And fair to them is the customer getting the absolute bare minimum, while they get instant millions for work they didn't do. Moreover – and this is the most important part – they believe they should get permanent protection from the ravages of the market, i.e., from one another's competition. Imagine Jack Nicholson on the witness stand, dressed in a repairman's uniform and tool belt. Who's gonna fix those refrigerators? You? You, Lieutenant Weinberg? You can't handle the truth!
That, ultimately, is what this case was about. Capitalism is a system for determining objective value. What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above.
"One of the biggest lies in capitalism," says Eliot Spitzer, "is that companies like competition. They don't. Nobody likes competition."
To the great credit of the jurors in the Carollo case, they didn't buy Wall Street's ludicrous defense. On May 11th, nearly a month after the trial began, they handed down convictions to all three defendants. Carollo, Goldberg and Grimm, who will be sentenced in October, face as many as five years in jail.
There are some who think that the government is limited in how many corruption cases it can bring against Wall Street, because juries can't understand the complexity of the financial schemes involved. But in USA v. Carollo, that turned out not to be true. "This verdict is proof of that," says Hausfeld, the antitrust attorney. "Juries can and do understand this material."
In the end, though, the conviction of a few bit players seems like far too puny a punishment, given that the bid rigging exposed in Carollo involved an entrenched system that affected major bond issues in every state in the nation. You find yourself thinking, America's biggest banks ripped off the entire country, virtually every day, for more than a decade!
A truly commensurate penalty would be something like televised stonings of the top 10 executives of every guilty bank, or maybe the forcible resettlement of every banker and broker in Lower Manhattan to some uninhabited Andean wasteland... anything to address the systemic nature of the crime.
No such luck. Instead of anything resembling real censure, a few young executives got spanked, while the offending banks got off with slap-on-the-wrist fines and were allowed to retain their pre-eminent positions in the municipal bond market. Last year, the two leading recipients of public bond business, clocking in with more than $35 billion in bond issues apiece, were Chase and Bank of America – who combined had just paid more than $365 million in fines for their role in the mass bid rigging. Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again. Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.
Over the years, many in the public have become numb to news of financial corruption, partly because too many of these stories involve banker-on-banker crime. The notorious Abacus deal involving Goldman Sachs, for instance, involved a hedge-fund billionaire ripping off a couple of European banks – who cares? But the bid-rigging scandal laid bare in USA v. Carollo is a totally different animal. This is the world's biggest banks stealing money that would otherwise have gone toward textbooks and medicine and housing for ordinary Americans, and turning the cash into sports cars and bonuses for the already rich. It's the equivalent of robbing a charity or a church fund to pay for lap dances.
Who ultimately loses in these deals? Well, to take just one example, the New Jersey Health Care Facilities Finance Authority, the agency that issues bonds for the state's hospitals, had their interest rates rigged by the Carollo defendants on $17 million in bonds. Since then, more than a dozen New Jersey hospitals have closed, mostly in poor neighborhoods.
As Carollo showed us, in open court, this is what Wall Street learned from the Mafia: how to reach into the penny jars of dying hospitals and schools and transform their desperation and civic panic into fat year-end bonuses and the occasional "big lunch." Unlike the Mafia, though, they were smart enough to do their dirt without anyone noticing for a very long time, which is what defense counsel in this case were talking about when they argued that towns and cities "were not harmed" by the rigged bids. No harm, to them, means no visible harm, i.e., that what taxpayers didn't know couldn't hurt them.
This is logical thinking, to the sociopath – like saying it's not infidelity if your wife never finds out. But we did find out, and the scale of betrayal unveiled in Carollo was epic. It was like finding out your husband didn't just cheat, but had a frequent-flier account with every brothel in North America for the past 10 years. At least now we know how bad it was. The trick is to find a way to make th
DEAR BUBBAS AND BUBBETTES,
More on capitalism, 21st Century style.
Banksters have long been among the brightest and most avaricious omnimoneymores, and they get away with this stuff for a very simple reason. Our political leaders are desperate for ever large amounts of money to keep running and trying to stay in office. And if you pony up to the lolly buckets big time you can cheat the system in myriad ways.
Strange evolution for what was once allegedly a moral liberal democratic republican political experiment. Many saw this disease coming, alas, and no one has yet found a reliable cure.
Any ideas of your own on how to turn this around??
Enjoy and take care, Andy
| | HOW BIG BANKS ARE STILL LYING, CHEATING AND RIPPING US OFF
By Joshua Holland, AlterNet, 17 July 2012. Joshua Holland is an editor and senior writer at AlterNet. He is the author of The 15 Biggest Lies About the Economy: And Everything else the Right Doesn't Want You to Know About Taxes, Jobs and Corporate America. Drop him an email: firstname.lastname@example.org
Earlier this year, researchers at the university of Southern California published the results of a study examining whether the wealthy – the mythical “engines of our economy” – display a better character than the rest of us.
As it turned out, after conducting seven experiments they found that the narrow pursuit of self-interest at the top of the economic heap leads our elites to behave like complete dirtbags. As Bloomberg summarized, the researchers found that the richest among us “were more likely to break the law while driving, take candy from children, lie in negotiation, cheat to raise their odds of winning a prize and endorse unethical behavior at work.” “It’s not that the rich are innately bad, but as you rise in the ranks -- whether as a person or a nonhuman primate -- you become more self-focused,”
Paul Piff, the lead author of the study, told Bloomberg. It is their lust for wealth, paired with a lack of empathy for others
– their disregard for the consequences of their actions on the “little people” – that makes them, at times, appear to simply be evil.
