Addressing Wall Street Securities Frauds in the 21st Century

Home Page What's New: Multinational Corporate Crime Crimes of the Powerful & State-Routinized Crime Social Justice Theft of a Nation Slide Show Addressing Wall Street Securities Fraud in the 21st Century WikiLeaks--Will the Public Remember? Mass Media & Crime Review Essay on Race Crime and Justice Terrorism Economic Crisis & State-Corporate Crime Crimes of State CSI or Tech Effect? Supranational  Criminology Peacemaking  Criminology Theories  of Violence Newsmaking  Criminology Mediatizing Law and Order Speaking of Class Race and Gender Integrative  Criminology Global  Criminology Transnational  Crime Visionary  Criminology Read About My Books Read About My Anthologies Read About My Two Volume Encyclopedia Book Review of Criminology An Integrated Approach Sexual Serial Killer Jack Unterweger Contact Me Blog

This essay was published in the Routledge International Handbook of the Crimes of the Powerful, 2015

 

 Limiting Financial Capital and Regulatory Control as Non-penal Alternatives to Wall Street Looting and High-Risk Securities Frauds

 

 

INTRODUCTION

The popular idiom, “Behind every great fortune lies a great crime,” is attributed to the 19th century French novelist and playwright Honoré de Balzac. One of the English translations from the words that Balzac actually wrote in his 1835 novel Le Père Goriot reads: “The secret of great fortunes for which you are at a loss to account are crimes that have never been found out, because they were properly executed” (Answers.google.com). If, by chance, some of the crimes of Wall Street were “properly executed,” many more of these crimes were not. Either way, not one of the top Wall Street bankers who were collectively responsible for the biggest financial crime epidemic in United States history has ever been charged, let alone, prosecuted for or convicted of violating any criminal laws against securities fraud. On the other side of the enforcement ledger, more than a few of those financial crimes of the past were legalized through decriminalization and deregulation, such as the repeal of the 1933 Glass-Steagall Act in 1999, while other forms, such as credit default swaps have not been outlawed as obvious conflicts of interests. Historically, these enforcement contradictions circulate around the marketing of licit and illicit securities trades. Finally, these securities fraud enforcement dilemmas cannot be detached from the codependency of capital accumulation and the development of the capitalist state (Harvey 2014).

For the foreseeable future, my argument has been that the controlling crimes of financial capitalism or crimes of capitalist control will remain more or less as they have been—primarily beyond incrimination (Barak 2012). Under the prevailing forms of the global political economy I further subscribe to the position that criminal sanctions will not be employed in earnest as a strategy for stopping high-risk financial crimes by a neoliberal capitalist state. Nevertheless, I do not want to remove securities fraud from the criminal law or state-penal lexicon, if only for its moral or symbolic value rather than its deterrence value.  As a way of (1) addressing the fundamental contradictions of capital accumulation, (2) reducing the speculative risks associated with the next securities based crisis, and (3) engaging in an alternative approach to the criminalization of high-stakes financial instruments, I contend that there are a slew of viable economic and social policies worth pursuing in the name of reducing the financial crimes of the powerful and enabling more stable, balanced, and sustainable growth between nation-states.

Accordingly, I am interested in long term “revolutionary” efforts that, on the one hand, resist the pathways to unsustainable capital expansion and, on the other hand, support the breaking up and/or turning those too big to fail (or jail) mega-banks of the global economy into public utilities. I am also interested in those other attempts aimed at structural changes in the distribution as well as the accumulation of capital as a strategy for addressing the growing monetary inequalities and asymmetries of political and economic power that have further enabled most crimes of the powerful since the early 1980s. Conversely, I am not interested in short term “reformist” efforts, such as harsher or stricter criminal enforcement, enhanced self-regulation, or upgraded ethical conduct as the appropriate means for restraining high-risk financial crimes in particular.

This chapter is about not controlling high-risks securities frauds. First, I describe the contradictory forces of free-market capitalism and the failures of securities law to prevent Wall Street frauds. Next, I discuss the inefficacies as well as the non-controls of state-legal interventions into these securities frauds. Finally, I encapsulate my argument and identify a number of related policy proposals and/or political ambitions that are anti-neoliberalism to the core and reflective of an alternative paradigm that I view as absolute necessary for changing the prevailing power relations of free-market capitalism and for curbing the crimes of the powerful. As Steve Tombs and David Whyte (2013 p. 213) argue: “If the key point of regulation is to retain some stability for regimes of capital accumulation under conditions of unequal power, then the key question for those who wish to influence the regulatory process is how particular regulatory interventions have the potential to make adjustments to those power imbalances.” More broadly, without a fundamental shift in global power relations and without a paradigm shift in economic thought and legal intervention from the present model based on a duality of “internal” versus “external” controls of financial markets to a new model based on a genuine understanding that capitalism and the capitalist state have always been inseparable institutions (Kroszner and Schiller 2011), then the economic crimes of the most powerful financial entities will remain as they have always been—beyond incrimination.   

