SHROUD OF SILENCE GREETS FINANCIAL CRISIS REPORT

February 15, 2011

Dear Citizens and Elected Officials:

Although we didn’t set out to write a history of the Great Financial Crisis when we embarked upon our foreclosure essay, it turns out that to do justice to the scope of this specific calamity, our work inevitably headed in that direction and therefore intersected at quite a few points with those made in the final report of the Financial Crisis Inquiry Commission, which was released on Thursday, January 27, 2011.

The Financial Crisis Commission’s Report
We ordered our copy from Amazon.com, paying just under ten dollars, and it arrived on Tuesday, February 1st, all 545 pages of it. Unfortunately, it didn’t have an index, which seemed rather strange, because indexes are crucial features when a book’s subject covers such an enormous cast of firms and individuals, and so many years of financial history. Fortunately, at the place where the Index should have been there was an online link to the publisher, and that’s where we found and downloaded its twenty pages, and immediately set to work to see who and what got covered, and what got left out. So far we’ve read about 180 pages, including the first seven chapters; anything that looked like it dealt directly with considerations of fraud, especially by the mortgage “originators”; the last chapter on “The Foreclosure Crisis”; and the 30 pages of dissenting views from the Republican minority, setting aside Peter Wallison’s longer solo dissent for the time being.

We think that at that price, this is something that citizen’s should have to read, browse and consult regularly. It’s encyclopedic in its coverage, but it reads better than an encyclopedia, although it’s not quite up to Michael Lewis’ standards, which is understandable, given the nature of commission reports. A number of commentators have already remarked that it has hints and leads for further investigations, and that it’s accompanied by a website which promises even more information – and opportunities for research by scholars and journalists – and maybe even various law enforcement agencies, although we’re not holding our breaths on that one. Here’s the link at http://www.fcic.gov/resource .

On the very first page of its Conclusions section, the Commission states that “the subject of this report is of no small consequence to this nation.” We agree with that assertion, which is why we think the Commission might have chosen a different week for its release than the competing one in which President Obama gave his State of the Union address. And wouldn’t you know that the President had nothing to say about the Report, just as he had nothing to say about the foreclosure crisis, indicating, by the silence, that he wants to distance himself from these clouds blocking out the sun from his own newly launched version of “Morning in America.” There wasn’t even a letter of acknowledgement, much less thanks, from the President, something one would expect to find in the beginning of a report like this, agree with it or not, nor was there any follow-up press release or commentary from the White House. We searched the White House Press Office online, but could only turn up the transcript containing the brief exchange which (former) Press Secretary Gibbs had with a reporter who asked about the Report’s findings.

Indeed, there has been something strange, out of phase, right from the beginning about the Commission. After Congress had authorized it via the Fraud Enforcement and Recovery Act in the spring of 2009, that body then made it very clear that it was going to pass financial “reform” without waiting for the findings from its own authorized investigative body. It’s not so surprising then, given a “demotion” out of the gate, that the Commission never really held “center stage,” or anything remotely close to that in the public’s eye, during its 19 days of public hearings, and thus commentators are right to put it in the dim shadows of comparison to its 1930’s predecessor, the Pecora Committee, which held two years of deliberations. Although historical commentary has taken some of the luster off the “analytical acuity” of its findings, Pecora’s work still stands out for its impact, in contrast to that achieved so far by the FCIC report: “Both the press and the president loved the committee and its fiery chief counsel. FDR urged it to come up with legislative remedies and incorporated its findings into the administration’s Securities Acts of 1933 and 1934 and the Public Utility Holding Company Act of 1935.” (From Steve Fraser’s excellent Everyman A Speculator: A History of Wall Street in American Life, 2005, Page 450.)

That having been said, we think that the American people have gotten a report well worth reading, and a fairly comprehensive one, based on what we have seen in a week’s worth of examination, and keeping in mind that it was produced in just over 14 months, having held its first meeting on September 17, 2009, in Washington, DC.

The Commission’s findings are presented in nine bulleted conclusions in a section presented ahead of the first chapter. Perhaps they decided not to call it the traditional “Executive Summary” because the executives portrayed in the Report don’t come off very well. Here are a few excerpts from three of what we consider to be its most important points: The very first: “We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well being of the American public. Theirs was a big miss, not a stumble.”

The second: “We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.

The sentries were not at their posts, in no small part due to the widely accepted faith in the self correcting nature of the markets and the ability of financial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe…Yet we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it….And where regulators lacked authority, they could have sought it. Too often, they lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee…From 1998 to 2008, the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions. What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.”

Findings on Fraud
And then there was the conclusion from what we will term the “Fraud Section,” the sixth point: “We conclude there was a systemic breakdown in accountability and ethics…

The report catalogs the rising incidence of mortgage fraud, which flourished in an environment of collapsing lending standards and lax regulation. The number of suspicious activity reports – reports of possible financial crimes filed by depository banks and their affiliates – related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $112 billion….As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in ‘catastrophic consequences.’ Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in ‘financial and reputational catastrophe’ for the firm. But they did not stop.”

Because in our own research on the foreclosure crisis we came across, time and time again, the charge of “fraud” at every stage of the “home lending food chain,” and we documented law professor William Black’s worries that federal prosecutors, and the FBI itself (see Part II which follows below) did not understand the concepts of “control fraud” and “accounting fraud,” we were very curious to see how the Report handled these matters. The fullest treatment that we have so far found comes in Chapter 9, “All In,” which has a section entitled “Mortgage Fraud: ‘Crime-Facilitative Environments.’” (Pages 160-164.) The section does have several references to Black’s testimony to the Commission, but it curiously does not use his terms “control and accounting fraud,” and they don’t appear in the Index, or in Appendix A, the six page Glossary of terms. It is a tantalizing section, which inches up to Black’s more forceful assertions, and, as we will soon see, has some individuals’ startling testimony which clearly suggest these types of systemic frauds at their firm’s higher levels, but it still manages to be largely “impressionistic,” rather than precise in apportioning “accountability.” There is just a hint of possible legal follow up: FBI Director “Mueller suggested that some prosecutions may be still to come” (Page 163) – but, on the whole, we think that the writings we cover from William Black, and his withering criticism of Andrew Kohr’s recent article “Spread the Word: Lying to Banks is Illegal,” which appeared in the journal American Banker, do a better job in explaining the difference between significant outbreaks of isolated mortgage frauds and the more systemic white collar versions that helped drive the crisis. The Report is therefore helpful in giving this factor greater weight in causality, but we think it is still understating fraud’s importance. We also note that commentators Yves Smith and William Greider have pressed the question of criminal referrals with Commission members, especially Brooksley Born, but have reported that they could not elicit any names or details, or even scope – only that referrals were made by the staff to appropriate legal authorities. Smith feels that the Commission’s one year time frame was a significant handicap in the use of its subpoena powers to obtain documents – claiming in one of her postings that any attorney worth his salt – and certainly that would include those employed by major financial firms – would have no trouble in fending off even government subpoena efforts constrained within such a narrow time window. And it seems logical to us that if the Pecora Committee in the 1930’s took two years, the greater complexities in finance 75 years later would certainly place greater strains on such a brief investigatory time frame.

Nonetheless, there is much of interest in the Report, and more promised at the online site, and so we now direct your attention to some of its more dramatic portions, which reinforce points we make in the essays which follow.

The first we have already cited, from Countrywide Financial, Angelo Mozilo’s firm, which was one of the most notorious subprime mortgage originators, and which you will see William Black gives central place to in his calls for prosecution of systemic white-collar fraud. Please note the year – 2004 – and how early it was that the firm knew its own seemingly irrational practices were headed for catastrophe – that’s from Page xxii of the report. It makes a New York Times’ story about the settlement with the SEC (from October 18, 2010) which “paints Mozilo as the horrified CEO who discovers what his other chief officers, including former President David Sambol, have been up to,” (our words) look like even more of an exculpatory piece than it already was – because the discovery of the collapse of underwriting standards in his firm is now pushed back another two years from the April of 2006 Emails cited in the Times’ story. That’s even more time for Mozilo to have fired those executives responsible, and send reports about what sure sounds like control and accounting fraud on to the proper authorities.

Yet Mozilo was noted for his vast network of admirers and supporters, including many affordable housing advocates, and despite more damaging information about his firm, the Commission Report keeps quoting him at various other stopping points, and not in the critical voice it directs upon so many deserving others. That probably has Bill Black scratching his head, because, as we report below, in Black’s words, “…every aspect of Countrywide’s nonprime mortgage operations that has been examined by a truly independent body has found widespread fraud…We have been amazed that…the administration, the industry, and the financial media act as if this is acceptable…Countrywide …has defrauded more people, at a greater cost, than any entity in history.”

In that light, consider this Report information, from Francisco San Pedro, the former senior vice president of special investigations at Countrywide, from page 162 of that “mortgage fraud” section: “Countrywide, the nation’s largest mortgage lender at the time, had about 5,000 internal referrals of potentially fraudulent activity in its mortgage business in 2005, 10,000 in 2006, and 20,000 in 2007…But it filed only 855 SARS (suspicious activity reports) in 205, 2,895 in 2006, and 2,612 in 2007.”

Or consider this testimony from Darcy Parmer, who did quality assurance and fraud analysis at Wells Fargo, “the second largest mortgage lender from 2004 through 2007...” She “told the Commission that ‘hundreds and hundreds and hundreds of fraud cases’ that she knew were identified within Wells Fargo’s home equity loan division were not reported to FinCEN (the Treasury Department’s bureau which works on financial crimes – and which works closely with law enforcement). And, she added, at least half the loans she flagged for fraud were nevertheless funded, over her objection.” (Page 162.)

How We Treat Whistle Blowers & Economic Dissent
Or consider the fate of Ed Parker, who was the “former head of Ameriquest’s Mortgage Fraud Investigations Department.” He “told the Commission that he detected fraud at the company within one month of starting his job there in January 2003, but senior management did nothing with the reports he sent. He heard that other departments were complaining he ‘looked too much’ into the loans. In November 2005, he was downgraded from ‘manager’ to ‘supervisor,’ and was laid off in May 2006.” (Page 12, our emphasis.)

And now ponder the fate of Richard Bowen, “business chief underwriter” for Citigroup beginning in early 2006. By June, 2006 he “discovered that as much as 60% of the loans that Citi was buying were defective.” That could threaten his company because “investors could force Citi to buy them back….he tried to alert top managers at the firm by ‘email, weekly reports, committee presentations, and discussions…’ but… it ‘never translated into any actions.’” Bowen, like many whistleblowers and worried citizens, in both the public and private sectors, did not give up easily. He took his alarms to the very top, to the Executive Committee of the Board of Directors, whose chairman was none other than Robert Rubin himself. Rubin was questioned by the Commission at a public hearing in April of 2010 about Bowen’s memo, and says that it “‘…was acted on promptly and actions were taken in response to it.’” Other Citigroup officers told the Commission that “the bank undertook an investigation…and the system of underwriting reviews was revised.’” And so Richard Bowen got his reward for trying to render good due diligence: “Bowen told the Commission that after he alerted management by sending emails, he went from supervising 220 people to supervising only 2, his bonus was reduced, and he was downgraded in his performance review.” (Page 19.)

Well, that’s a challenge from the Report to one of the three members of “The Committee To Save the World,” featured on Time Magazine’s cover in February, 1999. Let’s see how the other two fared, and let’s do that by considering the political context of the weeks surrounding the release of the Report, when the front pages of newspapers were filled with accounts of a hoped for successful democratic uprising in Egypt, where we are all rooting for the brave dissidents in the streets and hoping that they don’t end up in the hands of the country’s infamous police. So how do the economic dissidents fare here in the forums of the world’s greatest democracy, as portrayed in the riveting history of who issued early warnings, and when, in the first chapter, entitled “Before Our Very Eyes?”

Consider poor Bob Gnaizda, not exactly a household name, who was the “general counsel and policy director of the Greenlining Institute, a California-based nonprofit housing group.” Mr. Gnaizda may not have made it to the cover of Time, but he was not shy about his duties. We learn that “he began meeting with Greenspan at least once a year starting in 1999, each time highlighting to him the growth of predatory lending practices and discussing with him the social and economic problems they were creating.”

The repeated meetings, we now know, didn’t have much of an effect. The Federal Reserve, and Chairman Greenspan, in particular, therefore rightly bear a considerable portion of the blame handed out in the Report, for failing to act to shut down reckless mortgage lending, despite repeated warnings about exactly what was going on in our housing markets. But did Mr. Gnaizda have any idea of what he was really up against in trying to alter the assumptions of “the Maestro,” someone who had probably the greatest fingertip command of all the leading – and more obscure – economic indicators - to ever have resided inside one human brain, yet who failed miserably in seeing the overall direction of what was right “Before His Very Eyes?” How could that be?

We think, at this point in American history, and it has gotten worse every year since 1980, it becomes harder and harder for the citizens of a business dominated Republic to recognize the powerful influence of free-market fundamentalist ideology. It has become so pervasive that even its most extreme practioners, like Greenspan, who once was a seedling in Ayn Rand’s nursery hothouse, blend in well with the surrounding forests of de-regulatory timber. We think the Report does the public a splendid service in quoting often, and to great effect, the views of this low-key but extremely influential ideologue, who had found in his concept of the free market the answer to life’s every economic problem, able to soothe away every alarm, to shrug off every disturbing trend appearing right at his doorstep. Consider these words from the Maestro: “‘It is critically important to recognize that no market is ever truly unregulated…the self-interest of market participants generates private market regulation. Thus the real question is not whether a market should be regulated. Rather the real question is whether government intervention strengthens or weakens private regulation.’” (Pages 53-54.) And we certainly know how he answered that question: by leaving markets alone, to work their very own wonders.

