Wall Street Looting and Federal Regulatory Colluding
Theft of a Nation: Wall Street Looting and Federal Regulatory Colluding
The U.S. Constitution mentions three federal crimes that citizens may be found guilty of: treason, piracy, and counterfeiting. At the turn of the twentieth century, this number had climbed to several dozen criminal statutes. By the 1980s the criminal code consisted of some 3000 offenses and 23,000 pages of federal law. Today, nobody knows the exact number of offenses despite efforts at counting. According to a 2008 study there were an estimated 4,500 crimes in the federal code. In addition, there are thousands of federal regulations that carry criminal penalties. Many of the newly enacted federal laws have also lowered the bar for a conviction in that they no longer require the prosecutor to demonstrate the criminal intent of the defendant. For example, a 2010 joint-study by the conservative Heritage Foundation and the liberal National Association of Criminal Defense Lawyers “analyzed scores of proposed and enacted new laws for nonviolent crimes in the 109th Congress of 2005 and 2006. The study found of the 36 new crimes created, a quarter had no mens rea requirement and nearly 40% more had only a ‘weak’ one.”
As a result of these and other legal changes in punishment over the past 30 years, the U.S. Bureau of Justice Statistics reported that the total number of federal prisoners for 2009 had grown to 200,000, representing more than an eightfold increase compared to a fourfold increase of state prisoners that grew to a little over two million. The diminished requirements to prove criminal intent in order to convict, however, do not necessarily make the prosecutions of the crimes of the powerless or of the powerful any easier. For these legal developments are always subject to the vagaries of discretionary enforcement and selective application of the law. At the same time, prosecutions are also subject to the number of street and suite crimes in relation to the total systemic capacities of the agencies of crime control and financial regulation.
Rising criminal demand without increasing prosecutorial or penal capacity intensifies the inversely related criminal justice/punishment patterns of severity and leniency experienced by relatively powerless offenders versus the relatively powerful offenders. In effect, scarce resources result in criminal prosecutors selecting out those less demanding and more winnable legal cases. Demand and winnability are defined by the complexity of the involved illegalities and by the availability of potential defendants’ resources. Thus, the collective impact of system incapacity (i.e., scarce or shrinking resources) tends to suppress, or decrease, the likelihood of criminally prosecuting those complex white-collar offenses committed by persons with the deepest of financial pockets, like any of the Wall Street miscreants.
For example, as both the number of federal criminal statutes mushroomed in recent decades and the number of federal prosecutions rose annually from a little over 30,000 or 192 per one million adult citizens in 1980 to some 83,000 or 395 per one million in 2009, offenses prosecuted and offenders subject to criminalization and the penal sanction as indicated by the bar graph of the top ten federally prosecuted
Figure I.1: Top 10 Federally Prosecuted Offenses in 2010
Source: Tracking the Growth in Federal Criminal Sentences. U.S.
Sentencing Commission. 2011.
offenses for 2010 (see Figure I.1), varied considerably. Some 63 percent
of all those prosecuted and incarcerated were for immigration and drug related offenses. Out of the total, only about 11.7 percent of these involved white-collar offenses and the number of those convicted for fraud was 8028.
None of those criminal prosecutions involved any of the wealthiest banks for securities frauds, precluding one pathway to insolvency or bankruptcy. Moreover, in the wake of an epidemic of high stakes financial fraud, Wall Street was brought to its knees only temporarily, thanks to the Troubled Asset Relief Program signed into law by President Bush on October 3, 2008. However, before and after the TARP bailouts, a larger pattern of collusion exists in the forms of waivers and exemptions from punishment. These “plea bargain” deals have been negotiated between the mega investment banks of Wall Street, the Security and Exchange Commission, and the U.S. Department of Justice in numerous agreements and settlements pertaining to securities fraud.
The relative incapacities of the systems of criminal and civil/regulatory bureaucracies that normally address the separate and related worlds of street crime and suite crime, are also affected by the recent appellate and U.S. Supreme court decisions regarding corporate liability and victim compensation involving security violations. Other legal and political developments have specifically protected “crimes of capital accumulation” from aggressive prosecution, effectively establishing a noncriminal reality where banking and related investment frauds are, in effect, beyond incrimination. Notwithstanding politics, law enforcers are not pursuing Wall Street fraud for several reasons:
- Statutes of Limitations on securities litigation are effectively three years.
- Deferred Prosecution Agreements were established under the new 2008 guidelines of the U.S. Department of Justice that allow financial companies to avoid indictments if they agree to investigate and report their own crimes.
- The Securities and Exchange Commission and other federal/state regulators are not up to the potential case demand because of inadequate agency resources and staffing.