That research may help us understand why high-flying traders at Barclays Bank – and those at an as yet unknown number of other financial institutions – were willing to risk the credibility of the entire financial sector, as well as their cushy jobs, to rig interest rates in order to squeeze out more profits. And it certainly helps explain why they didn't think twice about the individual and institutional investors they ripped off: millions of ordinary people with credit cards, auto and home loans and other lines of credit.
That is what the budding scandal over banks lying in order to manipulate key lending benchmarks is all about. It's a story that doesn't lend itself to flashy headlines, and hasn't been getting the media attention it deserves in this country, so we asked David Dayen of Firedoglake to help break it down for us on this week's AlterNet Radio Hour. Below, is a lightly edited transcript of the discussion. Joshua Holland: David, I want to talk about this LIBOR scandal. You’re a wonky guy and I wanted to get the story in a way, I hope, that my grandmother Ethel can understand. I think it’s important to point out that this isn’t a story about boring interest rates. It’s about high-level banking executives lying and manipulating the system in order to make a bigger profit, and in doing so ripping off millions of people around the world. First, what is the London Interbank Offered Rate or LIBOR?
David Dayen: The London Interbank Offered Rate is sort of the rate that banks charge amongst themselves for lending. More important than that, it’s used as a benchmark rate for pretty much all loans. We’re talking student loans, car loans, adjustable rate mortgages, and all sorts of structured finance deals. There almost isn’t a lending product that isn’t affected by the LIBOR in some way or another. It’s a benchmark which is used to set those other rates. JH: So this is what a bank lending rate in London has to do with you folks out there. If you have a home loan, if you have a credit card, if you have an auto loan, if you’re living in, say, Nebraska, this London bank rate affects your pocketbook. This is really the nub of it. So what happened, David?
DD: It’s almost a bit unfair to single out Barclays Bank. Let me go through that, and then get into what happened with the LIBOR.
Barclays agreed to a settlement with the Justice Department over allegations that it rigged, or tried to manipulate, the LIBOR. It did that in a number of ways. In some cases their traders were asking for the LIBOR to be set up or down based on how they could make money off of derivatives trading. The spread in the rate would give them a leg up on the competition and improve their profits.
In a second deal, especially during the financial crisis, it was found that Barclays was submitting their rate for the LIBOR at the high end. Obviously if you’re a bank and you’re submitting an interest rate that’s higher than everybody else’s you’re asserting, in a way, that your bank is in more trouble than some of these other banks because you’re having to pay a higher interest rate. They were asked to submit a lower interest rate by their executives so that it didn’t look like Barclays was doing as badly during the financial crisis. So there are a number of different ways that Barclays was manipulating the rates.
The reason I say that it’s almost unfair to single them out is that they’re the one bank that has agreed to a settlement -- that has agreed to play ball here with the Justice Department. The LIBOR is set by a number of different banks submitting an overnight lending rate, and then the top and bottom are sort of thrown out, and the range is set that way.
There are plenty of allegations that every bank pretty much that was involved in creating the LIBOR was gaming the system in very similar ways to what has been alleged to have happened at Barclays. We only know about Barclays because they’ve come clean. We don’t know about all of these other banks that are under investigation. That includes banks in the United States like JP Morgan Chase, Bank of America, and on and on. JH: The Wall Street Journal reports that a number of banks are being investigated for similar fraud. It also appears that Barclays may have colluded with other banks in this scam. We should also point out that it’s not just LIBOR. There’s another major benchmark rate called the EURIBOR. It also has been subjected to some manipulation. The way this works is again -- let’s step back for a moment – is that the British Bankers Association publishes this LIBOR. What they do is get reports from major banks and they use those reports to come up with the rate. So when the banks had it in their interest to push those rates up or down they basically lied. They lied about what they were reporting.
DD: That’s why it’s called “Lie-bor.” That’s generally the idea. Because they sometimes pushed it up and sometimes they pushed it down it’s kind of harder to say exactly how people were affected in terms of their interest rates on their student loans or what have you.
I’ll tell you a way people were definitely affected whether it went up or down. That was in terms of local government. There are all these interest rate swap deals where local governments can lock in an interest rate at a certain level, and they do these deals with large, major banks. Banks are gaming the rate down – the locked-in rate makes them more money over time. When you’re talking about local governments you’re talking about local tax dollars. That really affects everybody. There are local governments across the country who engage in these local rate swap deals, who have been just completely ripped off, and the LIBOR gaming had something to do with it. JH: Thomas Ferguson wrote recently about these interest rate swaps and how devastating they are on local and state budgets. So, anyway, at times they lied in order to move the rate up and at other times they lied to move the rate down. Am I right in the belief that in doing so they managed to screw over both their own investors and consumers whose interest rates were tied to the benchmark?
DD: Absolutely. It’s a little hard to pinpoint because there are so many banks who deal with creating the LIBOR by handing in their rates to the British Bankers Association. There’s no question if you have banks that are manipulating this rate for the purpose of making more and bigger profits, or in protecting their bank and giving a false impression that the bank is doing better than it is, that money has to come from somewhere. In most cases it’s coming from the pockets of ordinary people. JH: So they ripped off everybody in sight and they were fined. Do you know how big those fines are?