Well, our hat’s still off to the housing non-profit’s general counsel and policy director for trying to change Chairman Greenspan’s housing views. That was quite a gulf he was trying to bridge, from the non-profit world to the highest pinnacle of private sector free-market orthodoxy, a vast chasm of “standing,” power and, in that era, symbolism itself – as audacious as a bunch of farmers trying to take on the railroads and the gold standard in 1896. Maybe, just maybe, someone a little closer to the Chairman’s world might have better luck – say someone like Raghuram Rajan – not exactly a household name either, we admit – but someone who was on leave from the very “Delphic Oracle” of economic knowledge, the University of Chicago, so that he could serve “as the chief economist of the International Monetary Fund.” Those were no minor credentials to have attached to one’s resume, and they were good enough to get him a podium to deliver a formal warning of economic troubles to come to the annual gathering of the “who’s who of central bankers” at Jackson Lake Lodge in Wyoming in August of 2005. That’s how the Report sets the stage for his delivered paper – “‘Has Financial Development Made the World Riskier?’” Not only did Professor Rajan warn of the dangers of credit default swaps and the weaknesses of regulatory institutions – he offered the worst insult that a mere academic could deliver to the august world of private sector finance, “he posited that executives were being overcompensated for short-term gains but let off the hook for any eventual losses…” (Page 17.)

The Economics Profession’s All-Encompassing Arrogance…
So how did that little speech go over with the third member of our “Committee to Save the World,” Larry Summers, who, we are reminded, was then the President of Harvard? The Commission Report tells us that Rajan “recalled…that he was treated with scorn…Summers…called Rajan a ‘Luddite’… ‘I felt like an early Christian who had wandered into a convention of half-starved lions,’ Rajan wrote later.” (Page 17.)

So much for the welcoming of dissent and whistle blowing in matters of corporate governance and in questioning the dominant values of our political economy. And to realize that Larry Summers has stood at the crossroads of economic interpretation for two successive Democratic presidencies is hardly an encouraging sign. No one’s persona
better illustrates the all-encompassing arrogance accumulated over the decades by the economics profession, and its gradual drift away from the deeper questions once posed by the Populists, Progressives and the more interventionist New Dealers about the structure of the capitalist economy, than Larry Summers’. Pair Larry Summers with the Alan Greenspan portrayed so skillfully in this Report, and you have a pretty good idea how the Right-Center consensus in economics has taken the country down the road to catastrophe.

If we find any great fault in the Commission Report, besides perhaps its underestimation of the role systemic fraud played in the collapse of the financial system, it would be that the majority report does not give Conservative economic ideology its full measure of credit in bringing us so close to doomsday. It accurately enough lists the effects of this ideology, which are spelled out in that long passage we quoted from the second “conclusion,” the one about the failures in financial regulation and supervision, but it is impossible to fully grasp their meaning without appreciating how much the mindsets of the regulators had been altered by the ideas advanced by the conservative revolution since 1980, inside both Republican and Democratic administrations. The Report lays out for us all the various decision points when the personnel of the Federal Reserve, the SEC, the Treasury, the FDIC, the OCC, the OTS …looked at troublesome data and developments but turned away from any type of decisive action. Again from the second Conclusion: “They had ample power in many areas and they chose not to use it…And where regulators lacked authority, they could have sought it. Too often, they lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.” This comes close to meeting our objection, but it never clearly names the ideology, nor does it mention, much less emphasize the great shift in the balance of forces, of power, in the political economy, from the public sector to the private sector, a shift so great inside the heads of regulators, and policy “planners,” that they can only, in the final analysis, see themselves as weak surrogates acting to protect the prerogatives of private market powers (justified as protecting “innovation” and free markets themselves). They can’t remotely imagine themselves in the role of vigorous public actors defending the common good, something which, in their minds, as in most of academic economics, has, over the past 30 years become nearly synonymous with the wishes of Wall Street and the broader financial sector, as well as other private corporate power nodes in different sectors of the economy. Unfortunately for all of us, the current utterances and policies of the Obama administration point to no great change from the failures illuminated by the Report; if anything, the President is planning to swim in the same ideological stream which carried us all along to near disastrous landing on a beachhead called subprime.

Fallout from The Age of Market Fundamentalism
Only a great ideological movement acting over many decades could achieve such complete “intellectual capture” as this, encompassing both parties, and it is understandable why the Commission, membership structured such as it was, did not take the more direct approach in naming that movement. (They lost a unified Report anyhow). Perhaps now our readers will understand why we have felt, over the past three years, that an appropriate name for the era which we are trying to leave, but clearly have not yet left, would be “The Age of Market Utopianism,” or just as well, or perhaps even better, “The Age of Market Fundamentalism” - the latter because it conveys that sense of absolute certainty and intolerance for any competing ideas or interventions, such as Summers displayed in 1998 and August of 2005. Market Utopianism, on the other hand, does capture that glow from Alan Greenspan’s vision of self-correcting and self-healing markets.

And these suggested titles for our era, 1980-2010 (and perhaps longer; the old era is not finished) also serve as useful guides to answering the Republican minority report issued as a dissent to the Commission’s majority conclusions, the opinions of Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas. “Our own” dissident, William Black, does a good job of taking on Peter J. Wallison’s solo dissent, in repeated postings at the New Economic Perspectives blog site, starting in early February. Here’s the first one at http://neweconomicperspectives.blogspot.com/2011/02/wallison-reinvents-h... and the others can be found listed on the right under “Recent Posts.”

The Republican Dissent
So why are the Republicans unhappy enough to issue a dissenting report? Naturally, they want to get the discussion off the majority’s focus on domestic U.S. regulatory failures and onto a broader discussion of the housing bubbles which occurred across many other mainly Western European nations, and onto the financial failures in Germany and Iceland, the U.K., Spain and Ireland. They ask, and it’s a good and fair question: these nations had different, and in some cases, stronger (questionable, in our opinion) regulatory regimes than the U.S., and their housing bubbles grew without the securitization machinery that developed here, so what was the real cause? They have something much broader in mind, which can be seen from their major heading on page 419: “The Credit Bubble: Global Capital Flows, Underpriced Risk, and Federal Reserve Policy.”

First, let us dispute the assertion that other nations had stronger financial controls and especially, bank lending supervision. Time and time again in the Congressional debate over financial reform, Wall Street and more generic banking lobbyists were arguing that if we tightened up at all, we would be then far stricter than Europe, where in the U.K. the private derivatives trading platforms have been less regulated than ours, and are no model for us to follow into the future, and “The City” (including the more recent Canary Wharf area) has been just about as dominant over U.K. governmental policy as Wall Street has been over our Congress, especially with London being the home of hedge fund activity in Europe. (For tax avoiding purposes, a majority are registered in offshore havens, of course.) But the real answer to how the western housing bubbles could grow to be such a problem across such different regulatory traditions is missing the elephant in the room: that all of western capitalism, indeed, all of global capitalism, has been deeply influenced by the conservative movement, epitomized by the University of Chicago School, so that the common denominator has been, certainly in most of the West, and more limited parts of the East, a strong emphasis on de-regulation and weaker market supervision – after all, markets have better knowledge than governments and are self-correcting and self-healing if left to themselves – or so the dominant Chicago School theory goes. And the fruits of this school have been no where more disastrously apparent than in the rise of the FIRE sector (that’s Finance, Insurance and Real Estate.)

Even when the news shifts to other topics, like the street struggles for democracy (we hope) in Egypt, it turns out that “unleashed” western finance has been working behind the scenes in not so wonderful ways, as reported by Nomi Prins’s post here at http://www.nomiprins.com/thoughts/2011/1/29/the-cia-on-egypts-economy-fi... and by Matt Stoller’s piece here at Naked Capitalism, on Valentine’s Day no less. We’re all eyes and ears to learn more about the dynamics in Egypt’s political economy, which is needed to fully understand why citizens took to the streets. We place the type of economy Egyptians want to build on equal footing in importance with setting up a new democratic political order. In that light, the details about what Egyptians on the factory floors of the sweatshops have been going through, especially with the police, and on ex-President Mubarak’s investment banker son, Gamal, are just fascinating http://www.nakedcapitalism.com/2011/02/matt-stoller-the-egyptian-labor-u...

Getting back to the Republican dissenters on the Commission Report: let’s be very clear about this; it is amazing that these Republicans can pretend to ignore the power of their own intellectual movement’s global triumphs upon all types of regulatory regimes, upon the very concept of governmental regulation – and then try to still blame governmental agents and policies – governmental “do-gooder” housing policy carried out by the GSE’s (Government Sponsored Entities), Fannie and Freddie. Although this report does not blast the cheap money, low interest rate policies of the Fed the way most of the Republican Right continues to do, it fails to understand why it is that that might be the chief “mainstream” tool left to the Fed to fight the deeper structural problems in the private economy. And those interest rates were kept low between 2002-2006 because of another economic collapse - of the Internet/high tech stock market bubble – and the fear of deflation stemming from the startlingly anemic recovery from what seemed to be such a statistically short, and mild recession (in terms of GDP decline) . Intellectually, Greenspan and Bernanke have been, if anything, Chicago School market men, and that means a whole range of more “populist” fiscal Keynesian tools – like public job creation and greater public investments and the planning that would be needed to make those investments effective – have never even come up for consideration. Low interest rates being of limited effectiveness, The Fed now has had to turn to even more exotic, indirect tools, like “Quantitative Easing II” in the hope that they might pull the economy up from its stagnant level.

The Report’s dissenters didn’t seem to want to have this type of discussion in detail, so they instead moved to shift the focus onto the great trading imbalances – such as between China and the U.S., and Germany and the rest of Europe, especially the periphery. Do the Republicans think by looking more closely at the international trade and monetary situation they’re going to find that it was Progressive economic policies which have been guiding the world since the gold standard was jettisoned by Republican President Richard Nixon between 1971-1973? This is a broad and deep discussion that our nation should indeed have, but it would take another whole Report volume, at least, and another year to cover it fairly, and we’re not sure that the Commissioners we see named in the Report, from either party, are the best ones to conduct it.

But it is a debate that one of the world’s leading economic journalists, Martin Wolf, of the Financial Times, has already had in his book Fixing Global Finance, which we have reviewed and discussed at some length in previous postings. Indeed, on page 106, he has this heading for the great debate on the causes of the world’s financial imbalances: Savings Glut versus Money Glut (the latter being U.S.’s cheap money, low interest rates, large private debt incentives) and he eventually names the main culprit, amongst many, many factors, as our own lack of adequate private investment.

Too much private debt and not enough savings in the U.S.? Perhaps wages and incomes haven’t been doing so well since the conservative revolution of 1980, which if it was anything, was anti-labor, anti-minimum wage, and gung-ho for trade on imbalanced terms with those nations who have the largest and cheapest competing labor forces, something which many U.S. international corporations made their chief lobbying objective during the Clinton years in the 1990’s. If the Republican dissenters want to get at the root causes of some of the major imbalances, they need only direct themselves to their own globalization strategies and policies, and the converts they made among centrist Democrats. And to see how growing citizen debt and borrowing, in the absence of good employment alternatives, grew intertwined around subprime lending of all types, we recommend that Republicans pick up a copy of Michael Lewis’s Big Short, and ponder how their supposedly “free markets” in mortgage securities actually worked. In the view of Lewis’ protagonists, who were hedge fund players themselves, these were unfair, insider-rigged “markets.”

And who then, in the Republican-Corporate Democrat ideological framework, will “de-rig” and police them in the future? The settlement happy SEC? Ben Bernanke over at the Fed? How’s the seemingly tough new regulator at the Commodity Futures Trading Commission doing, since that Commission has been given an even bigger job in regulating all sorts of derivatives by the recent “reform” legislation. That would be Gary Gensler, a former Goldman Sachs alumnus, who seems to have developed a different view of regulation than his private sector employer has held over the years. He tells us in a February 11, 2011 New York Times Interview that the CFTC’s tougher stance has encountered a rising sea level from lobbyists: “‘we’ve had about 475 meetings in five months. And since the lobbyists haven’t found us on the weekends (usually), you can do the arithmetic…In America, large institutions have a great deal more resources than the investor advocates…those 475 meetings…90-plus percent are probably larger institutions or corporations.” Here’s the interview at http://dealbook.nytimes.com/2011/02/10/at-center-of-debate-over-derivati...

Revising Lord Acton’s Dictum that “All Power Corrupts…
Let’s seize upon Chairmen Gensler’s recognition that it’s the large private institutions that are exerting the most lobbying pressure on him. It’s a good, concrete way to introduce a theme that we’ve had on our minds as we’ve been reading the Commission Report and also doing some background reading in some old American traditions: such as Gordon S. Wood’s The Creation of the American Republic, 1776-1787 (1969, Winner of the Bancroft and John H. Dunning Prizes), and his later book, The Radicalism of the American Revolution (1991, Winner of the Pulitzer Prize); Norman Pollack’s The Populist Response to Industrial America (1962); Michael Kazin’s The Populist Persuasion (1995); Charles Postel’s The Populist Vision (2007, which also won the Bancroft Prize); Alan Brinkley’s The End of Reform: New Deal Liberalism in Recession and War (1995). We also keep handy, when we want to go a bit deeper into intellectual history, J.S. McClelland’s A History of Western Political Thought (1996), and gave close attention to his 60 page chapter on “The American Enlightenment.”

We’ve been doing this reading for a number of reasons. One is that we were wondering why Lord Acton’s famous 19th century dictum that “All power corrupts, and absolute power corrupts absolutely” seems to have disappeared from present day conservative Republican discourse, or been altered greatly, without attribution, to now read that “only the exercise of governmental power is corrupting.” Yet it’s a bit hard to swallow, this new one-sided aphorism about power, as we work our way through the recent history of Wall Street and subprime mortgages.