- The Revolving Door between the government-private sectors has created a situation in financial litigation where the ties between the DOJ and the white collar-corporate legal defense community have become particularly strong.
- To pursue these securities frauds criminally would not only potentially bring about the demise of these financial institutions, but in the process would also certainly hurt investors.
Bottom line: the federal prosecution of financial fraud in the United States by the end of 2011 had fallen to a 20-year low. In fact, 2011 recorded the lowest number of securities fraud prosecutions in at least two decades. Trend wise, every year since 1999, the number of federal criminal prosecutions has gotten smaller and smaller as the banking oligopoly in the USA has gotten bigger and bigger. According to a recent Transactional Records Access Clearinghouse (TRAC) report from Syracuse University, the Department of Justice was on track to file just 1,365 prosecutions for financial institutional fraud in fiscal year 2011. At the same time, during 2011 the Securities and Exchange Commission filed a record-high 735 enforcement actions, going to trial in 19 cases, settling as many cases as possible with fraudulent defendants who neither admit nor deny wrongdoing while they agree to pay fines worth a fraction of the losses to their investors.
Theft of a Nation is about finance capital and institutionalized crime. This book explains how the federal government despite its rhetoric to the contrary came to dismiss the crimes of Wall Street and to rebuff the victims of Main Street. It examines the means by which a combination of governmental actions and omissions absolved Wall Street bankers, mortgage lenders, and associated swindlers from any accountability for their criminally fraudulent behavior. More broadly, Theft of a Nation is the story of the cultural and ideological histories of investment banking and Washington, DC, and how the interdependent cooperation by the nation’s economic and political elites enabled Wall Street not to be held liable for the millions of people it victimized, for the billions of dollars it looted from investors, and for the trillions in capital that it destroyed worldwide. Finally, within the circumstances of both a mature democracy and a free-market society, this book provides an explication of the contradictions between the forces of institutionalized financial crime and the forces of institutionalized regulatory control.
FRAMING THE CASE
Wall Street Looting and Federal Regulatory Colluding is not only about financial fraud and its control. More fundamentally, it’s about the interactions of law, power, and wealth. As Marx and Weber would have understood this investigation is about the interplay of the developing political economy and the bureaucratically rational-legal state. Both thinkers despite their different emphases would have agreed that it’s a study in the structural contradictions of bourgeois legality. Specifically, it’s about the ways that finance capitalists who have great wealth, prestige, and access to politicos at the highest levels of government were afforded ample opportunities to make, break, and neutralize, if not capture, the laws of regulation. It is also about how these financiers were able to push back against or circumvent those unacceptable regulations that manage to get passed into law.
This happens for essentially two reasons. First, within the worlds of monopoly and financial capital, Wall Street investment bankers have become the dominant economic players. Second, within the current rise of global capitalism, finance capital is both the product and generator of forces that are transforming the contradictory governmental processes of regulation and deregulation. Furthermore, because of the dominance of finance capital and the concentration of wealth into a small number of Wall Street firms and institutions, a banking oligopoly or a banking cartel now exists in the United States (see Figure I, 2).
For a quick historical perspective. Back in 1947 the federal government sued 17 leading Wall Street investment banks, charging them with effectively colluding in violation of antitrust laws.” The Department of Justice in its complaint alleged that these firms, among
other things, had created “an integrated, overall conspiracy and combination” that began in 1915 and was in continuous operation thereafter, by which they developed a system “to eliminate competition and monopolize ‘the cream of the business’ of investment banking.” The U.S. argued further that these Wall Street investment banks, including Morgan Stanley as the lead defendant and Goldman Sachs, had created a cartel that set the prices charged for underwriting securities. The cartel also set the prices for providing mergers-and-acquisitions advice, while “boxing out weaker competitors from breaking into the top tier of the business and getting their fair share of the fees.” Finally, the government argued that the big firms had placed their partners on their clients’ board of directors, as a means of knowing what was coming down the pike internally and as a means of keeping competitors at bay externally.
Figure I, 2: The Banking Oligopoly in America
Source: The Wild West of Finance, Adam Davidson, NYT, Dec. 7, 2011. http://www.nytimes.com/2011/12/11/magazine/adam-davidson-wild-west-of-finance.html.
As journalist, former Wall Street banker, and best-selling author of House of Cards, The Last Tycoons, and Money and Power, William D. Cohan, has recently contended, “the government was spot on” in their 1947 case: “The investment-banking business was then a cartel where the biggest and most powerful firms controlled the market and then set the prices for their services, leaving customers with few viable choices for much needed capital, advice or trading counterparties.” Today, the very same arguments can be made, only more so, as the capital worth of the leading firms (e.g., Goldman Sachs Group, Inc., Morgan Stanley, JP Morgan Chase & Co., Citigroup Inc., and Bank of America Corp.) is even more concentrated. In effect, this banking cartel or oligopoly with its political allies, pretty much control what does or does not constitute securities’ violations in the world of fraudulently based market transactions.
