The $9B Witness: JPMorgan Chase's Worst Nightmare
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This is not capitalism! And it's painful to see how this hybrid growth-corporatist model trump true innovation and economic progress. It's an insult to free market economics and democracy at the same time.
Rant over. One addendum: jail time isn't the answer. Putting an executive in a minimum security prison for 5 years just lets another one take his place. CEOs aren't afraid of jail time, they're afraid of losing money. If you let banks fail who deserve it then creative destruction will ensure stronger, better and safer banks in the future. Capitalism can't survive without profit and loss working hand in hand.
It's not worth all the human suffering caused by a depression instead of a recession just to prove that the banks should be more cautious.
Unfortunately the public doesn't get excited about passing complicated financial regulations.
a) minimize a current financial crisis
b) avoid future financial crises
c) penalize the law breakers responsible
Structuring a system that is more resistant to fraud and other behaviour that puts the national economy at risk would help. Either effective oversight or more exposure to market forces might help. Merely punishing individual or corporate wrong-doers will not prevent another collapse.
A firm, banking, investment, or trading, that is considered "too big to fail" is also not sufficiently exposed to market forces for the market in its shares to reflect the actual risks to the firm. In other words, the taxpayers are covering a TBTF bank's risks.
We would benefit far more from finding a way to move banking away from consolidation than we would from jailing or fining the guilty.
The country should be able to suffer the complete failure of any single bank or firm without much more than a small hiccup in our economy. FDIC rates should reflect risk for depositors per-institution, and be public, the way bond ratings are. Stock-holders and bank creditors would be on their own.
A nation whose banking industry is dominated by 10 banks cannot be secure, with around 100 banks of size is at risk, and with 1,000 banks may be able to cope with a few percent of them failing every year.
Finding a market solution to counterbalance the ongoing wave of consolidation would help.
Banks with holdings of over 0.5% of GDP lose all FDIC protection, while still paying.
Banks with holdings over 1% pay quadruple FDIC premiums while still receiving no coverage.
Banks over 2% also pay double-tax on every tax they pay either directly or indirectly, so all the payroll taxes are doubled and so are corporate profit taxes.
Banks over 3% pay all above but instead of double taxes, quadruple taxes.
Banks over 5% pay everything and get taxed at 5% of assets per year.
Very smart folks would immediately start figuring out how to fairly cleanly break the banks up while simultaneously not destroying themselves or the entire economy. Why? Because there'd BE MONEY IN IT.
I'm sure you would've said the same about Standard Oil or Bell back in the day.
Breaking up large corporation can and has been done before. It could be done again if government was interested in doing it, but unfortunately a combination of captured regulators and a revolving door between government and business more or less ensures that won't happen.
So the real situation here is the opposite. People with money and power get even more while everyone dependent on them suffers from their actions. It's outrageous and what should happen is criminal persecution of responsible individuals, not fines for corporation which don't touch people in charge and as you say "take down the economy".
It's not about proving a point, it's about preventing this situation from happening again. If the financial industry knows that outright financial fraud on a massive scale will never be punished, it ensures that outright financial fraud will continue unabated in the future. Millions of people will be hurt again because we didn't want the pain of dealing with the problem now.
HSBC got caught laundering money for drug cartels and escaped with a fine. If we're just going to let corporate malfeasance go unpunished, why even have the laws on the books at all?
Because the point of laws is not to punish the elite. They may be written to appear fair to the common reader, but they are intended and designed to not apply to the elite.
Instead we bailed them out, did basically nothing regarding new regulations and the banks are still growing and complaining about too much government regulation and some of them who gladly took bailout money even have the nerve to complain about the 'moral hazard' of government mandated mortgage refinancing.
So the US "pretended" that these guys were just caught by surprise because admitting the alternative had conceivably much worse consequences.
Maintaining confidence in the markets was priority #1 for the team dealing with the financial collapse of 2008.