At the same time, there is the added context supplied by the rise of the Tea Party, and its even more intense focus on Constitutional originalism, fundamentalism, foundationalism - whatever conservatives want to call it. Whatever the name, it’s intended to function as an even more constricting choke collar on progressive policies and even judicial “pragmatism” than the one at the end of the Federalist Society’s leash. This is nothing new in the long history of American constitutional law, where we can find instance after instance of judicial decisions working to choke off reform movements with legal interpretations crying, in direct and implied ways, that the “founders’ intentions” were being violated.

Perhaps the most frightening thing about Constitutional fundamentalists is their certainty that the answers to the troubles of American society, in whatever era they may arise, can be found in just one document of about 5,000 words in length, and done so quite easily. Garrett Epps, a law professor at the University of Baltimore, reminds us of how this works in the very contemporary setting of sitting Justice Scalia, in his dispute with Justice Stevens in the Citizens United v. Federal Election Commission case. Stevens was asserting a liberal form of “originalism,” arguing that in the founders’ era “most political thinkers distrusted the corporate form of organization. That might be true, Scalia replied, but only because in the eighteenth century corporations were associated with monopoly privileges: ‘Modern corporations do not have such privileges, and would probably have been favored by most of our enterprising Founders.’” Epps comments that “this dishonest contortion exemplifies the problems with ‘original meaning.’ Scalia is essentially saying, ‘They didn’t really know what they thought; luckily, I do.’” (From “Stealing the Constitution” (in the Feb. 7th print edition of The Nation.) Here at
http://www.thenation.com/article/157904/stealing-constitution

With all due respect to both Justices in the above dispute, what we discovered in our own search for the founders’ thinking about abuses of power was that they feared two major forms of it, neither one really focused on private corporations. The first, stemming from their very unhappy experiences at the hands of what was alleged to be (and in fact was) the world’s most “advanced” constitutional monarchy – Great Britain – was to make sure that the exercise of governmental power itself was controlled by a careful separation of powers. The second great fear came later, and was triggered by the democratic forces, and passions, set in motion by their own allegedly “conservative” Revolution itself. This second fear emerged from the new electorates and state governments, like that in Pennsylvania (and not only in the voting booth, if we remember the impact of Shay’s rebellion in Massachusetts in 1786). These “populist” passions were to be restrained and tempered by the various “checks and balances” built into the system. The actual physical seat of the new federal government was to be in a swamp midway between northern merchants and southern planters, a site that couldn’t generate mobs as yet (and for many years to come; some might say not until Jackson’s inauguration) because it didn’t have any residents. (Editors Note: Maryland State Senator and constitutional law professor Jamie Raskin has pointed out, quite accurately, that the Tea Party is named after the incident in 1773 triggered by the abuses visited upon the colonies by the rapacious East India Company, which was a private stock company chartered by Parliament, and which was given a monopoly in America to collect the tea tax, thereby helping it dispose of a huge surplus of unsold tea piled up in its warehouses. But when the founders set about controlling abuses of power in the constitution writing period, the mercantile abuses were subsumed under a broader response to the corruptions of the entire British constitutional system, ironically supposed to be the most advanced of its day by Enlightenment thinkers. Please see the conclusion of this Introduction for a link to Professor Raskin’s essay.)

Timeless Wisdom, Particular Wisdom, or Conspiratorial Wisdom?
We don’t mean to offend Justice Scalia here, and all the other “originalists,” but we didn’t find any one certain, simple interpretation of what the founders and their Constitution was about, especially when it came to checking potential abuses of power. But we did find J.S. McClelland’s handling of these matters in that chapter on “The American Enlightenment” to be most helpful on the power matters before us. He spends quite a bit of time considering the arguments for the Constitution put forth in the famous Federalist Papers, especially in that 10th Federalist one attributed to James Madison. Surely, if any one location would contain insights into the minds of the constitutional authors themselves, then it would be in their contemporary arguments for its adoption. But McClelland says commentators on the Constitution’s own commentary form at least three major schools of interpretation. One he calls the “Thesis of Timeless Wisdom,” which is that the original genius was so great, and so universal, and expressed so well in their sparse 6,000 words (he and Epps seem to disagree on how many words there are, and online sources say 4,400-4,500 – we’re sure that Scalia could clear this up for us…), and in particular Madison’s 10th Paper, which dealt especially with the reality of “factions,” what we today call special interests, and how to control them, that it can explain most of what happens in American politics, even today. And obviously, this “Timeless Wisdom” school would lend itself nicely to the inclinations of someone like Justice Scalia, and other “originalists,” who seem inclined to find most of the answers in one document and just one generation. Timeless and convenient. Could the conservative Republican pursuit of the China trade have led, behind their backs, to an increased tendency towards ancestor worship?

But Professor McClelland adds some, we’re sure, very unwelcome complexities in his handling of the second major school of interpretation, “The Thesis of Particular Wisdom,” which suggests that, implicit in the title, while the founders may have been very wise, and the best minds of their era, what they came up with might not always be able to solve the problems of later times. And he says that this is apparent from the fact that the Federalist commentaries on the Constitution have themselves generated such extensive and ongoing further “commentary,” making it obvious that they “do not speak directly to us.” Consider, he asks, the case of corruption, and the “commonplace view that democratic politics in America has been notoriously corrupt politics. How is this to be explained in the terms of the original model?” After all, he, writes, “the whole of the American case against the British rested on a view of the British political system as having been corrupted by the wealth available to monarchy in the form of places and pensions to buy a majority in the House of Commons. Republican politics was going to be cleaner politics because America was going to have balanced government.” So how in the world did we end up in the late 19th century with U.S. Senators being viewed as the center of corruption emanating from the great corporate trusts, when “the original model is meant to explain why corruption can’t happen?” Going a bit further, McClelland asserts that the Federalist Papers have been, and still are, very influential in explaining how modern day “interest group, pluralist democracy” functions. Or is that “seems to be function,” because, “a model like this cannot explain why some pressure groups are spectacularly more successful than others. Some pressure groups are so deeply locked into government at both state and federal level that it is often hard to tell where government ends and pressure groups begin.”

Well, that certainly has a contemporary ring to it. It also serves as an introduction to his third major school of interpretation about the Constitution and the Federalist Papers, what he calls “The Conspiracy Thesis,” but which he then quickly asks us not to take “too literally.” He steers us back to Madison’s “chief anxiety,” which is “that there should one day be in the United States a majority faction which could permanently dominate all the others for wicked, that is to say levelling, purposes.” (And we all know who the Tea Party’s very, very mistaken nominee is for those purposes.) In Madison’s view, “this dominant faction could only be a faction of the poor and many, and its victim would be the faction of the few and rich,” he says. So “therefore, let there be as many factions as possible and pluralism will be the inevitable consequence…the conventional view says: good for you, Madison, you’ve got it right. The poor will be divided into many factions (and the rich into as least two: the holders of real estate and the holders of mercantile wealth)…” Well, you’ve got to give Madison some credit here, although he wasn’t able to see anything quite like the power of the FIRE sector of 1980-2010 on that colonial horizon quite yet. And then our little known historian of Western Political Thought lowers the boom of reality upon the venerable Mr. Madison: “What this picture of cozy pluralism ignores is the possibility of a faction of all the wealthy against the multiplicity of the factions of the poor.” That’s not a bad description of where we’ve ended up in 2010, close to what William Greider has given us in his “End of New Deal Liberalism” piece, and considering that it was written in 1996, well before our current Supreme Court delivered its further green light for corporate funding of politics via its Citizens United ruling.

These United States: Born and Raised in Debt
Before we leave Professor McClelland’s handling of the “Conspiracy Thesis” about our nation’s founders, we thought we would add just a few more notes of irony, and complexity, to the longed for simplicity of our Constitutional Conservatives and Originalists. Right now, in mid-winter of 2011, the dominant conversation in political economy is about how awful the national deficit and cumulative debt are, and how badly government has behaved in running it all up, Keynes and all his “inadequate demand” believers, like us, be damned. Governments, like private citizens, must break all their recently acquired bad debt habits, goes the Center-Right narrative, reinforced by the President’s kitchen table metaphors, just like the ones we’ve been warning about for almost two years now. But wait just a minute, debt would seem to have a prouder tradition in America than today’s austerity conservatives want to tell us about. McClelland puts it this way:

Before independence, there was always a shortage of cash in the colonies; everybody lived on credit, and discounting bills of exchange (roughly, dubious cheques) became a special art in American economic life. These circumstances, and the fact that many borrowed the passage-money to America and to pay for the stock of a trade, or a farm, meant that debt had a very special place in American life…In the twentieth century we have become so thoroughly colonized by the idea that inflation is a bad thing that we tend to forget that it is a very good thing indeed for people in debt whose debt is expressed in money terms. Imagine a situation in America in the late 1780’s in which all the states got out the printing-press and began to pump paper money into their economies and passed legal tender acts to make acceptance of rag-money compulsory. Inflation would soar…and the value of debts would begin to go down spectacularly…Abolition of debt was seventeenth-century Commonwealth social levelling by any other name.

And that brings us back to Madison’s “chief anxiety,” that the poor “faction” would gain the upper legislative hand and do their leveling by inflating the debt away. It also brings us to McClelland’s mention of Charles Beard’s 1913 classic, An Economic Interpretation of the Constitution, which strongly suggested that the founders were not themselves quite the party above all factions, many having powerful interests in land speculation and the future handling of the old federal and state paper debts, and we all know what they were worth (“not worth a continental”) until Mr. Hamilton came along with his plan to buy them up at face value, and issue new federal debt in their place, which would require some banking institutions. The founders, then, were playing the initial role of “sound money” men, ready to put a clamp on runaway inflation, and binding the most prominent citizens of the colonies to the new government, and protecting their new bond interests. While Mr. Hamilton and Mr. Madison were actually on the level, and honorable in their intentions and their conduct throughout this very dicey period, some others were not, and were in fact, deeply involved in a debt speculation conspiracy, and that’s how Steve Fraser tells the tale of William Duer (and accomplices), who “became America’s original Wall Street speculator.” (From Everyman A Speculator: A History of Wall Street in American Life, 2005.)

The First Wall Street Speculators: Insider Trading and Cornering the Old Debts
Duer was busy at many levels, both during and right after the war ended in the 1780’s. He was busy scooping up those worthless continentals “and pay warrants he’d purchased from impoverished war veterans,” and “buying up abandoned Tory estates in the Hudson Valley…He was part of an organized syndicate of such speculators who managed to corner the supply of this paper as well as the outstanding securities of hard-pressed state governments, especially in the South.” When he served on the Treasury Board of the Confederation government “he regularly passed on inside information to his agents on matters affecting the price of these securities” and then managed to become assistant secretary of the new Treasury under Hamilton, where he continued with his insider trading, despite being warned and rebuked by Hamilton. It all collapsed for Duer in the spring of 1792, as well as for his “co-conspirators,” which “included members of New York’s great dynastic families: the Livingstons, the Roosevelts, the Macombs.” But things didn’t go badly for just the conspirators; the collapse “ignited a panic. Real estate prices plummeted, credit tightened, and housing starts stopped.” And that leads Fraser to comment, rather dryly: “And so ‘the Street’ made its first appearance on the dark side of the American imagination, where it would remain for some long time to come.” (All quotations from the first chapter.)

So you never know what you’re going to find when you go looking into the history of America’s founding constitutional generation. We went searching for their “instruction” on how to control abuses of power, and which “factions” they thought might be most likely to be abusers, and we came away wondering whether that founding generation will be of much help in the problems we are facing today, in 2011, with what we believe are our great, almost unbelievable abuses of private financial power on the way to 10 million foreclosures and no plan to “Save Pvt. Ryan.” Without taking anything away from the founders’ achievements - a democratic republic and a very durable, written Constitution - it is a fair and open question as to why the champions of today’s existing corporate power structure and inequitable distribution of income, that have brought us 10% unemployment and all those foreclosures - want so badly to reduce the scope and policy range of what our federal government might do to alleviate these conditions, as it once did to good, but far from perfect effect, during the Great Depression. Constitutional conservatives don’t seem interested at all in transferring Madison’s concepts of separation of powers and checks and balances to effective action against abuses of private power. Perhaps that’s because, in the theories of the Chicago School of economics, and free-market fundamentalism, and we’ve seen this in the already quoted words of former Fed Chairman Alan Greenspan, the market is self-correcting, and produces its own form of self-discipline. We hope that our review of the conclusions of the Financial Crisis Inquiry Commission Report, and its scathing attention to the thoroughly discredited views of Mr. Greenspan, might lead us all to consider how to construct better separations of power and checks and balances against those economic forces which have proved to be so destructive to so many of the American people.

Who is really Sovereign: No Checks and Balances on “Bond Vigilantes?”
But this will be no easy task. After all, isn’t it almost a cliché of our era of Market Utopianism and Globalization that the sovereignty of national states has been vastly eroded by the power of international financial markets, the worst sense of which is captured by the awful term, the “bond vigilantes.” But if that is true, and also in the sense that it has taken away the freedom of economic policy choice from elected governments – which really is the intent of those financial markets and the conservatives and corporate Democrats who cheer them on – then haven’t we also taken away the sovereignty of the rest of the people who elect these governments? And why wouldn’t Madison and company be cheered on by that development, seeing in it just a grander application of his checks and balances upon the passions of the people, and the relief of his “chief anxiety,” that they might engage in a little “debtor leveling?”