More fundamentally, capitalism has always been a system of control and domination. Central to control and domination is the law and the
state apparatus of enforcement that stands behind the law. Within the capitalist mode and relations of production, the state and law in tandem “operate to sanction the exploitation of direct producers – the workers – on behalf of the capitalists – the bourgeoisie – while giving the impression that state and law are in fact neutral, separate from the capital relation of exploitation.” This is not to imply that the interests of the state and
of capitalists are one and the same. There are all types of competing
interests within and between capitalists and state authorities. Thus, the state-legal criminalization of securities fraud hangs literally in the balance of the contradictory forces of free-market capitalism.
William Chambliss developed a structural contradictions theory of crime, law making, and enforcement. This theory reflects the position that fundamental to all historical eras and societies are the contradictory forces of survival and destruction. While societies produce the means of survival, they also produce the means of decline, creating perpetual dilemmas and conflicts. Under free-market capitalism, the fundamental contradictions are between labor and capital. The laborers or employees pursue better working conditions and/or higher wages. Meanwhile, capitalists pursue greater profits and resist the demands of workers as these will reduce their bottom lines.
Within the developing political economy of capitalism the dilemma for capital, labor, and the state is how to reconcile their conflicts and differences, considering that the fundamental contradiction between them cannot be resolved short of a revolutionary transformation of society. As a consequence, the resolution of lesser conflicts may result in still other conflicts or contradictions. From a structural rather than an instrumental position on the nation-state, regardless of which political parties occupy the White House or who fills the various offices of the other branches and agencies of government, the state remains deferential to the interests of the capitalist economy. At the same time, from an instrumentalist position and in terms of the ongoing class struggle between labor and capital, the capitalist classes are always putting pressure on the state to pass and repeal laws in their interests, winning most of the time, often in face of much resistance and opposition from other classes.
Chambliss identified two fundamental contradictions in a capitalist political economy that lead to crime: “wages, profits, and consumption” and “wage-labor supply.” The first contradiction has to do with whether or not workers have sufficient money to purchase commodities based on what capitalists pay them in wages and benefits versus whether or not capitalists have more or less profits available for reinvestment. When workers lack the money to purchase goods and services, the economy becomes sluggish. On the other hand, higher salaries for workers cut into profits and reinvesting. The second contradiction has to with the capitalist maintenance of a surplus labor force, inclusive of outsourcing too, that helps both to keep wages down and to provide a supply of labor from which capital can draw upon when the demands of workers threaten their profits. These inherent contradictions of free-market capitalism can culminate in crimes of theft from both the under and over classes, as each group goes about its respective business of economic survival.
With respect to the crimes of capitalist survival, these “arise from the particular forms of social relations associated with the processes of capital accumulation, concentration, and centralization.” The control of these types of financial crime call for an examination of: (1) the particular dynamics of accumulation that develop when capital is privately owned and the process of accumulation is managed largely for private rather than public interests, and (2) the contradictory political and economic forces that permeate the social relations of criminalization and law enforcement. Accordingly, this inquiry’s evaluation and treatment of the “crimes of capitalist control” include not only those acts prohibited under criminal or regulatory law, but also those reflected in civil laws and torts. To be precise, the socio-legal topography covered in this investigation addresses the criminal and civil/administrative processes as well as those processes of regulatory and other legal bodies that have had some kind of Wall Street oversight capacity.
Lastly, before turning to the rest of the book, let me tend to a housekeeping matter that revolves around how I collected the evidence for this analysis of Wall Street looting and federal regulatory colluding. Virtually all of the “data” presented herein is based on the public record. This research is of a secondary order. It has relied on major media networks, online news services, journalistic accounts, Internet blogging, and the digital retrieval of relevant documents—past and present—as these are related to the socio-historical documentation of the Wall Street crisis of 2007-08 and its aftermath. In turn, these empirically available records have been informed by and subject to an array of theories not only from criminology, but also from the disciplines of law, economics, and political science.
 Fields, Gary and Emshwiller, John. 2011. “As Criminal Laws Proliferate, More Ensnared.” The Wall Street Journal. A10. July 23-24.
 As chapter five will discuss law varies inversely with stratification, meaning that it is always easy to prosecute and criminally convict a powerless person and always difficult to prosecute and secure a penal punishment beyond compensation for a powerful person. See Black, Donald. 2010 (1976). The Behavior of Law, Special Edition. Bingley, UK: Emerald.