 

ON THE CONTRADICTORY FORCES OF FREE-MARKET CAPITALISM AND THE FAILURES OF THE CURRENT SECURITIES LAWS TO PREVENT WALL STREET FINANICIAL FRAUDS

State-legal criminalization of security fraud hangs in the balance of the contradictory forces of free-market capitalism. For example, when similarly dominant interests and behaviors of the political economy are both illegal and highly profitable as numerous financial transactions were in the run up to the Wall Street meltdown, then the capitalist state finds itself in the contradictory position of trying at the same time both to chastise and to excuse these criminal violations. During the recent financial implosion, these contradictions were reconciled through the selective enforcement of civil and regulatory law rather than the criminal law, where for example, in a pre-adjudicated civil case JP Morgan Chase was fined $13 billion to settle state and federal claims of securities fraud. Similarly, five other major U.S. banks agreed to pay some $25 billion to settle claims surrounding their fraudulent and illegal mortgage practices rather than face criminal or civil litigation.

Cognitively, the omission of the application of the criminal law happens through the cultural and social denial of the intentionality of the financial institutions responsible for the crisis and the corresponding lack of moral accountability for those powerful people in charge of those institutions. In the US, these denials are also reinforced by a capitulation of the mass media as well as by the academic fields of law, economics, and crime. For example, whether one is examining the Wall Street fiasco from the lens of criminology, economics, or jurisprudence, the traditional orientations in each of these disciplines have been ideologically disengaged from the political and socio-legal realities of the capitalist state. In the case of mainstream criminology, David Matza, underscored more than 45 years ago that among “their most notable accomplishments, the criminological positivists succeeded in what would seem the impossible. They separated the study of crime from the workings and the theory of the state” (Matza 1969, p. 143). Matza was careful to point out that this separation was not necessarily a conscious or a deliberate action. Rather, he contended that these scholars or scientists’ partial blindness was due to the fact that these fields structured their studies “in such a way as to obscure obvious connections or to take the connections for granted and leave the matter at that” (Matza 1969, p. 143). As both an iconoclast among sociological positivists and an integrationist among legal scholars, Donald Black’s holistic method to the study of legal behavior stands apart from most mainstream theorists of the law.

In particular, Black discusses and identifies four styles of law or governmental social control: (1) penal, (2) compensatory, (3) therapeutic, and (4) conciliatory. All but the therapeutic mode, which aspires toward achieving normality for the deviant violator, is applicable to Wall Street looting. Penal control in its purest form involves the state taking the initiative against the offender. The question becomes the guilt or innocence of a criminal defendant. By contrast, in the case of compensatory control, the victim takes the initiative without the assistance of the state. As the plaintiff, his complaint “alleges that someone is his debtor, with an unfulfilled obligation. He demands payment” (Black 2010, p. 4). Both of these legal forms of governmental control are adversarial. They have contestants—complainants and defendants—winners and losers. In the case of criminal-penal control, the conflicts are between self-determination versus punishment. In the case of compensatory-civil control, the conflicts are between self-determination versus payment.

Both the therapeutic and conciliatory styles of law are remedial. They involve methods of social repair and maintenance, or of providing assistance to people in trouble. In “these styles of social control the question is what is necessary to ameliorate a bad situation” (Black 2010, p. 4). In the case of conciliation, the goal is about re-establishing social harmony. In the pure case, “the parties to a dispute initiate a meeting and seek to restore their relationship to its former condition. They may include a mediator or other third party in their discussion, together working out a compromise or other mutually acceptable resolution” (Black 2010, p. 5). Finally, Black carefully emphasized that “social control may deviate from these styles in their pure form, combining one with another in various ways” (Ibid.).

