Sacrosanct capitalism searches causes
behind the Great Financial Crisis among individuals instead of in the system it
owns and operates, and fails to nab the culprits, the individuals involved with
the crisis. The act and the failure reiterate the fact mentioned many years
ago: the entire capitalist system safeguards capital, and governing machines –
finance regulatory, law enforcement or whatever it is – are not class-neutral.
The failure to nab culprits, the system’s in-built friend-foe-within, signifies
class solidarity of capital’s ruling machine.
Reports by the US governing system, and from media, an ideal
sample for study, tell reality of class solidarity. Based on (and liberally
quoted from) these reports the old pattern of failure and collaboration is
reiterated: as class-tool, state’s first job is to defend dominating interests.
Wall Street and the Financial Crisis: Anatomy of a Financial
Collapse (WFC), the 650-page report released in mid-April, 2011, describes
finance capital-friendly practices, improper even according to governing
standards set by capital, at different levels, and the governing standards were
ignored, in different styles and through different work methods and procedures
by the speculating capital and its regulators. Higher rate of quicker profit in
a stagnant economy made them reckless. The report focuses on a number of
players in the speculation game – Washington Mutual, the Office of Thrift
Supervision (OTS), Standard & Poor’s, Moody’s Investors Service, Goldman
Sachs and Deutsche Bank – while it provides evidence of collaboration that
enters the den of criminality.
Senator Levin, co-chairman of the Senate Permanent Subcommittee
on Investigations that released the report said: “The report pulls back the
curtain on shoddy, risky, deceptive practices on the part of a lot of major
financial institutions.” “[T]hose institutions deceived their clients and
deceived the public, and they were aided and abetted by deferential regulators
and credit ratings agencies…They gained at the expense of their clients and
they used abusive practices to do it.” (New York Times, Apr. 13, 2011) Others
including a Time story (the report on 25 blame-worthy, and referred in The Age
of Crisis), quite some time back, also made almost similar observations and
presented facts.
Almost always ignored, but the foremost fact is:
public-deceived. The speculating capitalists, as Marx and Engels retorted, have
“expropriated” property, the holiest love capitalists worship, in billions of
dollars, although they despise the act of expropriating property if working
people initiate. But the superrich get enriched by appropriation and
expropriation, which is actually thievery, a regular proud act of capitalists.
Inner workings of democracy of capital involved in this Great Gambling have
also been re-exposed by these reports.
“At least 10,500 people with criminal records”, noted the
Financial Crisis Inquiry Commission, “entered the [mortgage-broker] field in
Florida, including 4,065 who had previously been convicted of such crimes as
fraud, bank robbery, racketeering, and extortion.”
Before committing the first $85 billion to salvage AIG, the
government “failed to exhaust all options” said the US Congressional Oversight
Panel in one of its monthly reports in mid-2010. As AIG went to the verge of
collapse, Fed and the Treasury jumped on to save it with more than $100
billion. The report was not certain that whether taxpayers will ever be repaid
in full. The Panel said: AIG had an “insatiable appetite for risk” but
“blindness to its own liabilities.”
Is not the appetite the historically proven character of
capital?
During hearings of the US Financial Crisis Inquiry Commission
(FCIC) in 2010, an AFP report (Jan. 14, 2010) said: the bankers admitted mistakes
as they accumulated risks that led up to the crisis. Lloyd Blankfein, Goldman
Sachs chairman, said: “accumulation of risk” was “the biggest problem” that
financial institutions faced ahead of the crisis. “These are all exercises in
risk management.” John Mack, Morgan Stanley chairman, informed that many firms
were “too highly leveraged, took on too much risk and did not have sufficient
resources to manage those risks.” Brian Moynihan, Bank of America president,
admitted the “lot of damage” the banking industry caused. Jamie Dimon, JPMorgan
Chase chairman had the same admission: “We made mistakes.” But Blankfein
cautioned against overregulation: “Taking risk completely out of the system
will be at the cost of economic growth.” After hearing these frank confessions
and valuable observations, Phil Angelides, chairman of the FCIC, said: “It
sounds …like selling a car with faulty brakes and then buying an insurance
policy on the buyer of those cars. It doesn’t seem to me that’s a practice that
inspires confidence.”