Arguably an act of fraud in and of itself.
This is the common refrain, but is it true? I don't see why holding bank leadership accountable for crimes that harm their clients is a bad thing. In fact, I'm sort of surprised that the financial world isn't more "upset" over the fact that US banks have been given carte blanche to knowingly defraud their customers. Why do people still invest with Chase?
Transcript: http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...
There's obviously a lot more to this than this one quote, but this sums it up well (from part 2)
"JOSHUA GREEN, Bloomberg Businessweek: Geithner’s entire recovery plan depended on confidence. And if you suddenly started going in and giving haircuts, people are going to get upset. They’re going to be worried. Investors are going to pull back right at the time when they needed investors to have enough confidence in these banks to put their money back in."
1) As soon as such a principle is seen to be operating, it licenses further and greater misdeeds from those in the positions to which it applies, and
2) It ignores the damage (which may be less severe in the short-term, but is likely to be more lasting in the long-term) to public perceptions and confidence that the lack of accountability itself produces, including that resulting from the inevitably common perception (whether or not its accurate) that "too important to charge" isn't really about protecting the public from public harms resulting from damage to confidence in the institutional system, but is merely one of a set of a self-serving excuses that elites use to protect other elites from accountability to the superficially generally-applicable rules of society that are the only thing that protects everyone else from abuse by the elites.
None of the bank executives at fault were that important to consider not prosecuting. However their institutions and respective influence on the global markets were (in their options) that important to maintaining stability (albeit a false one) that was deemed the lesser of two evils.
And in the Nixon case, it wasn't a case of leaders of private institutions, but the President of the United States at a time of deep national division even aside from the proximate issues with which he might have been charged, and it was perceived that charging would have thrown the whole nation into chaos (and not merely financial chaos, but actual fighting-in-the-streets chaos.)
There's always a reason why accountability for elites in powerful positions is a special case that can be asserted to be sui generis and requiring special exceptiosn to the normal rules of accountability. But the impact of accepting the temptation to do this is that it rapidly becomes clear that elites are not accountable in general, leading to more elite abuses and less long-term faith and confidence in the very systems that the exceptions are intended to protect (short-term) faith and confidence in.
To avoid the long-term erosion and destruction of this faith and confidence, you have to accept (publicly) that the system at issue has been broken when it has and hold people accountable, even though there are severe short-term consequences. Otherwise, the long-term consequences are more severe.
Or, as a much better writer than I put it -- "The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants" -- you cannot save the integrity of the system if you are overly obsessed with preserving the myth of the existing integrity of the system.
Because they are all crooks and fear they will be next?
Nobody would have had real information on how deep the problem went, and the price of almost the largest financial resource ever would have dived at a time when the economy was already in trouble.
They didn't just choose to not charge Jamie Dimon. They choose to not charge the CDOs of his bank.
In reality the US has been engaged in a risky attempt to make bonds and stock prices go up to astronomical levels ever since the crash of 2001. There are a large number of coincidences that keep happening (7 different markets suddenly stopped trading after small slips in equity prices for 2-3 hours. Without exception during those trading halts the price of either the S&P or bond ETFs went up by 2-3% during the halts. This is just from the last month). Needless to say, most of those coincidences are in fact highly illegal if they weren't really accidents. The problem is the answer to "who benefits" seems to be mostly "the U.S. FED".
I suppose how people see this issue is tied to whether they think there is anything more important to civilization than 'maintaining confidence in the markets'.
[1] http://en.wikipedia.org/wiki/Fiat_justitia_ruat_caelum [2] p.90 'Law, Liberty, and the Rule of Law', Flores, Himma.
$9 billion just to shut things up and keep them from going to trial?
What other motive would he have had to enable this [since he said he was aware of it in 2006] besides greed and the expectation that he'd profit from it?
This is extremely common behaviour, high up and on the street, and it rarely benefits the person doing it - except in the extreme short term.