 Pontell, Henry. 1984. A Capacity to Punish: The Ecology of Crime and Punishment. Bloomington: Indiana University Press.
 Securities are negotiable financial instruments, which represent financial value, such as bonds, stocks, options, or swaps. Securities fraud is a “serious white-collar crime in which a person or company, such as a stockbroker, brokerage firm, corporation or investment bank, misrepresents information that investors use to make decisions.” Specifically, the “types of misrepresentation involved in this crime include providing false information, withholding key information, offering bad advice, and offering or acting on inside information.” Usually investigated by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD), these crimes “can carry both criminal and civil penalties, resulting in imprisonment and fines.”. INVESTOPEDIA. Retrieved on August 13, 2010 at http://www.investopedia.com/terms/s/securities-fraud.asp. These cases may also be criminally prosecuted by U.S. Attorneys representing the DOJ or by local and state criminal prosecutors representing the people of individual states.
 For example, Morrison v. National Australia Bank Ltd [561 U.S.____, 130 S. CT. 2869 (2010)], denied foreign defendants the right to sue executives for fraudulent activities and violation of Rule 10(b)(5) of the Security and Exchange Act of 1934.
 Kennedy, Mark. 1970. “Beyond Incrimination: Some Neglected Aspects of the Theory of Punishment. Catalyst 5 (Summer): 1-30.
 The Huffington Post. 2011. “Federal Prosecutions of Financial Frauds Falls to 20-Year Low, New Report Shows.” November 15. Basar, Shanny. 2011. “SEC Enforcement Cases Hit Record Levels.” Financial News. November 10.
 For example, during a CBS Sixty Minutes interview in 2009, President Obama criticized “fat cat bankers” who had received bailout money and then lobbied against Wall Street. In November of the same year, Obama signed an executive order establishing a specialized financial crime unit—the Financial Fraud Enforcement Network (FFEN)—within the DOJ whose raison d’etre was to hold accountable those who helped bring about the devastating financial crisis of 2008-09, and to prevent future financial crises. However, the end of 2010 could hear Obama publicly defending the bonuses handed out to the same Wall Street bankers. By the beginning of 2012, the specialized financial crime unit had not prosecuted a single case against anyone working for one of the six largest banks in America. Obama played the same déjà vu rhetorical card of getting tough on Wall Street during his 2012 State of the Union address: “It was wrong. It was irresponsible. And it plunged our economy into a crisis that put millions out of work, saddled us with more debt, and left innocent, hard-working Americans holding the bag.” Without bringing up the irrelevance of his previously created FFEN in the war against financial crime, Obama informed the American people that he was establishing a Financial Crimes Unit within the DOJ “to crack down on large-scale fraud,” “to protect people’s investments,” and “to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.” The President went on to say, this “new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.” All quotes are from “State of the Union: President Obama’s Financial Fraud Team Tied To Banks,” by Zach Carter and Loren Berlin, January 25, 2012. The Huffington Post. Retrieved 1/25/12 from: http://www.huffingtonpost.com/2012/01/24/state-of-the-union-obama-financial-bank-fraud_n_1229798.html.
 Ollman, Bertell. 1976. Alienation: Marx’s Conception of Man in Capitalist Society, 2nd ed. New York: Cambridge University Press.
 Weber, Max. 1976 (1904). The Protestant Ethic and the Spirit of Capitalism. London: Allen and Unwin.
 Davidson, Adam. 2011. “It’s Not Technically An Oligopoly.” The New York Times Magazine. December 11: 16-18.
 Cohan, William. 2012. “How Wall Street Turned a Crisis into a Cartel.” Bloomberg. Retrieved 1/9/12 from http://www.bloomberg.com/news/2012-01-09/cohan-how-wall-street-turned-a-crisis-into-a-cartel.html.
 Quoted in Cohan, 2012.
 Cohan, 2012.
 Represented in the banking oligopoly figure are the top 3 banks with 44% of market share, the top 20 banks with 92% of market share, and some 8000 other banks dividing the remaining 8% of market share. From Barry Ritholtz, The Big Picture, December 25, 2011. http://www.ritholtz.com/blog/2011/12/the-banking-oligopoly/.
 Critique of Law Editorial Collective. 1978. Critique of Law: A Marxist Analysis. Kensington, Australia: UNSW Critique of Law Society, p.18.
 Chambliss, William. 1979. “On Lawmaking.” British Journal of Law and Society 6 (2): 149-71. See also, Chambliss, William and Zatz, Marjorie (eds.). 1993 The State, The Law, and Structural Contradictions. Bloomington: Indiana University Press.
 Michalowski, Raymond J. 1985. Order, Law, and Crime: An Introduction to Criminology. New York: Random House, p. 318.