Nothing to see here, folks. Move along.
It's the financial sector's world now. The rest of us? We just live here.
That's the only conclusion logic can dictate concerning the pressure that is being put on New York Attorney General Eric Schneiderman to get on board with a deal that would require certain large banks that made ill-gotten gains out of misrepresented mortgage-backed securities and improper foreclosure procedures to be indemnified from future prosecution for an amount that at its highest represents only pennies on the dollar of the total amount of fraud perpetrated on individual homeowners and institutional investors.
Economic theory has a concept called moral hazard. The idea behind the concept is that parties who do not have to worry about the risk associated with their actions will behave differently from those who do. It's not hard to imagine a world where, for instance, criminal behavior carried no risk of prison or fines: there would certainly be much more of it, and the world would be a scarier place. For financial crimes that are designed to make money, however, the calculus is completely different: a criminal justice system or regulatory agency can impose fines or force settlements, but unless those settlements or fines approximate the profit that was made from the criminal enterprise in question, those fines become nothing more than a cost of doing business.
And there is no question that in the case of the deal being pushed by the Obama administration and other state attorneys general, massive white collar crime is at issue, as Matt Taibbi concisely explains:
The issue goes beyond fraudulent paperwork to an intentional, far-reaching theft scheme designed to take junk subprime loans and disguise them as AAA-rated investments. The banks lent money to corrupt companies like Countrywide, who made masses of bad loans and immediately sold them back to the banks.
The banks in turn hid the crappiness of these loans via certain poorly-understood nuances in the securitization process – this is almost certainly where Scheniderman’s investigators are doing their digging – before hawking the resultant securities as AAA-rated gold to fools in places like the Florida state pension fund.
They did this for years, systematically, working hand in hand in a wink-nudge arrangement with clearly criminal enterprises like Countrywide and New Century. The victims were millions of investors worldwide (like the pensioners who saw their funds drop in value) and hundreds of thousands of individual homeowners, who were often sold trick loans and hustled into foreclosure when unexpected rate hikes kicked in.
In a nutshell, it was this procedure and the concomitant purchases in credit default swaps to supposedly insure the investments that ended up popping a vastly overinflated bubble in the housing market and crashing just about the entire world economy. And despite massive fraud perpetrated against investors and the hundreds of thousands of underwater homeowners being foreclosed on after acquiring trick loans they couldn't afford, the Obama administration and the state attorneys general are pushing for the slate to be wiped clean in exchange for a settlement that amounts to a pittance.
The voices of supposed reason and temperance will say that such a settlement is necessary because a stable economy depends on a stable banking sector, and until the banks are able to achieve "cost certainty" regarding their liability for their previously criminal practices, the entire foundation of capitalism is going to be much less stable. The average 99-weeker would probably argue that a focus on jobs is probably more significant for the individual and the economy as a whole than liability cost certainty for the banking sector. But for the sake of argument, let's assume that a stable banking sector with cost certainty is a prerequisite for economic recovery. In that case, a settlement that basically forgives the banks for crashing the economy through a massive fraud scheme sends a clarion signal that the financial sector carries no risk and is no longer accountable to anyone because the economy cannot allow them to have cost uncertainty, much less fail. And that means it's a virtual certainty that the same shenanigans will happen again, as long as they're profitable.
Investigating and prosecuting those responsible for nearly inducing a second great depression through massive securities fraud should be considered the highest public good. If it really is true that letting the titanic bad actors on Wall Street off the hook is better because of the earthquake that would be unleashed if even one of those titans fell, then the only logical answer is to restrict the size of banks to one where the forces of both the market and the law do not need to be overridden by the Treasury Department for the sake of the security of the economy as a whole. There are only three options that the administration can choose: 1) let the investigations proceed; 2) undertake massive financial sector reform to shrink the maximum size of banks; or 3) admit that the financial sector rules America with impunity and will do what it wants, when it wants, and hope that come election season, they like you more than the other guy.
The deal currently on the table smells like option 3. And it should be rejected until we get the truth.