Cross-posted at macroindex.
William Black is a professor of economics and law at the University of Missouri-Kansas City School of Law. He was the senior regulator during the S&L crisis of the 1980s. If anyone knows the anatomy of a white collar bank heist, that would be Professor Black. His latest submission to the Huffington Post serves as an indictment of our criminal justice system's failure to treat financial crimes as crimes and the perpetrators as criminals.
Black's focus weighs on the mortgage finance fiasco we have experienced over the past three years. The blowback from CDO gimmickry, derivatives, leverage and fraudclosure underline a financial system that is irretrievably broken. Yet, this system continues its existence with the extraordinary largesse of the American taxpayer and the blind eye of the Justice Department.
From his column:
The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous "accounting control frauds" that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender's alleged efforts to defraud the federal government's TARP bailout program.
What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ's senior leadership cannot conceive of elite bankers as criminals.
The concept of elite bankers as criminals is an obvious blind spot in our justice system.
Black is, thankfully, not alone in decrying the glaring lack of prosecutorial energy that a person who is mindful of our nation's laws would expect to see.
The media, however, has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud. Prominent economists, particularly Joseph Stiglitz and Alan Greenspan, have joined Akerlof, Romer, Galbraith,Wray, and Prasch in emphasizing the key role that elite fraud played in driving this crisis. Even Andrew Ross Sorkin, generally seen as an apologist for the Street's elites, has decried the lack of prosecutions.
The core issue is that 'rule of law' is being ignored.
It appears that there is justice for the banks, then there's justice for the rest of us. Criminal prosecution can be avoided if one just throws enough money at the problem. The case of Deutsche Bank is an example.
Germany's largest financial institution, Deutsche Bank, admitted criminal wrongdoing and agreed to pay more than $500 million to avoid prosecution in the United States.
The bank was accused of generating $29 billion in fraudulent tax losses, according to the U.S. Justice Department.
Under the agreement, which was reached on December 22, the Frankfurt-based bank will not be prosecuted for fraud or tax evasion. IRS officials say this will enable many U.S. citizens to avoid more than $5.9 billion in income taxes.
$553 Million in fines paid to the IRS are offset against $5.9 Billion in tax losses.
Similarly, the case against UBS was settled just last week in which the bank admitted to criminal misconduct.
U.S. authorities recently ended their probe into UBS, which had been charged by federal prosecutors with helping roughly 17,000 clients with $20 billion in assets hide their accounts from the IRS.
UBS paid $780 million as part of a settlement and handed over the names of more than 250 client accounts and ended its U.S. cross-border banking business.
Professor Black offers a blueprint to alter the course of prosecutorial malpractice. The prosecution of white collar criminals during the S&L crisis shattered the myth that the perpetrators were unimpeachable. If it worked then, it can work today.
Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived. It makes tens of thousands of documents detailing the frauds public. It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds.
The bottom line: fraud is fraud. The magnitude of the crimes accompanied with impotent penalties emphasizes the idea that a fine is just the cost of doing business. The ramifications of such behavior hardly act as a deterrent against future criminal activity.
Source: William Black for the Huffington Post
Related reading: William Black at Bill Moyers' Journal (with video interview)
Barrons interview: The Lessons of the S&L Crisis