DD: The Justice Department fines are in the range of $450 million, which is really trivial comparatively. This scandal from the perspective of Barclays has already metastasized in Britain. The CEO Bob Diamond has had to resign. The chairman of Barclays Bank has had to resign. Parliament just launched an official inquiry into the scandal. The Serious Fraud office in Britain has opened a criminal investigation. So I think the odds are pretty high that we’re actually going to see prosecutions out of this.
Unlike in the United States, the British press has been going crazy about this scandal, particularly tying it to a larger question about the culture of banking in the City of London, which is the financial center of England. Much like we see here, it has favored greed and profit taking over ethics. I think the Barclays scandal is really coming to a head in Britain. Because it’s just the beginning, there’s no reason that might not happen over here. JH: Just to put those fines in context Barclays profits last year were around $9 billion. While Barclays CEO Bob Diamond (who is a Yank by the way) apologized and stepped down, nonetheless, according to NPR, he is keeping a $48 million golden parachute.
DD: He was asked about that in a Parliamentary session last week. I think his answer was he’s worked 16 years for this company. JH: Forty-eight million for having screwed things totally. Diamond said in that same inquiry that he knew nothing about this, and it was all the work of a few bad apples. He called them rogue traders. You talked about the US Commodity Future’s Trading Commission. They found, and I want to quote from their report, that Barclays manipulated these rates, “on numerous occasions, and sometimes on a daily basis over a four-year period.” And they also said that “this conduct occurred regularly and was pervasive.”
DD: And yet he didn’t know about it. JH: Right, how could he have possibly known?
DD: What’s really funny about Diamond is he simultaneously said he didn’t know about it and also that the Bank of England instructed him that it would be okay if they lowered their rate to help the bank. I don’t know how it squares -- that he could have known nothing about it but also was told directly by the Bank of England that it would be okay to manipulate the rate. JH: Now let me ask you for a prediction. Is this story going to get a lot of play in the American media? I had Jeff Thigen, who is Register of Deeds in Guilford County, North Carolina, on the show talking about massive foreclosure fraud perpetuated by the big banks right here at home in the robo-signing scandal. He told me how it affected his office. He basically doesn’t have any paperwork he can trust in his Register of Deeds. He’s suing a number of banks to try and get them to clean up the mess they made. This whole thing, I think, was kind of dismissed by many in the mainstream media. It was all mere “paperwork issues,” never mind that it showed this remarkable sense of entitlement. They didn’t like the way we registered deeds so they decided they’re going to set up a corporation called MERS and they’ll just skip that -- screwing over country registrars all across the country and utterly confusing the chain of title on millions of mortgages, and nobody seems to be upset about this.
DD: Yeah. I’ve of course been following that story for upwards of two years now. It is hard to get traction on it. Certainly you look at the track record, and it seems that the LIBOR scandal will play out in the financial press, not on the front page, and it will only be a blip. You can sort of look at the difference between the furor in Britain over the Barclays portion of the LIBOR scandal, and what we saw here when Jamie Dimon was brought in to testify before the Senate and the House over what I call the “fail whale” trades -- these trades, also in London, that lost $9 billion -- and those hearings were a farce. To suggest that the US press and US policymakers are going to wake up and recognize the enormity of this scandal and take appropriate action is kind of wishful thinking. JH: I struggle to figure out why that is. Part of me says that it’s because the political press likes to have a he-said/she-said kind of tension -- a partisan tension. What you’re seeing is that nobody is really calling for heads to roll in the financial sector. We heard very big talk from New York’s Attorney General Eric Schneiderman and his new commission that was going to study foreclosure fraud. They didn’t even get office space. They have no resources whatsoever. There’s just nobody, it seems, who's terribly concerned about any of this. I wonder if that leads to a kind of scandal fatigue?
DD: I think in a sense it does. When you see these things raised over and over again and there’s no appropriate accountability as a result, you tend to lose interest. Keep in mind the Justice Department settled with Barclays and forestalled any criminal investigation into the specific vendors. There are going to be civil lawsuits that play out -- I think there’s one with the city of Baltimore as one of the plaintiffs -- but the Justice Department said we got our $450 million and we’re done for the day. There’s still investigations underway. There are still other banks that are implicated in the scandal, but if you just look at the track record you cannot be optimistic in any way. JH: I come to this from an ideological perspective. Let me ask you a question from a banker’s perspective. What is the potential harm from this massive loss of faith and trust in these institutions?
DD: There’s a serious reputational risk. If I’m an investor, I don’t know why I would ever come within 50 feet of an investment bank or anything of that nature, given how they have just abused me over the last several years. Whether it’s with mortgage-backed securities that they didn’t tell me were based on fictions and bad loans, or this particular scandal where all the interest rates were actually falsified. It’s very hard to have continued faith in these institutions.
But of course if you’re a major investor, there aren’t that many institutions that have the economy of scale to be able to handle you. As we know, after the financial crisis the too-big-to-fail banks just got bigger. There are less of them, and they hold more assets now. It’s kind of a catch-22.
DEAR BUBBAS AND BUBBETTES,
Here are a few interesting questions to contemplate:
“What would western capitalism be like without seemingly incurable greed?”
“What other avaricious fuel could feed these insatiable fires?”