There is something people don't realize about decision making : time horizons. You make decisions that benefit you in time. That means you consider whether an action benefits you at point X in the future. There are extreme examples, like giving a kid all the candy he'll get for a week and letting him divide it up. On the other end of the spectrum we have the Sagrada Familia. The people voting to have it built would never see any part of it. Their grandchildren wouldn't see more than a tiny bit. Their grandchildren's grandchildren would not see it. And so on.
Now these aren't "pure" examples. The kid is not going to eat all the candy right then and there, and building the Sagrada Familia had economic advantages when it was being built, and even today.
But if you consider most crimes at a time horizon of a day or two. They make sense, suddenly they become rational actions. HSBC and Jamie Dimon made decisions that would benefit them for years at least, and then lead to disaster. This is in fact quite a long time horizon. These are rational actions. Given the outcome, they are very rational actions.
"Sure if you take someone off the street and give this offer to them. But people who rise to the position of being able to consider [be CEO who does unscrupulous things] have other options that are almost as good. "
That is just confirming what I said.
I'm not holding my breath though.
But I don't think it'll ever cover the full extent of the income without major changes to the political system.
Let's test that hypothesis. :-) I suspect if they really didn't mind that much we would see it more often.
edit: s/more often/at least once/
In other words, Adam Smith would be disgusted with our current society. I wrote a blog post about this: http://brianmayer.com/2012/07/what-adam-smith-really-said-ab...
This means that, if a crime is committed and evidence exists to prosecute, the Attorney General may stay proceedings to protect the economy.
This is an incredible and fascinating development in the American Capitalist Democracy. As far as I understand, there is no precedent for such logic in any democratic legal system. A corporation that is so vital to the nation that it is immune from legal consequence cannot exist in a capitalist democracy.
Not to put too fine a point on it, but this new system is very reminiscent of the mean human society throughout history: oligarchy.
They were forcibly folded into the the Bank of England by the Peel Act of 1845.
There is a medium-length Murray Rothbard diatribe against Laurence H. White; it appears to me to be principally about inflation and whether or not the Scots banks actually had access to any specie. I can never say I am sure what Mr. Rothbard is on about.
The very public justification given for bailouts is that there was systemic risk.
Calomiris/Haber wrote "Fragile By Design" in which the U.S. and Canada are compared/contrasted ( as close to a natural experiment as you can get ) and they essentially find rather deep cultural reasons for this. The "why" of the mortgage crisis is something they seem to have in better focus than most; it has to do with how public welfare functions are perceived in Canada and the U.S.
The amount we seem to not know about this issue is staggering.
But what do we do as a generation of people that don't want this? The closest thing to come was Occupy Wall Street, but that fizzled out. Is there a way to organize ourselves and vote in blocks to get rid of these current politicians and elect a new generation that hopefully isn't as corrupt? Yes, I know, it's a pipe dream.
That basically translates to use bitcoins alongside dollars and slowly transition to bitcoins only.
Or have cryptocurrency fans figured out a solution that I can't think of now.
I've been thinking of a few non-profit startup ideas to combat this widespread corruption problem, but its nothing I'd want to discuss publicly in case I actually pull the trigger on it and desired to remain anonymous. I think you're thinking down the right highway of thought though.
http://www.kalzumeus.com/2014/11/07/doing-business-in-japan/ (ctrl-f for "Taro", read about his banking relationship manager)
There are still banks in the US that operate like that in principle, if not in degree - no exotic products, strict adherence to traditional corporate lending standards, extensive knowledge of their customers, and a culture ingrained first and foremost with personal responsibility to the soundness of the local economy.
Best example I know of is First Hawaiian Bank [1], having worked there a few years. It is actually the longest continually-running bank in the US, having been founded in 1858 and survived every major depression and financial crisis since. They're not on the bleeding edge of tech or quantitative finance, but that's one of the things that saved them from being a victim of the financial crisis (aka, the Battlestar Galactica of banking).