We’ve written before, in Part I of “No Saving Private Ryan This Time” that we thought highly of William Greider’s article “The End of New Deal Liberalism,” something to keep in mind as we read about the zigs and zags of Corporate Democrats in power. Bill doesn’t try to paper over the difficulties of Progressives under these circumstances, now that’s its clear that we don’t have a friend in the White House. Indeed, “reformers today face conditions similar to what the Populists and Progressives faced…” He then follows with a list of conditions, none of which are pleasant to contemplate. Near the end of the article, he has some advice for left-liberals, who “need to start listening and learning – talking up close to ordinary Americans…We should look for viable connections with those who are alienated and unorganized, maybe even ideologically hostile. The Tea Party crowd got one big thing right: the political divide is not Republicans against Democrats, but governing elites against the people…We have more in common with small-business owners and Tea Party insurgents than the top-down commentary suggests.”

Now we think this is good advice, to keep talking, trying to find allies across the divides, especially with small businesses. It reminds us of the last book of what the late John Kenneth Galbraith considered his “central trilogy,” after The Affluent Society and The New Industrial State, according to his biographer Richard Parker. And that would be Economics and the Public Purpose, from 1973, something we have come to see, in light of Parker’s comments, as something of the last major effort from the left to think and propose systematically for a different economy, a poignant effort when one considers that despite the book’s success, the intellectual economic tide turned decisively against Progressives during that decade, and well beyond it, right through to the present. In light of Greider’s recommendations, here’s what caught our attention from this forgotten work from the dismal 1970’s: “…Galbraith called for increased public support for small business and for most American workers, which functioned outside the planning system of the giant corporations…His call was for ‘actions by the state to provide the small firm with research and technical support, capital and qualified talent {to}reflect not preferential but compensatory treatment…to reduce the inherently unequal development as between the two systems.’” (From John Kenneth Galbraith, 2005, Page 514.) Now some of the other recommendations Galbraith made still have great relevance for today – some we like and others we don’t – but the other thing that caught our attention was that the economics profession, in its various journals, “for the most part ignored it.”

Today, these types of supports and interventions into the structure of the economy are galaxies away from the “Chicago School” world of Barack Obama and his silent side-kick Cass Sunstein - someone we hope to say more about in the near future. We’re trying to imagine what Progressives could offer to small businesses that might undercut the Republican’s Right’s willingness to serve up the usual: more tax cuts and fewer regulations. (And the President has offered his own “moderate Republican” version of this. It’s no coincidence that the gifted law professor Sunstein ended up at the crossroads of governmental regulation – as head of the Office of Information and Regulatory Affairs, OIRA, at the OMB.) Getting one part of the business world to side with governmental interventions against another – breaking up the large banks, for example – or designing an effective health care bill – has proven to be a very tough sell.

Almost as tough as finding common ground with the Tea Party itself. Greider sees the opening for that ground in their “governing elites against the people” stance, but the Populist movement did not view the possibility of governmental action against those elites with anything remotely resembling the steam and horror that the Tea Party spouts with. And at the time when these two movements were most active, 1890-1914, there was hardly a regulatory bureaucracy in existence to speak of, for good or ill. The Progressive movement certainly was counting on “disinterested” public service from its elite ranks, “the best men,” in the new public agencies as they emerged. We strongly suspect Bill Greider is thinking of common ground against the Federal Reserve, like the Bernie Sanders-Ron Paul led effort in 2010 to bring it into fuller public disclosure. And that alliance made sense, but would there be any further common ground between the left and right, including the libertarians, on more democratic control of the Federal Reserve, when two-thirds of this theoretical coalition don’t see any mission for it, or which would strip it entirely of its already faux commitment for something well short of “full employment?” Such an alliance is very hard to see because of the enormous ideological divergence between the left and the right on the role of the government in the economy. To us, at times, that divergence seems as great, and as freighted with fateful significance as the one that faced the United States in the 1850’s. (And that’s with a weak left; what would the tensions on this point be with a strong left? Don’t look now, but you have the explanation for why organized labor is standing outside the White House with its trouser pockets turned inside out. You were expected something else from Cass Sunstein’s “libertarian paternalism?”)

We want to close this Introduction, which has taken on the form of an unintended “essay” itself, by recommending an excellent article by one of Maryland’s own state senators, who is also a constitutional law professor, Jamie Raskin. He takes a close look at “What the Tea Party’s Really Serving America” through an article he wrote earlier this winter for the group “People for the American Way.” It matches our own forebodings about what the constitutional conservatives intend to do, and where they would take us, and measures the “populism” of the Tea Party against the real thing, the Populists of the 1890’s. We hope that Bill Greider takes a look at it too, and wonder where he will find the common ground with a movement that wants to overturn constitutional amendment after amendment for what sure looks to be the serving of corporate interests. Here’s Professor Raskin’s article at
http://www.pfaw.org/media-center/publications/corporate-infusion-what-th...

And now on to Part II of “10 Million Foreclosures: No Saving Pvt. Ryan This Time.”

All the best to our readers,

Bill Neil
Rockville, MD
w.neil@att.net

10 MILLION FORECLOSURES: NO SAVING PVT. RYAN THIS TIME PART II

Back to ’Bama
At the end of March, 2010, Matt Taibbi once again put his skills to work in Rolling Stone magazine covering a domestic financial catastrophe in Jefferson County, Alabama, centered on revenue raising in 2002-2003 with Wall Street’s “help,” and many greedy and corrupt local political hands, to pay for a major sewer plant upgrade for the city of Birmingham. (We should add that we covered the story of municipal financing gone bad through Wall Street deals, including the Jefferson County disaster, in our essay The End of an Era, Part I, published in June of 2008, based on fine work from Bloomberg reporters Martin Braun and William Selway and a “heads up” from Pam Martens). Although Bear Stearns, Lehman Brothers, and Goldman Sachs also played a role, the financing “star” in Jefferson County was JP Morgan Chase, who ended up with “the largest swap agreements in the bank’s history – and was charged with fraud by the SEC in November of 2009, but, no surprise, ended up settling by canceling the $647 million in termination fees it was charging for the county breaking the deal, and agreeing “to pay a $25 million fine and fork over $50 million to assist displaced workers in Jefferson County.” Here’s the link to Taibbi’s story at
http://www.rollingstone.com/politics/news/looting-main-street-20100331.

Although Taibbi left his readers with the impression that Jefferson County, Alabama had been reduced to a “Third World” country – financially, at least – the story really doesn’t end there. There are other leads in Taibbi’s account that feed back into a broader national pattern of behavior by Wall Street banks. Amazingly, bankers at JP Morgan paid bribes not only to the local middle-men to get their share of the business with Jefferson County, they also paid $3 million to make Goldman Sachs go away and leave the best local pickings to them. That prompted Taibbi to get a quote from Christopher Taylor, who was the executive director of the Municipal Securities Rulemaking Board from 1978-2007. Taibbi is indignant: “That such a blatant violation of anti-trust laws took place and neither JP Morgan nor Goldman have been prosecuted for it is yet another mystery of the current financial crisis.” Then he lets Taylor lower the boom: “‘This is an open-and-shut case of anti-competitive behavior…’”

Financial Products from Beverly Hills
Taibbi also mentions the firm CDR Financial Products, of Beverly Hills, California, which was supposed to be advising Jefferson County on the financial “advisability” of the deals with the banks, the ones that went “south,” leaving the county with $3.2 billion in bond debt, “not including fees, interest and penalties,” according to a local Birmingham reporter. CDR manages to stay out of the legal entanglements flowing out of this county’s woes, but isn’t so lucky, as we will soon see, at the national level.

We knew, from our own clippings, that many local figures from Jefferson County had been indicted, and that one of the central ones, former president of the county commission and sitting mayor of Birmingham, Alabama, Larry Langford, had been found guilty on 60 counts of bribery and corruption in a federal trial on October 28, 2009, facing up to 800 years in prison. But we had lost track of what was happening, if anything, to the JP Morgan bankers, and indeed, the firm itself. That’s when we came across the article by on-the-scene journalist Kyle Whitmire, from November 20, 2009, asking “Can Jefferson County break the bank?” Needless to say, we were intrigued by that title. And we weren’t disappointed, because it contained a number of new leads and additional revelations.

Reporter Whitmire Pulls on the loose JP Morgan Threads
The first is that Jefferson County has filed suit against JP Morgan itself in Jefferson County Circuit Court, in November of 2009, asserting that “corruption and fraud” were involved in leading it down the path of its unbelievable indebtedness. The second was that the federal government had filed charges against CDR for collusion and bid rigging, working with banks to “inflate fees in exchange for more lucrative business.” The third was that the SEC filed charges against two former directors of J.P. Morgan Securities, Charles E. LeCroy and Douglas W. MacFaddin, on November 4, 2009, charging them with “fraud in connection with (a) unlawful payment scheme to obtain municipal bond and swap business” (from the SEC Litigation Release No. 21280.) Next came the even more dramatic findings and context from reporter Whitmire, posting online for the Birmingham Weekly:

Federal investigators probing public corruption in Philadelphia had wiretaps on the bankers’ phones. Recorded conversations among the two bankers and some of their coworkers suggest blatant acceptance of and participation in public corruption here in Jefferson County and possibly elsewhere. In 2005 LeCroy pleaded guilty to two counts of wire fraud in connection to public corruption in Philadelphia. He has since spent time in prison and been released…Retired investigators have told the media about a massive multi-agency investigation into JP Morgan and CDR, but that investigation has yet to result in any indictments other than CDR. Were an investment bank, such as JP Morgan, to be indicted, it could lose its securities licenses in most, if not all, states.

Now we know that the SEC quickly settled the Jefferson County, Alabama case – at least the attempt by the bank to collect that $647 million in termination fees - as reported in Taibbi’s article from the early spring of 2010, but the SEC chose to continue the prosecution of two of the bank’s “former directors,” so the new question that is raised by Whitmire assumes even more significance: how many bank officers can get in legal trouble before the firm itself faces institutional sanctions, like the loss of securities licenses? As we’ll soon see, it’s hardly an academic question, as laid out for us by the federal Justice Departments prosecutions of numerous bankers and several advisory firms like CDR in “the biggest criminal conspiracy in the history of the 198-year-old municipal finance market” according to Bloomberg News reporters Martin Braun and William Selway. With the national financial news dominated by the legal wars erupting over the foreclosure fiascos, and the emergence of the related MERS outrages, it’s been easy to overlook what has been coming out of the Department of Justice, quietly, on the rigged “bids on auctions for so-called guaranteed investment contracts, known as GICs.” So now we turn to yet another chapter in the seemingly endless saga of how Wall Street banks have made a serious, perhaps successful bid to become the sovereign power in American politics, courtesy of Bloomberg reporters William Selway and Martin Braun.

Rigging a Market You’ve Never Heard Of: Guaranteed Investment Contracts Somehow the titles from the two articles delivering the further bad banking news seem like they could have been from a tabloid at the supermarket: State Finances Rigged in Conspiracy by Banks, Advisers, (ten pages, May 18, 2010) and Bankers Rigging Municipal Contract Bids Admit to Cover-up Lies (seven pages, November 24, 2010), but instead, they are from the very core of respectable business journalism itself, Bloomberg News. The titles, and the authors, aren’t responsible for the luridness in this case; it’s the facts of the matter that can’t be dignified with the usual euphemisms for financial misconduct. And for once, as the nation rings with cries and questions about if and when senior white collar mortgage fraudsters are going to go to jail, the United States Justice Department has quietly, far too quietly in our opinion, gained guilty pleas from eight individuals from three different banks in federal court proceedings in Manhattan.

Here’s the essence of the story as told by Selway and Braun. When municipalities and states sell their bonds to raise money, the proceeds, which can amount to $400 billion in just a year’s worth of issuances, are placed into accounts which are managed by public bids on auctions for what are called “guaranteed investment contracts” or GICs, which are similar to certificates of deposits, without the rates being made public. These Bloomberg reporters explain that “The U.S. Treasury Department encourages public bidding for GIC contracts to ensure that localities are paid proper market rates.” But what happened was that the middleman-go-between firm, CDR, “gave false information to municipalities and fed information to bankers allowing them to win with lower interest rates than they were otherwise willing to pay…banks took their illegal gains from the additional returns and paid CDR kickbacks according to the indictment.” But that wasn’t bad enough: “CDR helped arrange deals in which financial firms took millions of dollars in profits from GICs, Bloomberg News reported in October of 2006. Almost all of the deals were shams: As much as $7 billion in bond-issue proceeds were invested in GICs but never spent for the intended purpose of providing services to taxpayers.”

The scope of the conspiracy is breathtaking, including “more than 200 deals involving about 160 state agencies, local governments and non-profits.” Selway and Braun quote Steven Feinstein, a professor of finance at Babson College in Wellesley, MA, who says that “municipalities have lost more than $1 billion because of bid rigging,” and ‘that money, instead of going to citizens, goes to Wall Street Banks…’” And to give you a further, clearer sense of the sweep of this rigged system, and the indictments, here is the playbill for the banks, outlined in the May 18, 2010 article:

At least five former bankers with New York based JP Morgan… conspired with CDR to rig bidding…according to the Justice Department list now under seal. At least three other former JP Morgan bankers are targets of the investigation, according to filings with the Financial Industry Regulatory Authority. Six bankers with Bank of America…are also named in the sealed Justice Department list as participants…Eighteen employees at 16 other companies, including units of General Electric Co., UBS AG and FSA…are also cited as co-conspirators by the Justice Department… None have been charged in the case.