Capital, it seems, involved in speculation has made risk a
commodity; it speculated on risk; and the risk-commodity has established a
number of relationships that connects individuals, institutions, practices,
procedures, regulations. But still it – risk-commodity – is difficult to
define. “A commodity is … a mysterious thing…,” says Marx (Capital, I, ch. 1,
sec. 4) Monopoly-finance capital, which is now engaged with speculation with
risk and illusory financial products, has made financial-commodity, it produces
and trades with, more mysterious. It is not a simple commodity. In it “human
brains and nerves, and muscles,” as Marx tells, “and in this sense are human
labour” (ibid. sec. 2) is spent. State machines, directly and indirectly,
formally and informally, serve them, for which the machine has been assembled.
Countrywide Financial, IndyMac and Washington Mutual were
considered as “constituents” by OTS officials. It supervised them; it relied on
bank executives to remedy problems; and it was reluctant to interfere with
“even unsound … practices” at Washington Mutual, said the WFC. Two risk
managers at the bank were marginalized and one of them was fired as the manager
informed the regulator that loss estimates provided by the executives were
outdated. In 2004-’08, the regulatory office identified more than 500 serious
deficiencies at Washington Mutual. But the bank was not forced to improve its
lending operations. In Sept. 2008, as the Federal Deposit Insurance Corporation
(FDIC) moved to downgrade the bank’s safety and soundness rating, the OTS
director, referring to the FDIC chairperson, angrily e-mailed to a colleague:
“I cannot believe the continuing audacity of this woman.” Washington Mutual
failed within weeks, informs the WFC.
In 2007, the WFC said, Goldman with its power to drive prices
to its desired direction tried to build its bet against housing, actually an
act of manipulation: drive down the cost of shorting the mortgage market by
squeezing those making negative bets, try to put on the squeeze, so that it can
add to its negative bets in a cheaper way and protect itself against the
housing collapse.
Greg Lippmann, a trader focused in the WFC, was vocally
negative about housing as early as 2005 and brought his idea of shorting the
market to professional investors. He described risky mortgage securities as
“pigs”. Once he was asked to buy one such mortgage security. His response: he
“would take it and try to dupe someone”. He persuaded Deutsche Bank to let him
build a large short position that reached $5 billion by 2007. Lippmann
considered the bank’s operation a “CDO (collateralized debt obligation)
machine” and characterized such securities as “Ponzi scheme.” Lippmann claimed
that he persuaded the AIG to stop writing insurance on mortgage securities. He
informed the committee that the head of the Deutsche that put together CDOs was
upset when Lippmann persuaded AIG to exit the business in 2006 as it would be
harder to keep these lucrative factories humming without AIG to insure the
instruments.
According to WFC, Deutsche and other banks made $5 million to
$10 million for every deal like Gemstone, a CDO these banks created. In 2006
and 2007, banks created about a trillion dollars of CDO deals, a casino economy
appliance that ignited the lending lust.
As examples of not looking deeply into acts of profiteering
with risk and bundling questionable loans and selling, creating illusory
profits, etc. the New York Times cites a number of incidents: Merrill Lynch
understated its risky mortgage holdings by hundreds of billions of dollars.
Mozilo, the chief executive of Countrywide Financial, publicly praised his
company’s practices, which were at odds with derisive statements he made
privately in e-mails as he sold shares. The stock subsequently fell as its
losses became known. Lehman Brothers executives assured investors in the summer
of 2008 that its financial position was sound, although they counted as assets
some holdings pledged to others. Bear Stearns executives may have pocketed
revenues that should have gone to investors. “But the Justice Department has
decided not to pursue some of these matters — including possible criminal cases
against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial
Products at A.I.G., the business at the epicenter of that company’s collapse.”
Brad Bondi and Martin Biegelman, two assistant directors of the commission,
specifically named Countrywide and Mozilo while outlining their recommendations
for investigative targets and hearings in a memo. They noted that subprime
mortgage executives like Mozilo received hundreds of millions of dollars in
compensation even though their companies collapsed. A message reached the
officials: Countrywide was off limits. Phil Angelides, the commission’s
chairman, told his deputies that Countrywide should not be a target or featured
at any hearing. Chris Seefer, an investigating FCIC official, said: Countrywide
had not been given a pass. Angelides said a full investigation was done on the
company, and that a hearing was planned to feature Mozilo. It was canceled
because Republican members of the commission did not want any more hearings.