Other banks like that scattered around the country too. You can start some research with the various bank rating sites:
http://www.bankrate.com/rates/safe-sound/bank-ratings-search...
What makes you think it's limited to the United States? These banks are global, and not global as in "we make shit in China" but global as they do business in almost every major country.
In fact, some of the largest financial "crimes" of the events leading to the 2008 financial crisis were conducted not in the US.
> President Obama, giving in to pressure from the Occupy movement and other reformers, had formed the Residential Mortgage-Backed Securities Working Group.
I wonder if there is an ounce of truth to that.
Too bad Occupy never adopted a leader. If there is anything I learn from that experience, is that there can't be a leader less movement. Someone has to become the face of it.
In both cases, it's important to understand that Occupy, at least according to prominent individuals in the movement like David Graeber, was ideologically built on anarchist principles. He argues in his book on the issue that being leaderless and 'horizontal' in nature was actually one reason why it did so well, relatively.
To be clear: I'm not sure I agree with his viewpoints or his perspective on the Occupy movement. That said, I can still strongly recommend "The Democracy Project" as an interesting and completely different view of not only the occupy movement, but on Democracy and society as well.
I've read a number of his books and articles and I like how they make me question things.
The biggest problem is that we (almost all of us) have come to value convenience more than anything else - convenience at the risk of privacy, security etc. That needs to change, and it is very hard (I had a colleague flip out the other day, because something he ordered from Amazon was a day late - just one frickin day, and it wasn't even something important or urgent). It requires a fundamental mindset change.
It's more the system that need to change than the individuals. Maybe if you could elect a leader that would try to change that stuff. Not sure who. Shame someone like Warren Buffett is not running for president.
"Couple this with the fact that the bank's share price soared six percent on news of the settlement, adding more than $12 billion in value to shareholders, and one could argue Chase actually made money from the deal. What's more, to defray the cost of this and other fines, Chase last year laid off 7,500 lower-level employees. Meanwhile, per-employee compensation for everyone else rose four percent, to $122,653. But no one made out better than Dimon. The board awarded a 74 percent raise to the man who oversaw the biggest regulatory penalty ever, upping his compensation package to about $20 million."
Just amazing
Well said. Here's hoping this will result in some civil suits against individuals at Citi, if not actual jail time.
That's the problem, right? Years of "we're getting to this soon!" "We're on your side!" "We're going to get those bad guys!"
Then, you look back, and 5 years later you see nothing has happened. The "justice" system is lying, running out the clock, and just trying to hope everybody ignores bad people in powerful positions doing bad things without any meaningful, and personal, repercussions.
Don't believe me? Look up how many people went to jail for:
* Tycho
* Global Crossing
* Enron
* HealthSouth
* Madoff
* the S&L Scandals of the late 80's
* Washington Mutual
William Black on Moyers and Company[1]: Sure. The savings and loan debacle was one-seventieth the size of the current crisis, both in terms of losses and the amount of fraud. In that crisis, the savings and loan regulators made over 30,000 criminal referrals, and this produced over 1,000 felony convictions in cases designated as “major” by the Department of Justice. But even that understates the degree of prioritization, because we, the regulators, worked very closely with the FBI and the Justice Department to create a list of the top 100 — the 100 worst fraud schemes. They involved roughly 300 savings and loans and 600 individuals, and virtually all of those people were prosecuted. We had a 90 percent conviction rate, which is the greatest success against elite white-collar crime (in terms of prosecution) in history.
[1] http://billmoyers.com/2013/09/17/hundreds-of-wall-street-exe...
Largest thus far is $30M - http://www.sec.gov/News/PressRelease/Detail/PressRelease/137...
She already did the leaking to the regulators. The legal system buried it.
So this is more like meta-leaking. The article is her ignoring the US legal system because it's been literally purchased by the banks and lets the billionaires get more billionaire-y while the rest of the world burns.