“And how can it really be that today so many ripoffsters are so profoundly indifferent to the misery they are bringing to so many of the untermenchen of the world?”
“Finally, Is there a possible cure?”
What do you think???
IS IT REALLY MORE COMPLEX THAN GREED?
By Sreven J. Harper, Esq, TheBellyoftheBeast, 10 July 2012.
Revisionism is already obfuscating the story of Dewey & LeBoeuf’s demise. If facts get lost, the profession’s leaders will learn precious little from an important tragedy.
For example, the day after Dewey & LeBoeuf filed its bankruptcy petition, Clifford Winston and Robert W. Crandall, two non-lawyer fellows at the Brookings Institution, wrote an op-ed piece for The Wall Street Journal offering this analysis:
“Dewey’s collapse has been attributed to the firm being highly leveraged and unable to attract investment from businesses outside the legal profession.” (see below).
Attributed by whom? They don’t say. Anyone paying attention knows that outside investors bought $150 million in Dewey bonds. But apparently for commentators whose agenda includes proving that overregulation is the cause of everyone’s problems — including the legal profession’s — there’s no reason to let facts get in the way.
On the same day that the Winston & Crandall article appeared, a less egregious but equally mistaken assessment came from Indiana University Maurer School of Law Professor William Henderson in the Am Law Daily: “More Complex than Greed.” Bill and I agree on many things. I consider him a friend and an important voice in a troubled profession. But I think his analysis of Dewey & LeBoeuf’s failure misses the mark.
“One storyline that will attract many followers is that large law firm lawyers, long viewed as the profession’s elite class, have lost their way, betraying their professional ideals in the pursuit of money and glory. This narrative reinforces that lawyer-joke mentality that lawyers just need to become better people. That narrative is wrong.”
What’s wrong with it? In my view, not much, as “House of Cards” in the July/August issue of The American Lawyer now makes painfully clear.
Rather than the greed that pervades “House of Cards,” Henderson suggests that Dewey & LeBoeuf reveals the failure of law firms to innovate in response to growing threats from new business models, such as Axiom and Novus Law. Innovation is an important issue and Henderson is right to push it. But as the story of Dewey’s failure unfolds, the inability to innovate in the ways that Henderson suggests — using technology and cheaper labor to achieve efficiencies and cost savings — won’t emerge as the leading culprit.
Rather, greed and the betrayal of professional ideals lie at the heart of what is destabilizing many big law firms. In that respect, most current leaders have changed the model from what it was 25 years ago. Am Law 100 firms’ average partner profits soared from $325,000 in 1987 to $1.4 million in 2011. Behind that stunning increase are leadership choices, some of which eroded partnership values. As a result, many big firms have become more fragile. If greed doesn’t explain the following pervasive trends, what does?
– Short-term metrics — billings, billlable hours, leverage — drive partner compensation decisions in most big firms. Values that can’t be measured — collegiality, community, sense of shared purpose — get ignored. When a K-1 becomes the glue that holds partnerships together, disintegration comes rapidly with a financial setback.
– Yawning gaps in the highest-to-lowest equity partner compensation. Twenty-five years ago at non-lockstep firms, the typical spread was 4-to-1 or 5-to-1; now it often exceeds 10-to-1 and is growing. That happens because people at the top decide that “more” is better (for them). Among other things, the concomitant loss of the equity partner “middle class” reduces the accountability of senior leaders.
– Leverage has more than doubled since 1985 and the ranks of non-equity partners have swelled. That happens when people in charge pull up the ladder.
– Lateral hiring and merger frenzy is rampant. One reason is that many law firm leaders have decided that bigger is better. The fact that “everybody else is doing it” reinforces errant behavior. Growth also allows managers to rationalize their bigger paychecks on the grounds that they’re presiding over larger institutions.
Throughout it all, associate satisfaction languishes at historic lows. No one surveys partners systematically, but plenty of them are unhappy, too. Unfortunately, such metrics that don’t connect directly to the short-term bottom line often get ignored.
Innovation won’t solve the problem
A few successful, stable law firms have shunned the now prevailing big law model. They innovate as needed, but far more important has been their ability to create a culture in which some short-term profit gives way to the profession’s long-term values. What is now missing from most big law firms was once pervasive: a long-run institutional vision and the willingness to implement it. Too often, greed gets in the way.
With all due respect to Messrs. Winston, Crandall and Henderson, sometimes the simplest explanation may also be the correct one.
WINSTON AND CRANDALL: THE LAW FIRM BUSINESS MODEL IS DYING
Rules that were adopted to protect the legal profession from outside competition are actually stifling it.
By Clifford Winston and Robert W. Crandall, WSJ, 29 May 2012.
Mr. Winston is a senior fellow and Mr. Crandall is a nonresident senior fellow at the Brookings Institution. They are co-authors, with Vikram Mahesri, of "First Thing We Do, Let's Deregulate All The Lawyers" (Brookings, 2011).
On Monday night the century-old law firm of Dewey & LeBoeuf filed for bankruptcy—following in the footsteps of other venerable firms such as Howrey & Simon, Heller Ehrman, Coudert Brothers, and Brobeck, Phelger and Harrison. It is easy to think that greedy lawyers are getting their just deserts. But this should not blind us from seeing that there is a better way for America's law firms to do business.