Accounting firm Ernst & Young helped Lehman “engage in massive accounting
fraud.” E&Y was sued in 2010. But to date, Lehman or any of its executives
has not been sued. (Apr. 14, 2011)
Mozilo tired with the demands of the OCC found an easy escape
route: Countrywide changed charters to go under the purview of OTS, a
“considerate” regulator. According to Connie Bruck of The New Yorker, the OTS
actually lobbied Countrywide to make the switch. West Virginia tried to sue
Capital One for credit card abuse in 2005; the company applied for a national
charter with the OCC; and Capital One escaped West Virginia’s jurisdiction. The
state lost authority to pursue the case. The OCC stopped Georgia as it tried to
enforce predatory lending laws. New York regulators were intervened while
pursuing discriminatory lending investigations. The FCIC head told John Dugan,
former OCC head, “You tied the hands of the states and then sat on your hands.”
The case with the Bank of America has been settled by the SEC,
and none of its executives were charged for their unholy acts. A civil fraud
lawsuit against the former chief executive and the former chief financial
officer has been filed. The case is pending. Last spring, new mortgage-related
subpoenas to eight large banks have been issued. But no case has been brought
on this matter. (NYT, Apr. 14, 2011)
Giant banks paid big bonuses immediately after their bailout.
That money was not brought back. Those bonus figures were only made public to
make the beneficiaries shameful. (ibid.) But big money and shame are not
hostile to each other.
After the Bear Stearns collapse, in-depth search for fraud throughout
the mortgage palace was suggested by some law enforcement insiders. The FBI
expressed concerns about mortgage improprieties in 2004, identified about two
dozen areas the fraud was assumed going unrestrained, and made a plan to
investigate major banks and lenders. Robert S. Mueller III, FBI director,
approved the plan. [Time, May 9, 2011 carries a report on Muller and
surrounding situation.] “We were focused on the whole gamut: the individuals,
the mortgage brokers and the top of the industry,” said Kenneth W. Kaiser, the
former assistant director of the criminal investigations unit. “We were looking
at the corporate level.” Days after the memo was sent, prosecutors at some
Justice Department offices began to complain that shifting agents to mortgage
cases would hurt other investigations. “We got told by the DOJ not to shift
those resources,” he said. About a week later he was told to send another memo
undoing many of the changes. Some of the extra agents were not deployed. A
spokesman for the bureau said that a second memo was sent out that allowed
field offices to try to opt out of some of the changes in the first memo. The
FBI scaled back a plan to assign more field agents to investigate mortgage
fraud. That summer, the DOJ also rejected proposal to create a task force for
mortgage related investigations. As a result, these cases remained understaffed
and poorly funded. A broader financial crimes task force was formed much later.
(ibid.) “[T]he FBI has seen a radical cut in the number of agents available to
investigate financial crime. …During the savings and loan crisis, 1,000 FBI
agents worked the financial-crimes scene. Today, just 240 do.” (Morgan Housel,
“Why So Few Ended Up in Jail After the Financial Crisis?”, Fool.com, Apr. 26,
2011)
Civil actions by the government were limited. The SEC’s broad
guideline in 2009, never made public, made it cautious about pushing for hefty
penalties from banks that had received bailout money. “The agency was concerned
about taxpayer money in effect being used to pay for settlements.” (NYT, Apr.
14, 2011)
Setting up a financial fraud task force to scrutinize the
mortgage industry was considered by the DOJ. Michael B. Mukasey, a former
federal judge in New York who had been the head of the Department, discussed the
issue with his deputies. He decided against a task force. Last year, the FCIC
asked Mukasey that whether he was aware of requests for more resources for
investigating fraud, Mukasey said, he did not recall internal requests.
Mukasey’s spokesperson said that he had no knowledge of the FBI memo. A year
later, several lawmakers decided that the government needed more people
tracking financial crimes; Congress passed a bill, providing a $165 million
budget increase to the FBI and DOJ for investigations in the area. But only
about $30 million in new money was provided. (ibid.)