I wish our politicians / president would grow a pair and do what is best for the American public and break up the big banks and remove them from political donations / lobbying.
Note well: I am not advocating murder! It's just that, since things didn't go that way, things aren't yet as bad as the most cynical of us assume they are.
...but they didn't really spend 9 billion if you read the article:
For starters, $4 billion of the settlement was largely an accounting falsehood, a chunk of bogus "consumer relief" added to make the payoff look bigger. What the public never grasped about these consumer--relief deals is that the "relief" is often not paid by the bank [...] but by the bank's other victims
Moreover, in this case, a fine-print addendum indicated that this consumer relief would be allowed only if said investors agreed to it – or if it would have been granted anyway under existing arrangements. [...]
The average person had no way of knowing what a terrible deal the Chase settlement was for the country. The terms were even lighter than the slap-on-the-wrist formula that allowed Wall Street banks to "neither admit nor deny" wrongdoing – the deals that had helped spark the Occupy protests.
EDIT:
And, to add insult to injury:
Because most of the settlement monies were specifically not called fines or penalties, Chase was allowed to treat some $7 billion of the settlement as a tax write-off.
Couple this with the fact that the bank's share price soared six percent on news of the settlement, adding more than $12 billion in value to shareholders, and one could argue Chase actually made money from the deal.
I would argue that it is much worse than you initially imagined.
Yeah they are not as bad as Russia. They could still aim higher though. Transparency International has the US at 73/100 on it's corruption index, ranking no 17. Denmark and New Zealand are the leaders at 91/100. Come on USA, you can improve!
http://files.transparency.org/content/download/700/3007/file...
I'm all for criminal consequences for the bank executives, but it sounds like we also need criminal consequences for coverups by the DOJ.
No, the problem is that we don't have an electoral system that makes it rational to choose such a candidate without reasonable basis to believe lots of other people will (choose the same candidate, not just any non-major-party candidate).
The symptom of that problem is that nearly no one chooses an alternative candidate.
More concretely, the Paul family might one or two things I agree with, but it's the other 999 things they believe in that I can't stand, thus I can't vote for them so much as against them.
I'm not just talking about the presidency... or am I missing something?
Neither am I. In fact, I'm mostly talking about legislative elections, where the use of the first-past-the-post elections in single-member districts produces both duopoly and about as unrepresentative of a legislature as you can get in a system which is even superficially democratically accountable.
People like to focus on the electoral college, but that's not really the main problem in the electoral system in the US.
But there is absolutely no justification for their sheer and utter lack of diligence in pursuing criminal cases against individuals. Holder, Breuer, Bharara and those who worked with them ought to be ashamed of themselves.
A corporate death penalty would be nice to see for some of the most egregious cases, including a "show-cause" requirement to allow executives to take leadership positions in another public company or one in a regulated industry.
This is fraught with problems though... you could kill the corporation, shame the executives, but tens of thousands could still be out of a job, and in the financial industry you'd wreak havoc on the entire economy. I'm not sure if it is worth the risk.
Realistically, I'm not optimistic that this will ever happen in a meaningful way...
Do those things, and a lot of the rest would sort itself out. Companies would need to constantly grow (Amazon) or downsize to their actual value-add (Banks).
One of the local PBS stations has started carrying that program, recently. After a few recent, similar surprises with it -- each one keeping me glued to it despite the late hour, until the end -- I've made a mental note to start catching it regularly.
As I've said before with respect to this fiasco and the Administration as well and Congress' response, as a mantra:
No jail? You fail.
I recall an interview with one of the lead investigator's/prosecutors during the 1980's Savings and Loan (aka S&L) scandal. Someone really in a position to know. He expressed similar disappointment, and more so he described in detail how things could have been done differently.