The problems these firms face today are twofold: Large clients are increasingly using in-house counsel to reduce costs, and the public is increasingly taking the do-it-yourself route given the growing access to a variety of legal services and documents on the Internet. The rational response would be for new, low-cost legal firms to start up, and for incumbents to reduce costs and attract new clients by providing innovative services.
But that is happening only to a limited extent because of state licensing requirements and American Bar Association (ABA) rules. Deregulation could open the market and transform the legal industry for the better.
Regulatory barriers have hamstrung other sectors of the economy in the past until the arrival of deregulation. For example, Interstate Commerce Commission (ICC) regulations raised railroad rates for decades after its inception in 1887. But with the proliferation of motor vehicles, trucks began to capture a large share of rail freight traffic.
Then trucks were included under the ICC's regulatory umbrella in 1935, to prevent railroads' freight market share from continuing to erode. But by raising trucking rates, the ICC induced some shippers to buy and operate their own trucks, exacerbating rail's woes. Similarly, Civil Aeronautics Board regulations elevated airline fares, and by the late 1950s—when interstate highway travel was possible—the high fares limited the percentage of seats filled with paying passengers.
The deregulation of transportation that began during the late 1970s enabled motor, air and rail carriers to reduce costs and, particularly in the case of railroads and airlines, to regain market share by offering consumers lower prices and better service.
How have regulations caused the demise of long-established "white-shoe" law firms? Much legal work is performed by associates, who in most states must graduate from a law school accredited by the ABA and pass a state bar examination. This form of licensing significantly limits the flow of new legal practitioners. It also means would-be lawyers must make a substantial upfront educational investment in money and time that must be recouped in high salaries later.
Such salaries can be and are paid because licensing limits competition in the legal profession, and because partners derive much of their own inflated earnings from associates' work.
But when law firms are under pressure to reduce costs, it is difficult for the partners to significantly reduce their reliance on associates without severely affecting their ability to serve clients. Efforts to outsource some tasks have met with only limited success.
While law firms can and do get bank loans, ABA regulations prohibit banks, private-equity firms or other corporations from owning or having an ownership stake in a law firm. This limits a law firm's financing options and raises its capital costs. Dewey's collapse has been attributed to the firm being highly leveraged and unable to attract investment from businesses outside the legal profession.
Law firms are aware of the value that professional business managers can add to their operations. But regulations that prohibit the ownership of law firms by nonlawyers prevent those firms from fully realizing the value of managerial skills and oversight that professional management could bring.
Finally, because regulations prevent corporations from providing legal services other than their own legal counsel, a law firm today cannot realize efficiencies or make more money by merging with a firm outside the legal profession to provide financial and accounting services, for example, along with legal services.
Eliminating regulations on who may provide legal services and who may own and operate a law firm could result in substantial efficiencies. Deregulated firms and new legal entities could reduce costs by hiring a variety of people to provide legal services—some who have completed three years of law school and some who have not.
Such firms would be better positioned to explore the substitution of capital for labor—for example, by accelerating the use of sophisticated Web searches as a substitute for manual document searches, and by using other information technology to ensure that corporate clients comply with government regulations.
New firms not necessarily owned by lawyers would bring new ideas, new technologies, new talents, and new operating procedures into the practice of law. This process has certainly happened elsewhere, the way Freddie Laker and Southwest Airlines brought new operating efficiencies to the airline industry, or the way satellite and cable brought a multitude of new programming to a once-stagnant television industry controlled by three broadcast networks.
As legal fees fell and services improved and expanded, many corporate clients would begin to downsize their internal legal departments. They would go back to relying principally on outside legal help, much as shippers have returned to deregulated for-hire trucking companies and less-regulated railroads. American businesses would reap the economies of specialization and technical progress that a rejuvenated legal-services industry could provide.
MORE FOR THE DYSTOPIAN GREED FILES IN THE CITY UPON A HILL
In case you had a few more questions about how the system still works today, and why those so deep into the mire seem to come out unscathed.
NEW YORK FED TO BARCLAYS: 'MM HMM'
If Libor-fixing is such a great scandal,
why did Geithner and other regulators do so little?
Wall Street Journal Review and Outlook, 16 July 2012.
The Federal Reserve Bank of New York released a trove of documents on the Libor scandal Friday, and the official Fed spin is that they show that regulators were "highlight[ing] problems" with Libor in 2007-2008, and "press[ing] for reform."
Well, let's see. In June 2008, Timothy Geithner, then head of the New York Fed, sent Bank of England Governor Mervyn King two pages of recommendations for "Enhancing the Credibility of LIBOR" and wrote that he would be "grateful if you would give us some sense of what changes are possible."
This is not exactly the language of a regulator who has just uncovered what we're now told is the financial crime of the century.
In the wake of Barclays's $450 million settlement with U.S. and U.K. regulators over attempted Libor-fixing, the political and media worlds are aflame with indignation that some banks misreported their borrowing costs during the financial panic of 2008. The U.S. Department of Justice let it out over the weekend that it is preparing criminal cases against individuals and banks in connection with the scandal. However, the evidence and testimony coming from regulators show they were well aware of price-fixing behavior at the time, but were not all that alarmed by it.