In July 2008, the SEC staff received a phone call from Scott
Alvarez, general counsel at the Federal Reserve in Washington, to discuss an
SEC investigation into improprieties by the largest US brokerage firms. Their
actions had hammered thousands of investors holding the short-term investments
known as auction-rate securities that UBS, Goldman Sachs and similar companies
operated propagating them as highly liquid investments. Investors holding
hundreds of billions of dollars of these securities could no longer cash those
in as the crisis spread. As the SEC investigated these events, some SEC
officials argued that the banks should make all investors whole on the
securities, because banks had marketed them as safe investments. But Alvarez
suggested that the SEC soften the proposed terms of the auction-rate
settlements. His staff followed up with more calls to the SEC, cautioning that
banks might run short on capital if they had to pay billions of dollars
required to make all auction-rate clients whole. The SEC wound up requiring
eight banks to pay back only individual investors. For institutional investors
including pension funds that bought the securities, the SEC told the banks to
make only their “best efforts.” (ibid.)
The FDIC sued Killinger, Washington Mutual’s former chief
executive, and two other officials, accusing them of piling on risky loans to
grow faster and increase their compensation. This is one of the few exceptions.
The SEC extracted a $550 million settlement from Goldman Sachs for a mortgage
security the bank built. (ibid.) Probably, somewhere some understanding failed.
Regulators failed to compile information that could have helped
frame criminal cases. Weak regulation made it difficult to pursue fraud. The
SEC slowed down the investigative work on other cases. In 2009, the DOJ
announced a task force to focus on financial crimes. But the department
received no additional resources. Lawyers opined that Countrywide exemplifies the
difficulties of mounting a criminal case without assistance and documentation
from regulators. The FCIC decided not to make an in-depth examination of the
company. Non-prosecution of Countrywide, the largest mortgage lender in the US,
puzzles legal experts. Last month, the office of the US attorney for Los
Angeles dropped its investigation of Mozilo after the SEC extracted a
settlement from him in a civil fraud case. Mozilo paid $22.5 million in
penalties, without admitting or denying the accusations. (ibid.)
Citing data from Syracuse University’s Transactional Records
Access Clearinghouse the NYT said: in 1995, bank regulators referred 1,837
cases to the DOJ. In 2006, it was 75. The following four years saw it slide to
72 a year on average. The declining trend began under Clinton. The Bush
administration maintained it. Prosecutions for Enron, WorldCom, Tyco and others
were exceptions. From the summer of 2007 to the end of 2008, OTS-overseen banks
with $355 billion in assets failed. But OTS has not referred a single case
since 2000. The Office of the Comptroller of the Currency has referred only
three in the last decade. Mostly small banks face civil enforcement actions.
There is no stiff penalty. No senior executives have been charged or
imprisoned, and no collective government effort has emerged. (ibid.)
Concerned with Countrywide’s reckless lending, Robert Gnaizda,
former general counsel at a nonprofit consumer organization, advised John
Reich, a former banker and Senate staff member appointed by George W Bush, to
set up a hot line for whistle-blowers inside Countrywide to communicate with
regulators. Countrywide switched oversight to the thrift supervisor, and that
agency was overseen at the time by John Reich. “John was uninterested. He told
me he was a good friend of Mozilo’s.” Reich said that he did not recall the
conversation with Gnaizda. (ibid.)
William Black, law professor, University of Missouri, said:
“There were no criminal referrals from the regulators. No fraud working groups.
No national task force. There has been no effective punishment of the elites
here.” David Skeel, law professor, University of Pennsylvania, said: “It goes
to the whole perception that Wall Street was taken care of, and Main Street was
not.” Henry Pontell, criminology, law and society professor, University of
California, Irvine said: “When regulators don’t believe in regulation and don’t
get what is going on at the companies they oversee, there can be no major
white-collar crime prosecutions. If they don’t understand what we call
collective embezzlement, where people are literally looting their own firms,
then it’s impossible to bring cases.” (ibid.)