In the case of Wall Street looting and federal regulatory colluding, there were multiple expressions or overlapping exercises in both compensation and conciliation (Barak 2012). Predictably, according to Black’s theory of the law in action, at the very height of the Wall Street pyramid of securities fraudsters, the “high rollers” were not subject to any criminal or penal control. Further down the financial “food” chain, a relatively small number or handful of inside traders or hedge fund dealers were subjected to criminal arrests, indictments, and convictions. Even further down the network of financial illegalities, a few thousand petty mortgage fraudsters were criminally prosecuted and sanctioned.

 

ON THE INEFFICACY OF STATE-LEGAL CONTROL OF FUTURE SECURITIES FRAUDS

Concerning what is currently being done to prevent Wall Street securities frauds and for the purposes of curtailing these financial menaces and otherwise assisting the stabilization of the productivity of financial markets, policymakers, politicos and enforcers have availed themselves of a myriad of economic and legal strategies. At the start of the recent financial crisis in early 2009, the realpolitik of capital hegemony had actually considered the idea of disbanding the mega-economic institutions of global banking, with Lawrence Summers, the Director of the White House’s National Economic Council for President Obama, 2009-2010, arguing for the breakup and Timothy Geithner, U.S. Secretary of the Treasury, 2009-2013, arguing against the breakup (Barak 2012). Typically, when financial crises occur capitalist societies tend to civilly mediate rather than criminally prosecute in their efforts to control securities-financial fraud. In the not too distant past, circa 1933 to 1998, as a strategy of preventing high-risk trading and speculation that contributed to the Wall Street Crash of 1929, the United States had simply precluded the mixing of commercial and investment banking transactions; to do so was a criminal felony.

Short of legally dissolving the mega-financial institutions, we also know that neither the common civil regulations nor the uncommon criminal sanctions have ever historically leveraged enough control or a big enough wallop to make a substantial difference in the conduct of Wall Street. When it comes to enforcing the vast majority of laws governing capitalist markets and the financial services industry today, the numerous investigations by the Securities and Exchange Commission each year, overwhelmingly result in steering these illegal transactions away from the criminal law and towards the civil law (Eaglesham 2013).

With respect to the transgressions involving the banking cartels of Wall Street, roughly 98% of these cases are settled civilly with the respondents having neither to admit nor deny illegal wrongdoing (Overdahl and Buckberg 2012), paying some kind of token fine representing a fraction of the ill gotten gains, and promising to clean up their future business dealings. Not only do these settlements, representing between 650 and 700 per year (Ibid.), not deter banking fraud, they also notably prohibit the filing of class action lawsuits by millions of financial victims. Lastly, because these settlements do not require the submission of consent degrees that would reveal the facts upon which the agreements were reached, it is basically impossible for U.S. district judges to determine whether the proposed judgments are fair, reasonable, or adequate, and, most importantly, whether or not these settlements are in the public interest (Calathes and Yeager, 2013).

From numerous vantage points, the state-social control panoply of legal powers have rarely, if ever, measured up to the political and economic powers wielded by those financially respectable criminals in their struggles to “self-regulate” their monetary transactions vis-à-vis the dominant ideology of “free” markets.  Since the passage of the Wall Street Financial Reform and Consumer Protection Act of 2010, otherwise known as Dodd-Frank, for example, legislators and lobbyists—even before these rules had had a chance to settle in or be implemented—were working nonstop on behalf of Wall Street to exchange, alter, overturn, and block the formation of the vast majority of the new rules to regulate financial transactions involving consumers, investors, and shareholders (Barak 2012).

The political irony is that this material and ideological resistance to the regulatory reforms of Dodd-Frank not only effectively preserves a private banking system that is dependent on the nation-state for its very viability, but it also reinforces the same kinds of crony capitalism that contributed to the financial meltdown of 2008. These bourgeois legal-social relations have been characterized by an array of negotiated bailouts, exemptions, and waivers worked out between the investment oligarchy of Wall Street and the Federal Reserve System, the U.S. Department of Justice, and the Securities and Exchange Commission to avoid, at any and all costs, the criminal culpability for between $13 and $20 trillion dollars in lost wealth not to mention the liability for the tens of millions of people worldwide who lost their homes and/or jobs. The important point to grasp is that the legislation of Dodd-Frank as well as most economic analyses of the financial meltdown leave these and other contradictions of finance capitalism and the capitalist state unacknowledged and unaddressed (Barak 2012).