That's especially clear from the New York Fed's document dump, if not from its spin. In August 2007, for example, one unidentified Barclays employee wrote to a Fed official, Fabiola Ravazzolo, to say, "Today's USD libors have come out and they look too low to me. Lloyds for instance has printed 5.48% for 3 months. Probably the lowest rate you coud [sic] attract liquidity in threes would be 5.55% and I am not too sure how much you would get at that level." It doesn't appear that anyone called the cops.
Nine months later, Ms. Ravazzolo discussed Libor bidding on the phone with someone on Barclays's money-market desk. The transcript compiled by Barclays and released by the New York Fed reads like a David Mamet play without the obscenities—or any air of criminality.
At one point, the unnamed Barclays trader tells Ms. Ravazzolo:
"We strongly feel it's true to say that . . . dollar LIBORs do not reflect where the market is trading which is you know the same as a lot of other people have said." Ms. Ravazzolo's shocked response, as recorded in the transcript? "Mm hmm."
When the Fed official asks her interlocutor why Libor is lower than the banks' actual borrowing costs, he says he's "gonna be really frank and honest." For the sake of clarity, we'll omit most of the "Mm hmms" interjected by Ms. Ravazzolo as she's informed of Barclays's heinous crime:
Barclays executive: "[Y]ou know we, we went through a period where we were putting in where we really thought we would be able to borrow cash in the interbank market and it was above where everyone else was publishing rates. And the next thing we knew, there was, um, an article in the Financial Times, charting our Libor contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market."
Ms. Ravazzolo: "Yeah."
"And, um, our share price went down."
"So it's never supposed to be the prerogative of a money market dealer to affect their company share value."
"And so we just fit in with the rest of the crowd, if you like."
"So, we know that we're not posting, um, an honest Libor."
"And yet—and yet—we are doing it, because, um, if we didn't do it . . . it draws, um, unwanted attention on ourselves."
"Okay, I got you then."
The conversation proceeds for perhaps another 10 minutes before Ms. Ravazzolo signs off with "Have a great weekend. Bye."
The New York Fed says that Ms. Ravazzolo was merely gathering market intelligence as part of the Fed's crisis response and not engaging in a criminal investigation. Which is precisely the point. It would be a strange, not to say incompetent, criminal conspiracy if traders were openly discussing it with government officials.
Another phone-call snippet, from October 2008, at the peak of the panic, with another Fed official went similarly:
Barclays trader: "[T]hree month Libor is going to come in at 3.53 . . . . It's a touch lower than yesterday's but please don't believe it. It's absolute rubbish. . . . [R]ecently you've had certain banks who I know have been paying 25 basis points over where they've set their Libors . . . "
[Unscandalized Fed official] Tania: "All right, well thank you very much for your time. I appreciate it." Which is exactly how you'd expect a federal official to respond upon being informed of the existence of a multibillion-dollar bank heist.
And lest there be any doubt, the New York Fed's own "explanatory note" makes clear that in the spring of 2008 briefing notes covering the underreporting of Libor were
"circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and the U.S. Department of Treasury."
The Fed also briefed the President's Working Group on Financial Markets, the so-called committee to save the world, that June.
Fed officials might argue that the middle of a financial crisis was no time to shout from the rooftops about bank borrowing costs. But the documents released Friday suggest that even in private, in his emails with fellow central bankers in the U.K., Mr. Geithner was not exactly calling in the shock troops over Libor. Instead, he was suggesting ways to "eliminate [the] incentive to misreport" Libor rates.
In other words, the question is not what did regulators know, and when did they know it. They knew it all along. The real question is when did a Libor rate that the New York Fed itself calls "increasingly hypothetical" during the panic switch from being a sign of distress to a criminal conspiracy?
After he decamped to Treasury from the Fed, did Mr. Geithner merely drop the subject? And what was Bill Dudley, his successor atop the New York Fed, doing about it for the last three and a half years? The Commodity Futures Trading Commission says it started investigating in 2008. But somehow it took until 2012 for Libor misreporting to become a great financial scandal.
The regulators and their media cheerleaders can't have it both ways. If the problem with Libor bidding was merely an "incentive to misreport" and thus nothing for regulators to get too worked up about, then let's fix the way banks report the rates, or find some other way to determine such a rate, and move on.
But if this is really the epic deceit and crime we are now reading about, then either new evidence needs to come to light, or the regulators who smiled and nodded and "Okayed" and "Mm hmmed" through the panic years are complicit with the banks now in the dock. They had ample opportunity to shut down this behavior, but nothing released by the New York Fed or the Bank of England suggests much more than a raised eyebrow at the time.
If heads are going to continue to roll over Libor, they should also include those of Mr. Geithner and the rest of the regulators who let this slide.
DEAR BUBBAS AND BUBBETTES,
WOW!! Can this possibly be true?
Did Treasury Secretary Geithner already know about the fooling around with Libor back when GWB was President, and Timmy was then head of the FED in New York?
And even more amazingly, has he really kept this quiet from a credulous and gullible public all the while that he has been Secretary of the Treasury??? If so, why??? And what does President Obama intend to do about this now???
What a strange and embarrassing world we seem to live in today. Where on our benighted little planet has probity fled to this time?? Have you seen any lately??
Any thoughts of your own on this, and on how to hold these folks accountable for the myriad lives of the untermenchen that they have allowed to be destroyed by these banking predators??
How about offering them a vacation in one of those nice uncomfortable cells in a super-max for-profit prison where the emphasis is on optimizing lolly returns to privileged investors???