The case against the banks and the “advisory” firms covers the years 1998-2006. Bank of America obtained “amnesty” from prosecution by agreeing to cooperate with the Justice Department, and has been providing evidence since 2007, and apparently the key witness was a Bank of America employee. The SEC is also pursuing a parallel investigation of the same firms. And the city of Baltimore, along with six other municipalities has filed a civil lawsuit against “Bank of America, JP Morgan and nine other banks.” We are also reminded in the May 18th article that JP Morgan went worldwide with its complex swap proposals to help governments raise money, and the results weren’t so different for the “Umbria” region of Italy. (In fact, reporter Kyle Whitmire wrote, on November 20, 2009: “In Milan, Italy, prosecutors are accusing JP Morgan, among other banks, of engaging in practices conspicuously similar to what transpired in Jefferson County. Public officials there are accused of conspiring with investment bankers to sell the city derivatives it didn’t need, swaps that created a tumultuous debt structure. The Italian government has seized JP Morgan’s assets in that country until the matter has been settled in court.” From
“Can Jefferson County break the bank?”)

It must be tough being a journalist on the Wall Street crime beat, trying not to generalize and ask the deeper questions that arise as one covers situation after situation that looks like it has elements of systemic fraud – in this instance a conspiracy to rig markets. With MERS we’ve seen a law professor testify that its corporate structure is arguably “fraudulent…” – and watch as case after case is either settled, and, in the realm of the mortgage subprime industry, no one ever seems to go to jail. So we’re not going to be the ones to be too hard on Selway and Braun as these all-too-obvious tensions begin to break through the restraining walls of “fair and objective” journalism. Thus they write in that November 24th, 2010 article for Bloomberg Magazine that the “U.S. Government has scorned Wall Street for packaging and selling subprime mortgages that played a central role in the longest recession since the Great Depression.” Yet “only four bankers have been criminally indicted; two were convicted, the other two acquitted.” And they hint at what seems apparent to us from a close examination of their own language in these two long articles about the rigged GIC “markets”: “Details of the scope and depth of this nationwide financial conspiracy are coming to light almost without notice, as one defendant after another appears to face justice.”

We hope we haven’t strayed too far from our main focus, which is on the lack of accountability in the mortgage-foreclosure crisis, but we thought it was important to follow additional evidence trails on what the major banks have been up to in some other markets, like interest rate swaps for local governments and the guaranteed investment contracts one. And we do confess that we are perhaps making an indirect appeal to you, the jury, by covering some of these other banking “achievements,” as we now proceed to zero in with answers to the question of why so few criminal charges have been brought, and jail sentences handed out, over the entire range of conduct in the subprime lending story.

Banks: No Cumulative “Points” for their bad “Driving” habits
And it does seem to us more than a little bit unfair that Wall Street banks don’t appear to accumulate “points” from cumulative bad behavior, as we average automobile drivers do, for getting tickets and other citations, something beyond the various forms of rebukes and “settlements” the SEC seems so fond of handing out. But we’ll have more to say on that later on in the essay. For now, let’s go back to mid-January of last year, 2010, when Sewell Chan of the New York Times wrote an article entitled “Panel Told of F.B.I. Efforts to Fight Financial Crime.” The panel here is none other than Chairman Phil Angelides’ Financial Crisis Inquiry Commission, and the “star witness” of the day, on January 14, 2010, was Attorney General Eric H. Holder. According to Mr. Holder, the Department of Justice “was working to hold accountable those who had contributed to the near collapse” of the financial system. “ ...In that vein, Mr. Holder said, the F.B.I. was investigating more than 2,800 mortgage fraud cases, almost five times as many as the 534 inquiries in 2004. The efforts to fight financial crime, Mr. Holder said, will foster confidence in the system.” (Our emphasis).

By August of 2010, the confidence “meter” was pointing towards “empty.” Mary Bottari of the Center for Media and Democracy and www.BankstersUSA.org, was asking on the Huffington Post “Will Perpetrators of Financial Crimes Ever Face Justice?” She too was troubled by settlements, settlements, settlements: 16 big ones over the past two years “amounting to some $1.6 billion in fines and restitution and $13 billion in buybacks of auction-rate securities that were represented to be as safe as cash.” She has noticed that judges are beginning to be vexed by the pattern of “no admission of wrongdoing, earnest promises to do a better job and a fine representing a fraction of the infraction.” Three in fact have rebuked prosecutors “to demand stiffer penalties against the banks.” Bottari has also headed in a direction we will say more about later, one that will make it easier for citizens to form sound conclusions: pulling together a cumulative file on the settlements and judgements against the large banks, in brief outline fashion, in chronological order, for each of the banks. Here’s the link to her article at http://www.huffingtonpost.com/mary-bottari/will-perpetrators-of-fina_b_6... .

This is a Financial Fraud Enforcement Task Force?
But the flood of accounts throughout the fall about the foreclosure nightmares and the absence of major prosecutions apparently has had some effect, if only to force a defensive acknowledgement of the charges, because on Monday, December 6, 2010, Attorney General Holder held a press conference heralding “the numbers” of criminal and civil prosecutions by President Obama’s Financial Fraud Enforcement Task Force, given new urgency by a program called “Operation Broken Trust.” But it doesn’t seem like the hype worked; journalists weren’t buying the story line. Andrew Ross Sorkin, no economic populist, threw cold water on the announcements with a December 7th article in the NY Times, “Pulling Back The Curtain On Inquiries.” He liked the slogan, but “after you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms…paying any attention to Mr. Holder’s ‘strong message?’ Of course not.” Two days later, a guest columnist in the NY Times from Pro Publica, reporter Jesse Eisinger, threw more cold water on Holder’s attempt to pump hot air into the “strong message” balloon: “All the hype carries an air of defensiveness. Everyone is wondering: Where are the investigations related to the financial crisis?” The investigation getting the most press coverage, instead, is the “insider trading” one centered on hedge funds. If hedge funds have committed crimes then fine, investigate them; but it really does look like it fits the title of Eisinger’s story: “Prosecutors Stage a Sideshow, While the Big Tent is Empty.” And it goes along with what we have just told you about in the Bloomberg coverage of the vast bid-rigging conspiracy for Guaranteed Investment Contracts, GICs, where there are lots of bankers being indicted, and some pleading guilty, but the bank names are blanked out, records are “sealed,” and the guilty pleas are dribbling out, one by one, not connected to the banks’ dangerous swap schemes for government financing in Alabama, and Pennsylvania and “the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and more than five hundred other municipalities in Italy…according to Matt Taibbi’s March 21, 2010 piece in Rolling Stone.

It seems to us that the year 2004 keeps popping up whenever someone begins asking why so little has happened to prosecute those responsible for mortgage fraud – especially the more senior corporate officers. 2004 has become the baseline date to demonstrate how early in the subprime crisis timeline alarm bells were going off, and adding a touch of incredulity that even by late 2010, so few senior executives from the originators and banks have been indicted, much less convicted. And so Sewell Chan in his January, 2010 article writes that Chairman Angelides of the Financial Crisis Panel asked Attorney General Holder “about reports that the head of the F.B.I.’s criminal division had warned in September of 2004 of an ‘epidemic’ of mortgage fraud, that, if unchecked, could match the saving-and-loan crisis of the 1980s in magnitude.” It’s William K. Black, once again, however, who has some pretty clear ideas about where the F.B.I.’s efforts have gone astray, since 2004, writing they have partnered with the Mortgage Bankers Association (MBA) in portraying the bank lenders as the victims of fraud, and the borrowers as the fraudulent parties, and producing a poster (2007) to be displayed in bank offices “warning borrowers that the FBI investigates mortgage fraud by borrowers.” That’s a quote from one of his major articles from the fall of 2010 (“Lenders Put the Lies in Liar’s Loans, Part 2”). Black has emerged as the most consistent and powerful voice in 2010, turning up the heat on the failed government efforts to bring white collar financial criminals to justice. So it behooves us to take a closer look at Black’s thinking about what has gone wrong, who to blame, and how to structure the investigations.

William Black has had extensive experience as a government regulator, at ground zero during the Savings and Loan disaster in the late 1980’s and early 1990’s, and has written a book (2005) about white collar financial crimes. Black has pioneered in the use of two concepts, “control fraud” and “accounting fraud,” which are used by senior management to breach and then control for criminal purposes the usual standards of risk assessment and bookkeeping safeguards that would normally have alerted management to, for example, the breakdown in underwriting standards for mortgage loans.

Wm. Black on Accounting Fraud, Control Fraud, and the Failure to Prosecute
Black wrote two articles in October, 2010, co-authored with L. Randall Wray, a colleague at the University of Missouri, Kansas City, entitled “Foreclose on the Foreclosure Fraudsters: Put Bank of America in Receivership, Part I,” on October 22, followed by Part II just days later, both on the Huffington Post. Part I was written just a week after the settlement of the SEC charges against Countrywide Financial’s three top executives, the most famous of whom was Angelo Mozilo, with the financial costs extracted from the individuals widely seen as inadequate, and of course, there being no admission of guilt. The former president of countrywide, David Sambol, was, however, barred from serving at a public company for three years, according to Gretchen Morgenson’s front page account in the New York Times on October 18, 2010, with Mr. Mazilo agreeing to be “permanently banned.” That was no financial hardship for someone who is 71 years old and whose total compensation from 2000-2008 was reported to be in the neighborhood of $521 million. So what’s a $67.5 give-back to the SEC from that take, with Countrywide picking up $20 million of it from prior legal commitments?

Black and Wray call the SEC’s settlement “grossly inadequate,” and lay-out a blistering account of why what went on at Countrywide (and indeed, throughout “every step in the home finance food chain.”) deserves much sterner legal punishment, and, at the final level of institutional remedy, receivership for banks at the top of the “food chain,” starting with Bank of America. They begin by reciting from a list of major institutions which have looked closely at Countrywide’s practices in originating mortgage loans:

...every aspect of Countrywide’s nonprime mortgage operations that has been examined by a truly independent body has found widespread fraud – in loan origination, loan sales, appraisals, and foreclosures…We have been amazed that… the administration, the industry, and the financial media act as if this is acceptable…Countrywide…has defrauded more people, at a greater cost, than any entity in history. Bank of America chose to purchase Countrywide at a point when it – and its senior leaders – were infamous. Bank of America made some of these Countrywide leaders its senior leaders…Bank of America…is responsible for its frauds…

We need to remember that when Black and Wray were writing this piece, in the fall of 2010, the press has been filled with tales of foreclosure horrors, including the lost mortgage notes and folders by the foreclosing institutions. Our authors are writing then, to call for deeper, more systemic remedies to the epidemic of fraud at the root of the both the foreclosure crisis and the more general financial crisis out of which it grew. In addition to criminal prosecutions, they call for placing the culpable institutions in receivership, the ones who have been “run as ‘control frauds,’” and for a nationwide moratorium on foreclosures “until the banks and servicers adopt corrective steps, certified as adequate by the FDIC, that will prevent all future foreclosure fraud.” That may be quite awhile, as our readers by now know from our account of MERS and all its problems. Black and Wray help make the crucial connections between the numerous fraudulent practices of the home lending “food chain” and the outbreak of “foreclosure fraud” in the fall of 2010: “Foreclosure fraud is an inevitable consequence of the underlying ‘epidemic’ of mortgage fraud by nonprime lenders, not a new, unrelated epidemic of fraud by mortgage servicers with flawed processes…Foreclosure fraud is the only thing standing between the banks and Armageddon.” (Our emphasis.) No wonder, given the almost unbelievable chain of connections in the mortgage-financial crisis, the language employed here is tending towards the Biblical: “For the sake of our (and the global economy), our democracy, and our souls this willingness to allow elite control frauds to loot with impunity must end immediately.” The third remedy they call for is, once again, to gradually break up the “too big to fail” financial firms, which they call SDI – systemically dangerous institutions.

In Part II, they spend a good portion of the article answering the question: “Who is Guilty?” – the lenders or the borrowers, which, although they use slightly different language, is yet another extended exercise in what one of our favorite academics, James E. Morone, calls the Great American Moral Dialectic: Who to Blame When Things Go Wrong, the individuals (the borrowers) or the system (the lenders). Although the authors make it clear that some individual borrowers, like the speculators who claimed six different houses as their primary residences, and who had the sophistication and inside knowledge to game their numbers to satisfy the key ratios of “LTV” (loan to value) and “income to debt” which are hurdles fraudsters must clear, most of the millions who got subprime loans were following the guidance of the lender and had nothing approaching the knowledge necessary to fudge the numbers so that they appeared to have “at least minimal coherence.” And then there were the inflated appraisals, something totally out of the control of the borrowers, but subject to lots of formal and informal pressures by the lenders. In yet another article, he cites the case that then Attorney General Andrew Cuomo brought against Washington Mutual (WaMu), as reported in the Seattle Times of November 1, 2007: “‘By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion…First American and eAppraiselT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike.’”

Black and Kahr Struggle over the Balance Scales of Justice
Because Black realizes just how important this struggle for establishing “guilt,” or “blame” is in the “court” of public opinion, he (without co-author Wray this time) devotes two more articles to the topic: “Lenders Put the Lies in Liar’s Loans, Part I (Nov. 8, 2010) and (same title), Part II, November 10, 2010, which appeared on the Huffington Post as well as Benzinga.com. His “foil” in these articles is Andrew Kahr, the former subprime lending pioneer for credit cards who created Providian Financial Corporation, in the late 1990’s. Kahr has written a very contemporary article in the journal American Banker with the title “Spread the Word: Lying to Banks is Illegal,” which unfortunately, isn’t available without subscription, so we have to rely on Black’s commentary. While Kahr is busily trying to shift the blame onto millions of allegedly fraudulent individual borrowers for lying on their applications, he is also arguing how “irrational” it would be for lenders to have made so many poorly underwritten loans because they are bound to lead to enormous losses later. As Black states, with tongue in cheek, “No honest bank would operate in the fashion Mr. Kahr described as being characteristic of nonprime mortgage lenders.” But what is really going on is Mr. Kahr is unintentionally (Black writes “one cannot compete with unintended self-parody”) describing the very purposeful behavior which is characteristic of control fraud and accounting fraud directed by corporate leaders and carried out as the (sometimes unstated, but implied) policy of the firm, but which Mr. Kahr is trying to pin entirely on the lying borrowers; all those fraudulent loans then had to be misrepresented to sell them to the infamous GSE’s, because “the obvious point, ignored by Mr. Kahr, is that the banks could not lawfully sell endemically fraudulent loans to Fannie and Freddie.”

