The Power of the Law

I wasn’t surprised by anything that happened on Wall Street because I know that, given control of vast amounts of money and power, some greedy people will lie, cheat and steal.

I used to argue with people that if I ever came into a large sum of money (and I still might), I would never, ever, EVER invest it in the market. “It’s rigged,” I’d say.

“No, all you have to do is make prudent choices and have a balanced portfolio,” they’d earnestly respond.

Hah. Looks like I was more right than they were.

Some people tend to accept labels. Courtroom = justice, school = education, hospital = cure, investment = prudence. But all our systems are riddled with fraud and abuse, and expecting that to come to a good end was just plain silly.

In a written statement to members of the Senate Judiciary Committee this May, Jamie Galbraith explains:

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.

4 thoughts on “The Power of the Law

  1. For many years there were whole cities and counties rules by the mob. They functioned by buying off mayors and city councils, police chiefs and sheriffs, judges and often state legislatures. They intimidated newspapers and used violence on individuals who threatened to disrupt their dominance. Ordinary citizens accepted their domination as ordinary corruption and “went along to get along”.

    Eventually the mobs grew up, evolved beyond their peasant, slum social status, sent their sons to college and got into “legitimate” business. They now rule our country, the congress, the president and the courts. Our only hope is to reassert the rule of law. Not “Consumer Protection” but investigations and prosecution are what is needed.

    As Spencer Tracy said in “Bad Day at Black Rock”, “The rule of law has departed and the guerrillas have taken over.” We have got to wake up the drunken sheriff and put some spine into him.

  2. Reform, prosecution, restitution, and punishment would be nice, but it ain’t gonna happen. Our political system is in thrall to big, ill-gotten money, headed by the financial/insurance, energy, and military contractor sectors. All those corrupt interests have needed to do is buy off a few hundred people, using far less than 1% of their wealth, in order to rule the nation, and they are not going to give up their positions.

  3. It’s important to remember that “acccounting control fraud” is perpetrated by the executives who control the accounting systems; Bill Black was able to prosecute and convict many of them back in the S&L crisis, before the rich had impunity and back when we had the rule of law. Which is why CEOs in orange jumpsuits doing the perp walk really is the baseline for financial reform, and if you don’t see that, you’re seeing kabuki.

  4. Let’s applaud Iceland once again. Doing the right thing…………………….putting the criminal $$$$$$$$ people on trial, extraditing them from their wealthy hide outs, publicizing their names, and generally humilitating them in public!!!! As long as Iceland can do it…………………………….the $$$$$ people are worried and well they should be. The 60’s were nothing compared to the hell-to-pay, baited/switched SLAVE of the us.

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