Enjoy and take care, Andy
| | GEITHNER WROTE “LIBOR MEMO” IN 2008
By Damian Paletta and Jon Hilsenrath, WSJ, 12 July 2012. Write to
Damian Paletta at email@example.com
WASHINGTON—Timothy Geithner in 2008 sent a private memo to Bank of England Governor Mervyn King calling for six changes that he said would improve the credibility and integrity of the London interbank offered rate, a key interest rate that is now at the center of a international banking scandal, according to documents reviewed by the Wall Street Journal.
At the time the memo was sent, Mr. Geithner was president of the Federal Reserve Bank of New York and the financial industry was about to enter one of the darkest periods of the financial crisis. Mr. Geithner is now U.S. Treasury secretary. As Mr. Geithner sent the memo to London, U.S. regulators also began conferring about concerns related to possible distortions of Libor and what the impact might be, people familiar with the matter said.
The June 2008 memo, reported earlier by the Washington Post, provides a window into the role played by U.S. regulators in the Libor scandal, though possibly an incomplete window. More documents are due to be released Friday by the Federal Reserve Bank of New York, in response to demands by lawmakers for more information about Mr. Geithner's and the New York Fed's efforts to address questions about Libor.
The latest disclosure makes clear that Fed officials were aware of irregularities in the Libor interest-rate market
. What is less clear is how far Mr. Geithner and other officials went to address the problem.
The Geithner recommendations, which came in a June 1, 2008, memo, included a call to "eliminate incentive to misreport"
by banks. Investigators in the U.S. and U.K. are now probing whether banks intentionally misreported interbank lending rates in a way that distorted Libor, which could have affected interest rates for trillions of dollars-worth of financial banking products all over the world, including mortgages, student loans and complex derivatives. The misreporting of this interest rate also could have given the public and regulators a false sense of the health of the big banks involved in this market.
Mr. Geithner recommended that the British Bankers' Association, which sets Libor based on data submitted by different banks, "collect quotes"
from a number of different banks but "randomly select a subset"
of banks when determining Libor. This would take away the incentive of individual banks to game the system.
Mr. King responded favorably to the memo, a person familiar with the discussions said, and there were follow-up communications, though it couldn't be learned how close the Bank of England came to implementing any of the changes.
Fed officials became deeply concerned about the functioning of short-term lending markets in late 2007 and early 2008. One problem was that large banks developed troubles tapping short-term loans to fund their operations and their borrowing costs soared.
Mr. Geithner's memo was sent after an April 2008 article in the Wall Street Journal raised questions about the way Libor was set.
The memo could be released as part of a broader package of data the New York Fed is expected to disclose Friday in response to congressional lawmakers' queries about what knowledge the bank had of possible problems with Libor in 2007 and 2008.
Other recommendations in the memo from Mr. Geithner included calling for a more "credible reporting structure,"
that would have set up a set of best practices for banks when "calculating and reporting rates
." The New York Fed recommended having the BBA require that a bank's internal and external auditors confirm that they were abiding by best practices.
Mr. Geithner also called for broadening the number of U.S. banks that were represented in some of the measurements of Libor. And the memo recommended that the BBA "provide more specific guidance as to the size of the transaction being referenced in the reported quoted rates."
Several top officials from large British bank Barclays PLC have resigned in the wake of the company's $453 million settlement stemming from a long-running investigation into allegations that traders at the bank sought to manipulate interbank lending rates. A number of other U.S. and U.K. banks are under investigation.
The Federal Reserve Bank of New York has faced scrutiny in recent days after revelations that it had discussions in 2007 and 2008 with Barclays about the issue.
U.S. lawmakers in recent days have stepped up pressure on Mr. Geithner and the New York Fed for details of what they might have known regarding rate fixing in 2007 and 2008 and why more wasn't done to intervene. Both men are expected to be grilled on the subject at hearings later this month.
Twelve Senate Democrats on Thursday called on the Justice Department and federal banking regulators to pursue a widespread civil and criminal probe against bankers who might have unlawfully manipulated Libor.
The group of Democrats, including Sen. Jack Reed of Rhode Island and Carl Levin of Michigan, also asked the Justice Department to look into "allegations that U.S. and foreign bank regulators may have been aware of this wrongdoing for years."
They said "regulators who were involved should be held to account for any failures to stop wrongdoing that they knew, or should have known about."
The senators don't allege any wrongdoing by Mr. Geithner in their letters, but they call on the Justice Department to scrutinize the actions of regulators at the time.
The lawmakers say the banks, by allegedly improperly manipulating Libor, could have boosted their trading positions and improved market perceptions of their health. "But this can, and likely did, hurt millions of American families, businesses, and municipalities,"
This article below is very interesting for the on-going preparation of our overseas American lobbying strategy.
The attached IMF report from 2010, which is an earlier version of the report by the NBER cited below, by the same team of authors, is also quite illiminating, although rather long and detailed. The first few pages are well worth the effort to do a download and spend a few minutes reading.
Quite clearly, lobbying the Congress really does work, but it is also usually very expensive and time consuming. Having a clear strategy that is very well focused on the right individuals seems to be very important to any eventual success.
I look forward to your comments and suggestions, and to our getting started with this Herculean task that not only confronts us, but, alas, seems to grow ever larger and more ominous with every passing day..