Professor Black closes out the article by reminding readers that Mr. Kahr’s Profidian was accused of “widespread deception in order to enrich itself at customer’s expense…and “paid record fines to settle these charges…” before “WaMu purchased it.” Quoting from the San Francisco Chronicle’s series on the case in 2002, Black mentions an internal memo from Kahr from 1999 which the government puts to good effect: “‘Making people pay for access to credit is a lucrative business wherever it is practiced…Is any bit of food too small to grab when you’re starving and when there is nothing else in sight? The trick is charging a lot, repeatedly, for small doses of incremental credit.’” It’s apparent, as we’ve been pointing out in other cases, that Mr. Kahr’s troubles with government agencies and the subsequent settlements over Profidian’s actions have been no detriment to his writing a major article, in a major industry’s journal, to attempt to shift the blame in the great accountability crisis which has emerged from the foreclosure troubles. It’s also clear, thanks to Bill Black’s caustic articles, that Kahr has no clue about the nature of accounting and control fraud inside financial institutions.

Now here are the links to the four articles:

http://www.huffingtonpost.com/william-k-black/foreclose-on-the-foreclos_... (Part I, “Foreclose on the Foreclosure Fraudsters…” Oct. 22, 2010)

http://www.huffingtonpost.com/william-k-black/post_1115_b_772820.html (Part II, Foreclose on the Foreclosure Fraudsters, Oct. 24, 2010)

http://www.huffingtonpost.com/william-k-black/lenders-put-the-lies-in-l_... (Lenders Put the Lies...Part I, Nov. 8, 2010)

http://www.huffingtonpost.com/william-k-black/post_1243_b_781593.html
(Lenders Put the Lies…Part II, Nov. 10, 2010)

Morgenson Misses Mark on Countrywide’s Business “Model”
The same might also be said for Gretchen Morgenson’s New York Times article from October 18, 2010, the day after the SEC settlements with the officers of Countrywide were announced. Looking back at it (and we generally like her work) after having been “to school” with Professors Black and Wray, she paints Mozilo as the horrified CEO who discovers what his other chief officers, including former president David Sambol, have been up to. Morgenson cites two April, 2006 Emails from Mozilo, the first of which is directed to Sambol: “‘In all my years in the business, I have never seen a more toxic product,’” he wrote “referring to loans that allowed borrowers with poor credit histories to buy homes without putting any money down.” Later, in a broader Email, he writes that he had “‘personally observed a serious lack of compliance within our origination system as it relates to documentation and generally, a deterioration in the quality of loans originated.’” So who was responsible for these trends; if not Mr. Mozilo then Mr. Sambol and Eric Sieracki, former chief financial officer – the others charged by the SEC? Given everything that Black says others have gone on the record with about Countrywide, it’s hard to take what Morgenson writes at face value without raising the questions of control fraud and accounting fraud. If things were that bad in Mr. Mozilo’s eyes, why did Countrywide send these loans on for securitization to the banks, and later to Fannie and Freddie? And presumably, although it’s not mentioned in the article, Mr. Mozilo did not immediately fire the senior officials that allowed these shocking, shocking failures of underwriting standards to flourish.

The Prospects for Justice
And that brings us to Mr. Black’s summary article from late December, 2010, looking ahead to what will happen in 2011 – “2011 Will Bring More De facto Decriminalization of Elite Financial Fraud,” which appeared at the New Deal 2.0 site. The article cuts in two directions at once: pessimism over the fact that the “FBI and the DOJ (Department of Justice) remain unlikely to prosecute the elite bank officers that ran the enormous ‘accounting control frauds’ that drove the financial crisis” and optimism that “the media …has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud,” and “prominent economists” are pointing it out too. If the momentum keeps building in these directions it increases the chances to bring legal accountability, and the possibility of bi-partisan action in Congress, as there was during the earlier Savings and Loan crisis.

But the hurdles in getting there are high. Black quotes an article suggesting that Benjamin Wagner, a U.S. attorney who is actively prosecuting mortgage fraud cases in Sacramento, California, still has no idea about accounting and control fraud, quoting him as saying “‘It doesn’t make any sense to me that they would be deliberately defrauding themselves.’” My, my: that’s right up there alongside Andrew Kahr’s views in his American Banker article. Black also acknowledges those hurdles by indicating that the FBI, aside from their reliance on the Mortgage Bankers Association for “guidance and support,” what he calls “the trade association of the ‘perps,’ instead has to get guidance from the regulators themselves, with referrals acting as “roadmaps” to successful prosecutions. Getting more specific, Black says there are three things necessary to overcome the “intellectual blinders that have caused DOJ to mischaracterize the nature of mortgage fraud,” and to be effective “against the epidemic of accounting control fraud: “First, DOJ needs to realize that it is dealing with accounting control fraud…Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies…Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6(e))…”

Now, nearly one month after Black’s late December article there are no signals from an increasingly conservative and pro-business White House that it intends to follow any of Black’s advice; certainly it’s hard to imagine Obama’s new chief of staff, William M. Daley, fresh from heading JP Morgan Chase’s euphemistically named Office of Corporate Social Responsibility, “whose most important function was to oversee the company’s global lobbying efforts” (the quote is from a friendly NY Times story on January 7, 2011, by Eric Lipton), urging more vigorous prosecutions. Indeed, following up on the ability of the press to incorporate relevant information – the type we have presented about JP Morgan’s executives’ activities (and sometimes their indictments) in Alabama, Italy, the founding of MERS, and the guaranteed investment contracts (GICs) bid rigging conspiracy, we took a look at number of different mainstream sources for their stories about Daley’s appointment, curious to see whether any of the findings from the trail we were able to follow made it into their accounts. We looked at them from the Huffington Post, Reuters, Bloomberg.com (the very same source for the best GICs scandal coverage), the Guardian, the LATimes, the Washington Post and, of course, the NY Times. So that’s seven in all: not one article about Daley’s appointment mentioned the cumulative troubles, or any of the troubles we’ve reported on, for JP Morgan Chase.

Last Stand for Foreclosure Fairness: State Courts?
But the major financial firms are not home free and clear, by any means, on the legal front, even as William Black seemed to have correctly forecast in late December that the collaborative efforts of the 50 states Attorneys Generals on the foreclosure crisis are more likely to fizzle out into some form of bank-originator “financial settlements that include new funding for loan modifications.” (At one time lead legal tiger Thomas J. Miller, AG of Iowa, was threatening that some would go to jail -but not lately, it seems.) Although Matt Taibbi wasn’t very impressed with the judge he met (and vice-versa) in the special Florida foreclosure courts – the “rocket docket” – on the whole, the state court systems, as in Missouri, Kansas, Oregon and now Massachusetts, have handed down decisions that favor borrowers and not lenders, and in three cases, have cast grave doubts upon the legal viability of MERS to foreclose. The real question then becomes: could the state court decisions generate enough cumulative impacts on broad enough categories of borrowers to overturn millions of previous foreclosure decisions and millions of future ones, thereby threatening the investors which hold the mortgage “backed” bonds, and the balance sheets, once again, of the major banks themselves? Yves Smith at Naked Capitalism, who is following the legal aspects very closely, reports that the banks are worried enough to push a grand solution, test-ballooned in a friendly think tank (The Third Way), that could lead to Congressional legislation that would ratify MERS (and attempt do much more) – a course which, she points out, has Constitutional troubles even if Congress blesses it, because of the long-standing law precedents for real property registry systems based in state property laws. Yves really goes after this proposal for being anti-borrower/homeowner, anti-investor, and anti-legal precedent. Ms. Smith has some advice for “Establishment Republicans” too: they “would be wise to give this proposal a wide berth. If you want to recruit for the Tea Party, you could hardly find a better tool than to have the Federal government interfere with local courts on a matter as important to most Americans as their homes.” Here is the article from January 13, 2011 at http://www.nakedcapitalism.com/2011/01/dc-puts-its-bankster-friendly-sol...

Who Will Be Left Standing When the Housing Market “Clears?”
The flow of this essay has, out of purposeful necessity, taken our readers into a considerable amount of detail about foreclosure processes and legalities, MERS, accounting and control frauds, contract bid rigging and conspiracy, all in the way of arguing that the scales of justice, and who to blame in the Great American Moral Dialectic, have shifted from resting heavily upon the shoulders of those losing their homes in the foreclosure tidal wave, the borrowers, to the economic institutions and processes that set it in motion, the lenders. But now it’s time to step back once again for a much broader perspective on what is happening. We’re going to look at the macro-economic picture of the forces behind the giant foreclosure wave, the complicated triangle (or perhaps it’s a many more-sided geometric figure) between lenders, borrowers-homeowners, investors (of several layers and conflicting interests, sometimes called “tranche warfare”) and “servicers,” who are not always revealed to be, at least for the four largest, also, once again, some of our biggest banks: Bank of America, with 19.9 percent of the home loan “servicing” market, Wells Fargo (16.9%), JP Morgan Chase (12.6%), and Citi (3.2%). {GMAC is at 3.2% and US Bancorp at 1.8%...and then there are the banks who hold large numbers of “second liens,” second home loans, mostly home equity loans, but including other types of lending against the first mortgage…but we’ll get to that in a while…}

As one of the first economists to call the housing bubble, economist Dean Baker, along with Robert Schiller of Yale, pointed out in looking at the long-term history of US housing prices, from 1895 to 1995, that they followed the general inflation rate. But starting around 1995, according to Baker in his 2010 book False Profits, housing prices grew faster than the inflation rate, and by 2002, when he first wrote about the bubble, “house prices had already outpaced the overall rate of inflation by 30 percent.” This price run-up, Baker and others point out, had no basis in demography, no new baby boom that was pushing – and justifying greater demand for homes – and higher prices. No, the great price rise and bubble were being generated by increased speculation, and by what Michael Lewis does a good job of describing in his history of Wall Street’s “great doomsday machine” (The Big Short) - by the extension of credit “to less and less creditworthy homeowners,” “subprime” land, in other words. That demographic would have been risky enough new territory for traditional mortgage lending, but Wall Street went ahead and built and marketed an investment empire from bonds pooled together from a much shakier base than “traditional lending,” as we have seen, and when there weren’t enough poor borrowers and credit risks left to write often fraudulent mortgages to, Wall Street created “synthetic collateralized debt obligations” – not of value themselves (other than fee generation), but to serve as the basis for a huge betting operation via credit default swaps: either for the synthetic mortgage bonds staying above water, or against, betting that they would be going under – defaulting on their payments in other words.

But beneath the exotic layers of the “innovations” in American finance lay a more mundane physical reality: between 2002-2006 we built far too many houses, and Dean Baker says we built at such a rate – about 1,880,000 a year – that it exceeded the previous peak rates of 1969-1973, a moment in economic history that did have some basis in the demographics of the postwar baby boom. This way of looking at our housing troubles, that it has created a physical glut, an oversupply of homes, led us to another interesting perspective on the whole housing market bubble and burst, something called “The $4 Trillion Dollar Question,” which appeared at Barry Ritholtz’s blog on July 15, 2010. Mr. Ritholz offered us a guest column by Dhaval Joshi, who works for a London hedge fund and was formerly with Societe Generale and J.P. Morgan Chase.

Like Baker and Schiller, Joshi pays attention to a longstanding ratio, but a different one than housing prices compared to inflation rates: that of total mortgage debt to the value of the U.S. housing stock – in other words, the current aggregate appraised value of the homes themselves. The normal ratio has been that mortgage debt was equal to .4 (four tenths) of the value of the total housing stock. By 2006, at the peak of housing prices, that meant that “$23 trillion of housing collateral could support $10 trillion of mortgages.” But since that peak, housing prices have fallen by 30% according to the Case-Shiller index, exceeding some estimates of a 25.9% drop during the worst years of the Great Depression, 1928-1933 (according to Martin Anderson’s post from January 11, 2011, “U.S. Breaks Housing Price Decline Record Set During Great Depression.”) So with that level of price drop, the total housing stock value has fallen to $16 trillion, which means that only $6 trillion in mortgage debt is supportable by the traditional ratio. But the amount of outstanding mortgage debt “has remained at $10 trillion - $4 trillion too high.” And then Joshi puts us through the numbers again, different ones, but they all point in the same direction: housing stock surplus, oversupply, glut, whatever you want to call it:

Whether you look at the houses to population ratio, the houses to household ratio or vacant houses ratio, the conclusion is the same – there is a 3% surplus of properties, equivalent to 4 million homes. And with household formation running at just 0.9 million while the US is still building 0.6 million new homes annually, only 0.3 million of the oversupply will be absorbed per year.