I also recall comments around or shortly after the peak of the recent crisis, from Sheila Bair as well as Elizabeth Warren. Particularly from Bair -- as I recall it, roughly: Too big to fail be damned. She/they were ready to take those banks into receivership, if the political leadership would only give the go ahead. And no common account holder/investor need lose their shirt as a result of that process.
Market panic might have been another matter. But I think, now, that that would have been a lesser cost than the one we will now end up, as a society -- or rather, multiple societies -- paying.
As far as I'm concerned, no statute of limitation should apply to the crimes surrounding these events. Particularly to the perversion of justice that has initially gotten these blackguards off the hook.
Law is a social convention, and they have so flouted social convention, that I for my part no longer deign to extend it to them. Like barbarians they acted? Well, let them so be treated.
After all, all of this boiled to 2 sides negotiating like in a classic political game, and one side won, and I don't know if the good side really won...
I just pity Holder for mismanaging this. Or maybe there are more horrific details we haven't heard of yet. I don't know which one is the more frightening. One only thing, it's now more than 6 years that all of this happened, and it doesn't seem really over.
Your pity would be misplaced; there are horrific details. A large part of the problem is that there is a revolving door between the DOJ and the law firms that represent financial firms (likewise for the SEC). Holder was assistant AG in Clinton's DOJ, then he moved to the law firm Covington and Burling where he represented the bank UBS among other clients, now he's back at the DOJ, and soon he will likely move back to the private sector where he will be handsomely rewarded for his service to the finance industry while AG.
The big picture is that the Obama administration is to Finance as the Bush administration was to Oil, but for horrific details about Obama's economic team, read this: http://www.vice.com/en_uk/read/larry-summers-and-the-secret-... .
http://www.zerohedge.com/news/2014-11-07/why-matt-taibbi-thi...
http://www.democracynow.org/2014/11/7/matt_taibbi_and_bank_w...
There are two interesting notes on the matter. One, the notice of departure [0], and then a longer piece on "The Inside Story Of Matt Taibbi's Departure From First Look Media" [1].
The second links contains some interesting snippets:
"Taibbi’s dispute with his bosses instead centered on differences in management style and the extent to which First Look would influence the organizational and corporate aspects of his role as editor-in-chief. Those conflicts were rooted in a larger and more fundamental culture clash that has plagued the project from the start: A collision between the First Look executives, who by and large come from a highly structured Silicon Valley corporate environment, and the fiercely independent journalists who view corporate cultures and management-speak with disdain."
It also notes that The Intercept had similar problems while launching.
I also found it interesting that this is the first time I have actually heard what Taibbi was trying to do with First Look: "His vision was a hard-hitting, satirical magazine in the style of the old Spy that would employ Taibbi’s facility for merciless ridicule, humor, and parody to attack Wall Street and the corporate world."
[0] https://firstlook.org/2014/10/28/important-announcement/
[1] https://firstlook.org/theintercept/2014/10/30/inside-story-m...
Edit: Happened upon some additional details about the conflict at NYMag [2]:
"Over the last year, however, the center of gravity of the organization has shifted, as Omidyar and his Silicon Valley braintrust have exerted control over budgets and vacillated over the journalistic mission. Over the summer, Omidyar appointed a longtime confidante, John Temple — a former newspaper editor who previously led an Omidyar-financed civic journalism venture in Hawaii — to be the president for audience and products, putting him in a position above Eric Bates, the former Rolling Stone editor who was brought on as a First Look editorial director, who is close to Taibbi."
[2] http://nymag.com/daily/intelligencer/2014/10/matt-taibbi-dis...
Then, nothing happened. FLM kept announcing new hires, Taibbi was supposedly neck-deep in admin, and the article never materialised. Now, with just two weeks after his departure from FLM, we are blessed with a heavy-hitting Taibbi piece from Rolling Stone.
So I'm torn, because on one hand I'm personally delighted to have Taibbi writing again. But on the other hand I'm genuinely worried about FLM's future direction. From your comment I have to assume the worry is not unwarranted.