In a capital dominated world system, capital’s profit making
motive is “not” crime! Capital loots instead of making investment into
manufacturing as profit from manufacturing is lower than loot! The situation
“makes” loot legal! The need to sue for loot “doesn’t” arise as loot drives
economic activity! Prosecuting capital is not the job of capital’s governing
machine! Capital’s crimes are “not” crimes and capital’s corruptions are “not”
corruptions until its crimes and corruptions corrode capital.
But these also are ignored as higher profit comes in quicker
speed although this produces perilous moments of meltdown. It corrupts the
political system, which is essential for its existence. “The financial services
industry”, Paul Krugman writes, “has claimed an ever-growing share of the
nation’s income over the past generation, making the people who run the
industry incredibly rich. … The vast riches achieved by those who managed other
people’s money have had a corrupting effect on our society as a whole. … But
surely those financial superstars must have been earning their millions, right?
No, not necessarily. The pay system on Wall Street lavishly rewards the
appearance of profit, even if that appearance later turns out to have been an
illusion. … At the crudest level, Wall Street’s ill-gotten gains corrupted and
continue to corrupt politics, in a nicely bipartisan way. (NYT, “The Madoff
Economy”, Dec.19, 2008)
The profiteering from risk-activity by the capital made more
than seven million Americans jobless and about 25 million Americans
unemployed/underemployed. It pushed out more than two million families from
their homes in the last three years. During that period, more than 10 million
were in the foreclosure process. It was a harmony of chaos and catastrophic
failure made by capital with deep uncertainty in the lives of the people.
McClatchy Newspaper reported: attorneys for hundreds of injured workers
informed that AIG was dragging out insurance payments that their clients need
to cover home mortgages, failing to pay full compensation benefits and refusing
to pay medical bills. (June10, 2010) An insurer spreading and accelerating uncertainty
among people! The report said: AIG, the company linked to major financial firms
around the world and through which more than $90 billion in federal money
flowed out the back door to some of the same Wall Street banks whose risky
behavior fueled the nation’s financial crisis, is now being accused of
short-changing its customers.
Dominating definitions of legality made the capital’s
accounting tricks legal (i.e., Lehman’s repo 105 accounting method) although
those were unethical. Its ethics and legality do not collide as one stands on
the other. Probably this led Morgan Housel to write: Not only was this stuff
legal, but lucrative. Many executives walked away rich. … This was heads they
win, tails you lose, and in either case, jail remains elusive. You can almost
hear them laughing now. (Fool.com, April 26, 2011)
“[T]hree years after our [in the US] horrific financial crisis
caused by financial fraud, not a single financial executive has gone to jail …”
(Charles Ferguson, director, Inside Job documentary, while accepting the Oscar
for best documentary in 2011, quoted by Housel) Morgan Housel informs in his
column: “After the savings and loan crisis of the early ’90s, 800 financial
executives went to prison. Not only have most bank execs avoided prosecution
this time around, but many are still gainfully employed by the banks that ran
the economy into the ground.” (Fool.com, Apr. 26, 2011) The NYT queried: “It is
a question asked repeatedly across America: why, in the aftermath of a
financial mess that generated hundreds of billions in losses, have no
high-profile participants in the disaster been prosecuted?” The NYT replied:
“Answering such a question — the equivalent of determining why a dog did not
bark — is anything but simple. (Apr. 14, 2011)
The system is concerned with stabilizing and shoring up its
institutions, a day dream in long term. The capital involved with the crisis
has established a relationship between victors, on the Wall Street, and
victims, on the Nowhere Street, a relationship between deceived and deceiver,
dominant and dominated, powerful and powerless, plundered and plunderer, a
relationship determined by plunderocracy, a relationship of plunder, enjoy and
marginalize the majority, a relationship carrying many contradictions, a relationship
creating crisis of credibility of the governing system. While covering the bail
out bill in the Congress Time told this credibility crisis in related story
“The Bail Out Defeat: A Political Credibility Crisis”. The credibility crisis
has still not come out with its full face and force. Recent surveys on mass
psychology show part of that face.
All aspects of the Great Financial Crisis have still not been
identified, debated and discussed. This is needed as the crisis is making
impact, on the one hand, on the lives of the people, and on the other hand, on
capitals, and classes that own these capitals, and dominate the present
geoeconomy and geopolitics. These will make far-reaching impact on the ruling
classes and peoples’ struggles in many lands.