Although he didn’t take the math that far, when we divided the 4 million surplus homes by the 0.3 million annual “absorbed” figure, we didn’t come up with a very pretty number; at the current rate it would take 13 years to “make the market clear,” a term that our readers will encounter time and time again in the context that house prices have to fall further to speed up that “market clearing process.” At least that’s how many economists look at the problem, even some progressive ones: the traditional way to clear a “glutted market” is to have the prices fall until enough buyers step in to return the surpluses to a more normal level. But this is exactly where we insist that considerations of “political economy” must step in, because while prices have fallen 30% since 2006, the mortgage debt written down has not kept pace, and other charts in Joshi’s article show that out of 47, 674,187 million total mortgages, 23.7 % were “underwater,” meaning the appraised “street” value was less than the mortgage debt itself, and 4.9 % were “near negative equity.” And the economists we pay attention to were calling for housing prices to fall another 5-10% in 2011.

This would be a bad enough situation, as it was in the Great Depression, if we had just lenders and borrowers, and the same dynamics. But now we have securitization, mortgage-backed bonds, which means that many investors, aside from the basic lenders and homeowners, are hurt by falling prices, and would be hurt by a write-down of the mortgage principal, which is the consensus way to lower monthly payments to keep more people in their homes and stop the foreclosure wave. One of the best ways to get a handle on these abstractions is to remember that whatever reduces monthly payments for borrowers – mortgage principal reductions, interest rate reductions or extended terms (to 40 years, say) – is a reduced monthly income flow to the mortgage issuers and investors. Although in the abstract most academics and economic writers all seem to agree that foreclosures are bad for everyone, the facts on the ground, the reluctance to write down the outstanding mortgage debt principal, would seem to indicate that’s not the “real” attitude of the mortgage industry behind the scenes, nor of the investors holding the bonds.

Why Banks and Servicers May Not Want to “Modify” the Loans
How else to interpret the touching story of 73 year old, retired Lilla Roberts, of Queens, New York, in a knock-down, drag out three year battle with Bank of America, to get a “modification,” and a six month legal struggle to prevent being foreclosed upon. Ms. Roberts was very fortunate to have Elizabeth Lynch, a “young public interest lawyer” on her side, as well as New York Times business writer Joe Nocera in the courtroom for her big hearing, as reported on the front page of the business section on January 22, 2011. The title of the story gives the plot away – “Shamed Into Altering a Mortgage” – but what caught our attention most, especially in light of what we have just written in the paragraph above, was that instead of writing down the principal (her mortgage was not underwater but there were disputed claims about the size of a loan which grew out of her refinancing into a subprime mortgage – a home equity loan, we presume; such loans would come under the category of “second liens” which are important, as we will see next), the bank reduced her interest payment, extended her term to 40 years, and then stuck a $50,000 “balloon payment” on the end of the 40 years – a seeming absurdity for someone who is her age. Nocera tellingly comments that “such balloon payments have become common features in mortgage modifications because the banks get to avoid writing down principal – and everyone involved gets to kick the can…” Although the judge was satisfied with the outlines of the deal, it would seem that if this is the norm, as Nocera indicates it is, we’re not going to be closing the gap between the value of the debts on the books (with a disputed refinancing loan debt the crucial factor here) and the actual street appraisal value – de-leveraging, to put it another way - anytime soon. Nonetheless, this story is a good summary of the forces and tensions at play in the foreclosure drama, and you can read it here at http://www.nytimes.com/2011/01/22/business/economy/22nocera.html .

Mike Konczal, writing two posts at his blog site Rortybomb.com in late December, 2010 helps us all begin to fill in the gaps between the notion that foreclosures are bad for everyone and the reluctance of banks/servicers to write down the outstanding mortgage principals to help prevent them. He quotes one of our old favorites, the father of mortgage securitization, going back to Michael Lewis’ days at Salomon Brothers in the 1980’s, Lew Raneri, at the Milken Conference in 2008, repeating the conventional notion that “‘you are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure.’” Well, that used to be the case, Raneri, said, until “securitization” came along, because now “‘nobody is acting as the fiduciary…’” Someone has to “cut the Gordian knot of the securitization of these loans because otherwise if we keep letting these things go into foreclosure it’s a feedback loop where it will ultimately crush the consumer economy.’” Raneri maintained that it wasn’t a government issue; the “market” needed to do it. It’s now three years later, and Konczal reminds us that things aren’t getting better, they’re getting worse. He throws in some good data points: in 1980 only about 11% of mortgage loans had been packaged and sold as bonds – securitized, in other words; by 2008, it was 61%. Konczal agrees, just like Dhaval Joshi said, that there has to be “de-leveraging,” that $4 trillion dollar gap between mortgage value on the books and current real estate prices must come down, as well as other types of “second lien” consumer debt, but that doing it by “defaults and foreclosures” is “an extra painful and disordered way to do it,” bloating a “ ‘shadow inventory of homes,’” creating “confusion over the worth of our banks to investors, and really hurting investors, who are left with a property they didn’t want that they have to sell at a deep discount when they could have kept someone in there paying some rate.” That’s all in Part I of his two posts, both with the title of “Stop Servicer Scams.” But in Part II, we learn that “the largest banks have a lot of second lien debt on their books.” That would be Bank of America, Wells Fargo, JP Morgan Chase and Citi as the top four, and this type of debt totals around $477 billion dollars. And then we get the crux of the problem: “If there is a principal reduction the second and other junior liens will be wiped out. That’s great for homeowners, lenders and the community, but really bad for these major banks that made dumb junior loans.” But wait, it gets worse, even as Konczal’s writing rises – or is it falls – to the occasion – and remember too that these four banks with all those “second liens” are also the four largest “servicers” of primary mortgage loans issued by other lenders and now caught up in the “Pooling and Servicing Agreements” which govern the trusts which handle the bundles of “securitized” mortgage loans:

However, if the servicer keeps the homeowner in limbo, encouraging them to make their relatively smaller second lien payment while not making their first payment, allowing servicers to juke the process and necromance a zombie homeowner, that is really great for the largest banks but a disaster for homeowners, lenders, and the community.

Here are the two links to Konczal’s posts:
http://rortybomb.wordpress.com/2010/12/23/stop-servicer-scams-1-why-you-...

http://rortybomb.wordpress.com/2010/12/23/stop-servicer-scams-2-dissecti...

So now we can begin to make more sense out of Bank of America’s reluctance to write down the mortgage principal for Lilla Roberts, and we can begin to understand why a report by the National Consumer Law Center, released in October, 2010, found that “servicers lose no money from foreclosures because they recover all of their expenses when a loan is foreclosed, before any of the investors get paid. The rules for recovery of expenses in a modification are much less clear and somewhat less generous…” Lose no money, we might add, as long as the servicer isn’t also a holder of one of those second lien loans. (The report was covered by the business reporter for the Huffington Post, Shahien Nasiripour, writing on October 21, 2009; our only complaint is that he didn’t make it clear that in the case of the four biggest servicers, they are also the banks caught up in the second lien attachments.)

But wait, the twists and turns of foreclosures vs. mortgage principal reductions grow even more complex. Dan Magder’s study, “Mortgage Loan Modifications: Program Incentives and Restructuring Design,” which appeared in November of 2009, under the auspices of the Peterson Institute for International Economics, a study which supports Mike Konczal’s observations about the four big “servicer/banks” who own all those “second liens” being an impediment to first mortgage principal write-downs, adds the following
on the conflicts among the mortgage bond investors, under the heading of “tranche warfare”: “Holders of AAA tranches may prefer foreclosures since they are shielded from any loss by their seniority. By contrast, investors holding residual tranches are more likely to support modifications that offer them a chance to recoup some of their investment.” Of course, we now know that some investors are suing the banks, asking them to buy back the misrepresented mortgage loans and securities, especially the ones from originators like Countrywide. But, if you’ve been following the different accounts of homeowners caught in the shadows of foreclosure notices, but who are still in their homes, then the following might help explain it, yet another variation on investor perspectives:

More recently, servicers may be getting encouragement from investors to keep loans that have become seriously delinquent in a purgatory that is not quite foreclosure. With the buildup of foreclosure inventory, depressed home values, and a backlog in the courts that can reach 24 months, investors have no incentive for the servicers to foreclose and to try to sell the home…investors forestall the foreclosure, hoping the homeowner will self-cure or at least that they hold off foreclosing until the market s come back. Even if the investor is forced to take the same loss later on, by not foreclosing they can defer the accounting recognition of the loss.

(Here’s the link to Dan Magder’s Working Paper at http://www.iie.com/publications/interstitial.cfm?ResearchID=1428 ).

As we read through all these conflicting accounts of motives, actions, and the various stages of limbos and purgatories resembling the descent into Dante’s inferno by way of foreclosure, Mike Konczal seems to have gotten it right when he wrote “we simply don’t know what is happening here.” One senior economist at the Federal Reserve Bank of Boston, Paul S. Willen, in looking at the various Obama administration programs to help save the borrowers from foreclosure, said they amounted to “‘three years of failed policy.’” He was speaking at a housing policy conference in late October, 2010, and delivered some mercifully blunt assessments about the banks’ willingness to voluntarily modify loans: “ ‘Unlikely…’” Here is his take on what the banks are doing, and the choices facing the public, and our government, brought to us in a NY Times article from October 26, 2010, by David Streitfeld and Binyamin Appelbaum, entitled “Loan Adjustment Efforts Yield Inconsistent Results” (how’s that for understatement?):

Banks…continue to pursue foreclosures in most cases because they regard modifications as expensive and ineffective. Mr.Willen sees two possible solutions: Require banks to modify loans, basically imposing the cost on them; or pay banks to modify loans, imposing the cost on taxpayers. ‘We know how to prevent foreclosures…We just need to be prepared to spend the money.’

The State of the “Political Economy” and the American “Social Contract”
And that stark outline brings us back to the great questions of political economy, of private versus public power, and just what, if anything remains of the American Social Contract, the one which emerged, sometimes implicitly, out of the New Deal but which now has run its batteries down, in 2011, to provide just a flicker of its former brilliance. Problems on the scale of 10% unemployment, and 10-13 million foreclosures, don’t get solved by the broken tools left to government in the wake of Reagan-Conservative “revolution” since 1980. Missing too is the intellectual outlook necessary before picking them up, repairing them, or inventing new ones. The countervailing forces of powerful labor unions and public interest-minded regulators have receded to the point where there are no significant checks on private economic power, as the history of the financial crisis has demonstrated, and which we hope the details of this essay have further documented. And an unrepentant, unpunished and undeterred Wall Street stands ready to block all the methods public policy might logically pursue to remedy the situation on the scale necessary, such as the one outlined by Mr.Willen above, imposing the costs primarily upon the lenders, which we believe is the just solution based on all the havoc they have caused, although we’ve seen interesting alternatives that would allow the lenders to split with the “saved” homeowners any profits from a future rise in housing prices. And the Obama administration’s view, after three years of failed policy? Howard Glaser, someone who worked in housing policy under President Clinton, who consults with the National Association of Realtors, and has “close ties to policy makers in the administration,” had this to say to David Streitfeld of the New York Times on September 6, 2010: “‘The administration made a bet that a rising economy would solve the housing problem and now they are out of chips…they are deeply worried and don’t really know what to do.’” Glaser also had a warning for the free-market folks who want the market to finally “clear” by stopping further interventions to prop it up: “ ‘If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers…’” Here’s the link for the front page Times’ article at http://www.nytimes.com/2010/09/06/business/economy/06housing.html

By late December of 2010, the drift to chaos in the foreclosure crisis had progressive economic commentator Robert Kuttner writing about “The Next Banking Crisis,” one triggered by the realization that the banks’ books don’t reflect the losses of the actual, and coming writedowns – represented by that $4 trillion dollar gap we previously cited. That’s a gap big enough to bring down major banks. Kuttner hopes that the “mortgage documentation fiasco could force Congress and the administration to get serious about mortgage relief for the more than 7 million families still at risk of losing their home.” We share that hope too, but given the recent policy drift of the President, confirmed by his appointments of William Daley and Gene Sperling, we think things have to get yet worse – much worse actually - before we would ever get the change of course that Kuttner hopes for, and get the scope of action required by the depth of the problem. After all, even the New York Times recognized, in its October 15, 2010 initial editorial (there would be four more on foreclosures by the end of November) that “throughout this crisis, the Obama administration has been far more worried about protecting the banks than protecting homeowners…This latest foreclosure crisis should settle one issue once and for all…The banks that got us into this mess can’t be trusted to get us out of it. (“The Foreclosure Crisis,” lead editorial, page A-22.)

Measuring the Magnitude of the Catastrophe
And that’s why the magnitude and the cruelty of the scope of foreclosures are so important. This is a major human catastrophe, for our whole society, not just a banking and investors’ problem, on a scale we haven’t seen since the Great Depression; but we are not coming up with any New Deal solutions of the scope of those in the 1930’s – far from it. When the New York Times wrote in that lead editorial from October 15th, placing these numbers in front of us, it sent us scrambling to check their accuracy:

According to the latest figures, 4.2 million loans are now in or near foreclosure. An estimated 3.5 million homes will be lost by the end of 2012, on top of 6.2 million already lost. Yet the administration’s main antiforeclosure effort has modified fewer than 500,000 loans in about 18 months…

So that’s what sent us to the Center for Responsible Lending, and their article from June 18, 2010, “Foreclosure by Race and Ethnicity: The Demographics of a Crisis.” The Center points out that there is no one official, or even informally central private database for the tracking of foreclosure statistics. They relied upon H.M.D.A. (Home Mortgage Disclosure Act) data as well as the Lender Processing Service, a private data base that covers 70% of 1st lien mortgages. On page three of their report, we found this statement: “Looking ahead, independent analysts have projected that between 10 and 13 million foreclosures will have occurred by the time the crisis abates.” We learn that from 2007-2009, 6.9 million foreclosures were initiated. Of those completed, here’s the breakdown on the category of mortgage which led to foreclosure: 63.6% were subprime; 5.9% termed “junk”; and 25.5% “conventional.” From 2004-2008, 58.5% of subprime loans were refinanced or home improvement loans…And 82% of the completed foreclosures were owner-occupied. Of those losing homes, 56% were white (non-Hispanic); the foreclosure rate for blacks and Hispanics was 8%, nearly double the 4.5% rate for whites.

