The Financial Crisis as Crime Story
The case has not even been heard in court and the company denies all the allegations. Almost every business publication has carried commentaries by insiders who say the government may have a hard time prevailing, and dismissing all the Sturm and Drang.
And yet the public seems to be delighted if not outraged by the SEC's charges against Goldman Sachs, the opulent investment bank that many Americans see as the poster child of those causing the financial crisis. Even in the world of business where dislike of government crackdowns is dominant, a new poll shows that a majority believe Goldman is getting what it deserves.
Argyle Executive Forum conducted the survey electronically among its senior corporate leadership community.
The precise wording of the survey question was:
As Goldman Sachs Group is currently at the center of a legal maelstrom triggered by the SEC's fraud charge last week, we want to ask you how you currently feel about the charges. Please select one of the below:
• I feel the firm is innocent
• I feel the firm is guilty
• I am currently unsure
• 55.2 percent of business leaders feel Goldman Sachs is guilty
• 20.7 percent of business leaders feel Goldman Sachs is innocent, and
• 24.1 percent of business leaders are currently unsure
An earlier poll of the citizenry found that 82 percent in our highly polarized country wanted a "crackdown" on Wall Street. A public that seems to oppose bailouts has a different attitude towards a jailout.
Writing on Greanville Post, Patrick O'Connor and Barry Grey argue that Goldman's actions are criminal even though the SEC brought only a civil complaint against what seemed to be an arcane practice, alleging a failure to disclose key information. They write:
The public marketing and secret short-selling of junk assets was a common practice carried out by virtually every major Wall Street firm. It was part of a colossal fraud perpetrated on the American people. The banks lured people into taking out mortgages they knew the purchasers could not afford. They then packaged these toxic loans into securities--collateralised debt obligations--and made billions in profits by selling them to investors around the world, including pension funds, 401(k) plans, insurance companies and private investors. Those involved knew very well they were running the equivalent of a giant Ponzi scheme--a fraud far more massive and destructive than the criminal operation headed by Bernard Madoff.
Madoff's sins preceded the meltdown by years diverting attention from how Wall Street itself had become a far more sophisticated crime scene, not of lone con men but of institutions that had successfully lobbied to loosen laws and regulations and build an industry on a bedrock of fraud and deception.
This environment was promoted through the expenditure of hundreds of millions of dollars for lobbying legislators and campaign contributions. There was extensive collusion between the financial services industry and politicians of both parties.
Cutbacks in government monitoring of financial practices became the norm, with fines and "settlements" in (with some exceptions) replacing vigilant oversight and the prosecution of wrongdoers at the federal and state level. Fraudsters were primarily punished with fines businesses paid as a cost of doing business.
These practices, aided and abetted by cutbacks in the budgets of agencies that monitored and enforced laws, meant that an open season on homeowners and investors had been declared. In 2004, the FBI warned of an epidemic of mortgage fraud, but also acknowledged their own white-collar crime squads had been downsized when fighting "the war on terror" became the priority.
As conservatives dominated politics, laws were softened and courts soon looked the other way as a historically unprecedented transfer of wealth got underway. What were once considered criminal practices were now redefined as legitimate ways of doing business. Observers like Denis Arvay commented in The Atlantic:
"This was criminal in any serious definition of criminality, but all perfectly legal in the lawyer-crafted vermin-nourishment clauses under which our economy was looted.... The way that the banking industry recently gutted foreclosure-protection indicates the thieves are still running the show, with the help of a thoroughly corrupted government."
This deeper story was also not as media accessible because it revolves around an unsexy finance-industrial labyrinth--of savvy computer-tethered mathematicians ("quants") and financial magicians devising complex and hard to understand structured and bundled financial vehicles: derivatives, CDs, CDOs, credit default swaps and tranches etc.
This army of nerds was rarely flamboyant or even public about its endeavors despite the mansions and Maseratis they bought with ill-gotten gains. For years, their convoluted schemes were perceived as insider baseball, as exciting as a graduate economics seminar.
Boring, boring, boring.
And yet, as former federal bank regulator William Black explains, as quoted on the financial website Naked Capitalism, "massive fraud is what caused the economic crisis. As one example, he explains that everyone involved knew that the CDOs that packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) that spun the mortgages into more and more abstract investments were intentionally created to defraud investors." His conclusion: "The entire strategy is to keep people from getting the facts." This enterprise was also complicated because it connected several separate industries into a chain of criminality stretching from community-based mortgage brokers and appraisers to investment bankers and ratings agencies to insurance companies like AIG skilled in the arts of leveraging a housing bubble into a global crisis that led to losses of trillions.
For my film on financial crime, I turned to a convicted white-collar criminal for insight, Sam Antar, once the CFO of the long-closed Crazy Eddie, an infamous New York electronics chain. He admits he and members of his family stole millions until they were caught.
Of the financial crisis, he says:
"This crime has been ten, fifteen years in the making. It's been going on. We're only finding out about it for one specific reason: the tanking economy. Imagine if the economy didn't tank? Imagine if this was allowed to go on for four or five, six, seven years? Imagine how big it would've gotten then?"
"How did they get away with it?" I asked.
"The white-collar criminal has no legal constraints. You subpoena documents, we destroy documents; you subpoena witnesses, we lie. So you are at a disadvantage when it comes to the white-collar criminal. In effect, we're economic predators. We're serial economic predators. We impose a collective harm on society."
Moreover, he said many "legitimate" businessmen are, at heart, opportunists and will break the law when they think they can get away with it or when they are feeling pressure to drive up revenues.
What are some of the crimes they commit?
• Fraud and control frauds. Control frauds start at the top with CEOs seizing control of their companies from Boards and then driving up share values with speculative investments while increasing their own compensation and bonuses.
• Insider trading
• Theft and conspiracy
• Ponzi schemes
• False accounting
• Bilking investors, customers and homeowners
• Conflicts of interest
• Mesmerizing regulators
• Manipulating markets
• Tax frauds
• Making loans and then arranging that they fail
• Misleading the public
Financial frauds and other crimes are on the rise in the United States, reports The Economist: "Over 730,000 counts of suspected financial wrongdoing were recorded in America last year, according to recent data from the Treasury Department's Financial Crimes Enforcement Network. Institutions such as banks, insurers and casinos are required by law to report suspicious activities to federal authorities under twenty categories.
No wonder Senator Ted Kaufman insists fraud is behind the whole crisis but, so far, the financial reformers in Washington, The White House, most of the media and even the progressive movement have downplayed the issue even as far more Banksters went to jail in the S&L years than now.
Today, some on Wall Street are calling for justice. In an interview with the New York Observer, billionaire Jim Chanos said, "I don't know why there haven't been any [perp walks] yet, but it's amazing that it's taken them this long. We've known about Lehman's books since late 2008, but we just needed it confirmed by someone who wasn't a short seller, since we're not to be trusted.... We've known something was wrong with their books since the collapse."
Writes financial blogger Edward Harrison at Credit Writedowns, "Three years after the subprime crisis first hit and eighteen months after Lehman's bankruptcy there haven't been any arrests, any indictments, nor any convictions at major banks. How do you lose trillions of dollars in the most lax regulatory environment without somebody, somewhere, at some time lying or stealing? It makes no sense."