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THE TOP LOBBYING BANKS GOT THE BIGGEST BAILOUTS
By Lauren Tara LaCapra, Reuters, 26 May 2011.
The more aggressively a bank lobbied before the financial crisis, the worse its loans performed during the economic downturn -- and the more bailout dollars it received, according to a study published by the National Bureau of Economic Research this week.
In their report, entitled "A Fistful of Dollars: Lobbying and the Financial Crisis," they said that banks' lobbying efforts may be motivated by short-term profit gains, which can have devastating effects on the economy.
"Overall, our findings suggest that the political influence of the financial industry played a role in the accumulation of risks, and hence, contributed to the financial crisis," said the report, written by three economists from the International Monetary Fund.
Data collected by the three authors -- Deniz Igan, Prachi Mishra and Thierry Tressel -- show that the most aggressive lobbiers in the financial industry from 2000 to 2007 also made the most toxic mortgage loans. They securitized a greater portion of debt to pass the home loans onto investors and their stock prices correlated more closely to the downturn and ensuing bailout.
The banks' loans also suffered from higher delinquencies during the downturn.
What the economists could not determine definitively was the banks' motivation for lobbying. If banks were looking to generate income at society's expense, then it would make sense to curtail their lobbying.
If banks were concerned mainly about short-term profit and not thinking about the long-term consequences, then executive compensation practices should be changed, the report said. And if banks just wanted to inform lawmakers, and were overoptimistic about their prospects, it would be more difficult to suggest reforms.
BIG LOBBYING, BIG BAILOUTS
When the bubble burst, banks that spent more on lobbying received "a bigger piece of the cake" from the $700 billion bailout in the fall of 2008.
As examples, the report cites Citigroup Inc spending $3 million to lobby against the HR-1051 Predatory Lending Consumer Protection Act of 2001 as well as Bank of America Corp spending $1 million to lobby on banking and housing issues.
HR-1051 was never signed into law, nor were 93 percent of all bills promoting tighter regulation from 1999 through 2006. However, two bills that significantly reduced restrictions in the mortgage market became law, the American Homeownership and Economic Opportunity Act of 2000 and the American Dream Downpayment Act of 2003.
Citigroup and Bank of America each eventually received $45 billion worth of bailout funds, more than JPMorgan Chase & Co Wells Fargo & Co or other large commercial banks.
Now that the Dodd-Frank financial reform bill has passed, big banks have been lobbying aggressively against restrictions they believe are too harsh. Among the top items on the industry's lobbying agenda are stronger capital regulations, as well as a Consumer Financial Protection Bureau, new rules on derivatives trading and restrictions on proprietary trading.
In an interview with Reuters on Thursday, Igan said her counterparts at the Federal Reserve Board have expressed concern to her that "some of the concepts would get watered down in the process because the financial industry is lobbying hard against them."
On Tuesday, the House Financial Services Committee voted to delay implementation of derivatives reform for 18 months. Although few expect any such measure to clear the Senate or be signed by the president, some executives on Wall Street are pressing for slower rulemaking.
At an event on Tuesday, Morgan Stanley Chief Executive Officer James Gorman warned that implementing reforms too hastily could "tip the world economies into recession."
The economists' report outlined the negative impacts of bank lobbying, but Igan said that this time around, Wall Street's interests may be aligned with the broader economy -- if only by happenstance.
She said bank lobbying is "not inherently bad" and current activities may act as a counterbalance to regulators' post-crisis inclination to keep banks on a tight leash.
Cuban lunch chatter appetizers.
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|File Type: || pdf| Epidemics of 'Control Fraud' Lead to Recurrent, Intensifying Bubbles and Crises
by William K. Black,
University of Missouri at Kansas City - School of Law, April 15, 2010 Abstract:
“Control frauds” are seemingly legitimate entities controlled by persons that use them as a fraud “weapon.” A single control fraud can cause greater losses than all other forms of property crime combined.
This article addresses the role of control fraud in financial crises. Financial control frauds’ primary weapon is accounting. Fraudulent lenders produce exceptional short-term “profits” through a four-part strategy: extreme growth (Ponzi), lending to uncreditworthy borrowers, extreme leverage, and minimal loss reserves. These exceptional “profits” defeat regulatory restrictions and turn private market discipline perverse. The profits also allow the CEO to convert firm assets for personal benefit through seemingly normal compensation mechanisms. The short-term profits cause stock options to appreciate. Fraudulent CEOs following this strategy are guaranteed extraordinary income while minimizing risks of detection and prosecution.
The optimization strategy causes catastrophic losses. The “profits” allow the fraud to grow rapidly by making bad loans for years. The “profits” allow the managers to loot the firm through exceptional compensation, which increases losses.
The accounting control fraud optimization strategy hyper-inflates and extends the life of financial bubbles. The finance sector is most criminogenic because of the absence of effective regulation and the ability to invest in assets that lack readily verifiable values. Unless regulators deal effectively with the initial frauds their record profits will produce imitators.
Control frauds can be a combination of “opportunistic” and “reactive”. If entry is easy, opportunistic control fraud is optimized. If the finance sector is suffering from distress, reactive control fraud is optimized. Both conditions can exist at the same time, as in the savings and loan (S&L) debacle.
When many firms follow the same optimization strategy a financial bubble hyper-inflates. This further optimizes accounting control fraud because the frauds can hide losses by refinancing. Mega bubbles produce financial crises. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590447