The Rule of Law: Fairness, Accountability & The Foreclsoure Crisis
All through the fall of 2010, and especially leading up to Veterans Day, November 11th, we were thinking about the vast scale of this foreclosure crisis, and what it said about the nature of our society and political institutions, which seemed at a complete loss on how to deal with it. How much closer could we come to the unraveling of something so near to the representative core of The American Dream – the dream of home ownership: now we were watching millions upon millions losing their homes, and the more we learned about the processes and procedures, and the causes, the more unjust it looked. On November 4th, Nobel Prize economist Joseph Stiglitz wrote an opinion piece called “Justice for Some,” in which he declared that the “mortgage debacle in the United States has raised deep questions about ‘the rule of law,’ the universally accepted hallmark of an advanced civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America in the wake of the sub-prime mortgage crisis, it has done neither.” Just one day later, economist James K. Galbraith declared “It was the Banks,” in an article for Common Dreams.org. He thus pinned the blame for the election debacle directly on the Obama administration’s policies towards the banks: “Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.” (Our emphasis). And all during the fall, observer after observer, as we’ve seen in this essay, kept asking: “Why isn’t anyone going to jail?” Here are the links to the two articles:
http://www.project-syndicate.org/commentary/stiglitz131/English

http://www.commondreams.org/view/2010/11/05-13 (Galbraith.)

It’s been pretty clear to us that the Democrats, who played the “tough on crime” song over and over during the 1990’s under Bill Clinton, and helped speed America along the road to its “Great Incarceration” destination, really meant getting tough on inner city, minority street crime, not the white collar, executive suite crime of 2002-2008. That’s why Charles M. Blow’s NY Times’ column from October 23rd, 2010, caught our attention. He was mocking “Attorney General Eric Holder’s recent chest-thumping against the California ballot initiative that seeks to legalize marijuana,” and highlighting how the Democratic Party had zealously pushed the financing of the war on drugs through programs like the Byrne Formula Grant Program, even when at the end of the Bush presidency Republicans weren’t very much interested in it anymore. Democrats pushed so hard that they managed to get $2 billion more in the 2009 stimulus bill. Did the Democrats realize the unintended results of their law and order zealotry on their own constituents, Blow wondered, quoting a recent study which found that “‘in the last 20 years, California made 850,000 arrests for possession of small amounts of marijuana, and half-a-million arrests in the last 10 years. The people arrested were disproportionately African-Americans and Latinos, overwhelmingly young people, especially men.” And that’s also in light of the fact that national surveys show that “young white people consistently report higher marijuana use than blacks or Hispanics.” Now we make no brief here for marijuana use or legalization, certainly not at a time of 10% unemployment and 10 million foreclosures, and have to note that Blow would have written an even more powerful piece had he picked up the cry of “no white collar subprime fraudsters going to jail,” under that same “law and order” reign of the Democratic Party. Here’s the link at http://www.nytimes.com/2010/10/23/opinion/23blow.html

“What Kind of Country Are We?”
You get the idea here. It’s just one type of the many types of blatant unfairness, of the sort that led Richard Trumka, President of the AFL-CIO to ask, in a major speech delivered at the National Press Club on January 19, 2011, “What kind of country are we?” Trumka has no doubts about what he sees first hand in the capitol: “Here in Washington, we live in an Alice-in-Wonderland political climate.” William Greider, writing in the January 24, 2011 print edition of The Nation, is even tougher than Trumka on the state of the political system: “Collectively, the corporate sector has its arms around both political parties, the financing of political careers, the production of the policy agendas and propaganda of influential think tanks, and control of most major media.” The only thing Bill left off that list is that they also have grabbed some of local government’s traditional revenue sources, like real property registration and transfer fees, and the full income from their bond sales, as we have just seen. Greider had some blunt advice “for many progressive groups, including organized labor…They will not be able to think clearly about the future of the country until they get greater distance from the Democratic Party.” Here are the links to both these important pieces:

http://www.aflcio.org/mediacenter/prsptm/sp01192011.cfm

http://www.thenation.com/article/157511/end-new-deal-liberalism

Although neither Trumka nor Greider used the term “Social Contract” directly, it was implicit in all that they were laying out for us; that the contract, or what’s left of it, is on the verge of completely unraveling. Indeed, that implicit contract formed the most powerful part of Trumka’s speech, when he pointed out, after being introduced by a 9/11 firefighter from New York, Stan Trojanowski, that Congress had kept people like Stan waiting for seven years to be made whole for their medical costs incurred on, and after, September 11, 2001: “It’s a funny thing, when the firefighters arrived at the World Trade Center on September 11 and started that long climb up the stairs to rescue the bond traders trapped on the upper floors, it didn’t occur to any of them to call up and ask, ‘What’s it worth to you for us to come and get you?’”

Saving Private Ryan and The Social Contract
“That boy is alive. We are gonna send somebody to find him. And we are gonna get him the Hell…outta there…” Those are the words of the American Chief of Staff in World War II, General George C. Marshall, at least as they were spoken in the Steven Spielberg movie Saving Private Ryan (1998), after Marshall learns that three of Ryan’s brothers have already died, a tragedy not yet known to his mother back home in Iowa farm country. You may not have realized it, or thought about it in these terms, but this war movie is also about a form of the “Social Contract,” something the director was trying to say about his father’s generation and what held it together. And although the overpowering cinematography comes to visually and emotionally dominate the movie, what holds it together thematically is a Social Contract mission, a rescue mission, undertaken on humanitarian grounds, even in the midst of the chaos of the greatest American military effort in history. The theme is introduced early in the movie, by flashback scene, a modern day veteran’s visit (the saved Private Ryan & his family) to the American military cemetery in Normandy, and also by that understated, yet powerful frame of hundreds of women, back in Washington, DC, typing bereavement letters to the families of the dead, where an alert typist notices that three of the letters are going to the same address and moves her discovery quickly up the chain of command, right into the hands of General Marshall.

It seems like a hopeless and time consuming mission, especially given that James Francis Ryan of Peyton, Iowa, the surviving son, is a paratrooper with the 101st Airborne Division, which has been widely scattered by an airdrop gone astray over the Normandy countryside. Yet so powerful is the humanitarian meaning, the affirmation of social and societal bonds even amidst all the bloodshed and chaos of war, that the message has to get through and Ryan found, because we can’t, in the eyes of Marshall, or of Spielberg, as a society, let one family bear so disproportionate a share of the suffering. So that social contract, which teeters on the edge of the ridiculous in this setting of war, and appears to be so to the squad of Army rangers chosen to carry it out – is given a special symbolism: a symbol of the basic fairness and decency of the civilian society which sent them to war. That’s not the way the troops on the mission feel about it; they’re caught up in the ugliest and most mundane horrors of day-to-day combat, and at one point, they’re close to repudiating the social contract of the mission, especially Pvt. Reiben (Edward Burns) of “Brooklyn, NY,” when they’re ordered by Capt. Miller (Tom Hanks) to destroy a German machine gun nest that has already cut down some unsuspecting American paratroopers. Miller is asking them to uphold another form of solidarity: to divert long enough to save other innocent soldiers from a similar fate, a fate they have the power to change, but at a significant price. The saving Private Ryan mission doesn’t really require them to do it; but the moral bond connecting them to their fellow soldiers does. At the crucial point of the revolt, the Captain finally reveals some personal details from his private, civilian life, and they just happen to be affirmations of some of the most familiar bonds of civilian society: he is, of all things, an English teacher, English composition to be precise, the symbolic upholder of the standards of meaning and expression in the language itself, and a baseball coach too, no less, which needs no additional comment.

We’ve read a lot of reviews of this movie, and most of them focus on the powers of Spielberg to tell a great story, and his command of the cinematography. There seems to be a consensus that if it’s not the greatest war, or anti-war movie (because of its frighteningly realistic portrayal of the costs and carnage) ever made, it ranks in the top ten. But only two that we came across seemed to grasp the importance of the underlying message, despite it being inherent in the title, the power of the bonds of the social contract, even in wartime, and even from a general, who, like Eisenhower, was probably not a FDR New Dealer in terms of American politics. Margaret McGurk’s review for the Cincinnati Enquirer, from July 24, 1998, put it this way: “Marshall’s decision to save Ryan, for instance, could easily have been a symbol of clueless homefront bureaucracy. Instead, the film presents it as a statement of near religious faith.”

“When Trust Between Leaders and People is Broken…”
Another reviewer got closest to the message we’re conveying here, in our essay, and that we think the movie shares with so many people who are looking at the financial crisis, and the foreclosure scandals, and wondering where the “moral calculus” is, where the Social Contract has gone? So here’s how Steven Lloyd Wilson puts it in his review:

Wrapped up in this sacrifice is a simple faith, the faith that the people above you giving the orders understand the moral calculus. You might just be able to stand giving your own life for something, not for a great cause, but simply because you believe that you would not be told to do it if it didn’t save others. When that faith dies, when this trust between leaders and people is broken, no war can be won.

In light of what we have been reporting on in this essay, we can add that no society can hold itself together when that trust has been lost, the moral calculus and the sense of fairness and accountability that holds white collar criminals to the same standards of justice as blue collar street criminals.

Whether he intended it or not, if there is anything that comes across clearly in Michael Lewis’ tales of Wall Street, first in Liar’s Poker (1989), and then in The Big Short (2010), it’s that any remnants of trust and the Social Contract disappeared a long time ago. “Inside the Doomsday Machine” it is literally the end of trust between parties, made very clear by the words spoken by his protagonists shorting the world of subprime mortgages. (We grant that there is an evolution of sorts, the emergence of a rough social conscience, a necessary pre-condition to developing a social contract, in the “biography” of Steven Eisman.) Unfortunately, because of the central role that finance has played in our society, that mistrust, and now financial misery, has been transmitted like a plague to tens of millions, the unemployed and the foreclosed upon alike. The question posed by William Greider, and Richard Trumka, and us is: what are we going to do about it?

Postscript: Creating Accountability for Wall Street Banks
We’re going to end on a constructive note, with a practical suggestion. As every motor vehicle driver knows, the officials that be in every state keep track of your traffic violations, and the score is cumulative. When the points add up, and it doesn’t take too many, you can lose your license, which is not a trivial matter. As we read through Mary Bottari’s summary list of Wall Streets settlements from this past August, plus all the others that we came across as part of our research for this paper, it occurred to us that there is no such cumulative system for our financial offenders, the ones who are always settling SEC charges via documents where they don’t admit to wrongdoing, they cough up a few million, small change to the senior people in the Alice and Wonderland World of American finance, and go on their way. So we decided to go to the SEC website to do a little hands-on research on a couple of the major Wall Street firms, just to get a better feel for the SEC system of “tracking.” We spoke to several people at the SEC, and were advised that they don’t have such an intentional system for cumulative offenses, but we got some suggestions as to how to use their raw material, internal search engines. So here’s how we did it; we went to the SEC home website here http://www.sec.gov/ ; and clicked on the main Litigation link near the center-bottom of the home page, which is itself a mass of categories and options. Then you get the “Search Litigation Materials” page, which has a blank box of that name; if you don’t put anything in, but hit the search button to the right of the box, you’ll go to the advanced search page, where you can fill in the dates and types of litigation you are looking for – in our case, we checked three: “Enforcement,” Regulatory Actions,” and “Litigation.” We thought the years 1990-2011 would be a good representative sample. When we did it for JP Morgan Chase, we came up with a cumulative figure of 1476 actions by the SEC: 15 enforcements, 676 regulatory, and 785 litigation. (And yes, we are aware that JP Morgan merged with Chase Manhattan Bank in 2000, and we played with individual searches for each, as well as the cumulative one we chose here.)

For Morgan Stanley & Co., we came up with 1408 actions: 16 enforcement; 572 regulatory; 820 litigation.

For Goldman Sachs, the number is 605: 1 enforcement; 279 regulatory and 325 litigation.

For Bank of America, our initial search turned up 34,127, which seemed out of line and excessive, even with the pounding they’ve been taking during the foreclosure fiascos. It turned out that it was the word “America” that seemed to be adding extraneous listings on a general search; when we put Bank of America in the “this exact phrase” search box options we came up with just 226; when we plugged them into the “All of these words” box, we got 3305.

Here’s our point: we don’t put too much faith into the SEC’s tracking system or their search engines, which seem to have a lot of chaff in with the core categories of wheat “troubles” that we’re trying to get a public handle on. And the SEC doesn’t share a data base with the 50 different State Attorney Generals offices, which they should. (And the Association site for the AG’s wasn’t much help either, from what we could see.) But you can glimpse the potential, and we recommended that they undertake one. But citizens, and law schools, and non-profits, are going to have to work with these agencies/departments so that we can come up with meaningful categories that tell a fair story. When major news organizations can cover the appointment of someone like William Daley, from an important post at a major Wall Street Firm that has gotten into as much recent trouble as JP Morgan Chase has, in the areas covered in this essay, and that appointment is at the right hand of the President, and no one even mentions the legal track-record, then we have a clear break-down in accountability. For readers who want to go right to the Litigation search page at the SEC, here’s the link:
http://search.sec.gov/secgov/index.jsp#queryResultsTop

Until our next posting, the very best to our readers.

Bill Neil
Rockville, MD
w.neil@att.net

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future