The absence of law or social control as an explanation for a variety of crimes has a long tradition in both criminological and socio-legal circles (Andenaes 1966). This absence is also part and parcel of the underlying rationale for an alternative or new regulatory paradigm. At the same time, for more than a century psychologists and sociologists have used the concept of social control to explain the conduct of people in organizations, neighborhoods, public spaces, face-to-face encounters, and for our purposes, trusting financial relationships. In terms of the latter, this has meant that “there has to be trust in rules” and “trust that others one hardly knows will uphold the rules” (Schiller 2011). Accordingly, market exchanges have always had to disconnect their financial transactions from personal relationships by formalizing these into legal rules and regulations. Unfortunately, these legal transactions of social control have rarely been severed from the structural needs of a changing political economy.

Ubiquitous social control can also be found whenever and wherever “people hold each other to standards, explicitly or implicitly, consciously or not; on the street, in prisons, at home, at a party,” or in the high speed digitized universe of Wall Street trading. In the world of criminality both high and low, social control “divides people into those who are respectable and those who are not; it disgraces some, but protects the reputations of others” (Black 2010, p. 105). Within the legal dynamics of social control, criminality and respectability are defined at one and the same time as polar opposites. Black contends further that social respectability also helps to explain the behavior of the law: “to be subject to law is, in general, more unrespectable than to be subject to other kinds of social control. To be subject to criminal law is especially unrespectable” (Ibid. p.111). As one of Black’s legal principles maintains, when all else is constant, the amount of criminal law varies inversely with the respectability of the offender’s socioeconomic standing.

             These characteristics of the law’s behavior and of social control beg another kind of and yet related question: “How far will agents of law enforcement and academia or policy wonks go to whitewash the financial crimes of Wall Street in order to protect the fraud minimalist reputations of some of the most successful banking criminals in the world?” In the summer of 2011, for example, there was the rather alarming and prominent whistle-blowing Congressional testimony of SEC attorney Darcy Flynn about how “the nation’s top financial police [had illegally] destroyed more than a decade’s worth of intelligence they had gathered on some of Wall Street’s most egregious offenders,” including both insider trading and securities fraud investigations involving such heavies as Goldman Sachs, Lehman Brothers, AIG, Deutsche Bank, and many others (Taibbi 2011). In a nutshell, shortly after the financial implosion, the SEC conveniently eliminated the records of some 9,000 investigations of wrongdoing or “Matters Under Inquiry” dating from 1993 to 2008. There were also a cozy number of cases involving high-profile firms that were never graduated into full-blown criminal investigations because of what has been referred to as an “obstruction of justice” by misbehaving attorneys caught up in the revolving personnel doors of government regulation and Wall Street. 

The problem of controlling securities fraud goes far beyond the revolving doors that are not really conflicts of interests per se. As Matt Taibbi formerly of Rolling Stone wrote at the time of Flynn’s testimony before Congress, the “SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago” (Taibbi 2011). The same could also be said about the widespread use of systems of automated, real time monitoring of trades and trading patterns that have been around since the 1990s. Nevertheless, maybe it is time to empower forensic accountants and law enforcement as well as regulatory officials so that they may both “routinely use ‘panoptic’ surveillance” methods and “digitally mine the online activities of CEOs” (Snider 2013, p. 155). After all, banking firms are already “tapping a cottage industry of software companies that use complex algorithms to monitor traders’ calls and emails—looking for catch phrases as well as changes in tone—to try to detect signs that traders may be colluding or placing unauthorized bets” (Colchester 2013). 

Moreover, I am quite confident that if the software does not already exist in the National Security Agency’s arsenal of surveillance, then the NSA or one of its contracting companies could usefully spend millions of taxpayer dollars to lure away some of those Wall Street Quants who are paid seven figure incomes annually for their ongoing development of highly complex algorithms that lay those billion-dollar golden eggs. On the other hand, the government could try using traditional wiretapping and on-tape conversations to prove securities frauds as it did in successfully bringing down the Galleon Group hedge fund for “insider trading” and criminally convicting billionaires Rah Rajaratnam and Rajat Gupta. Then again, the use of wiretaps in prosecutions of financial crime is still contested territory. That is to say, both Rajaratnam and Gupta are presently free from their prison sentences while they appeal their guilty verdicts, asking the courts to set aside their convictions, arguing that the wiretaps violated their 4th amendment Constitutional “right to privacy.” 

 

ON THE NONCONTROL OF HIGH-RISK SECURITIES FRAUD

Throughout U.S. history, the illegal use of public money by economic and political elites for personal gain has come mostly without penal sanctions of any kind. Such fraudulent use of public money in the US can be traced back to the Panic of 1792 and to the rampant speculation of William Duer, the Assistant U.S. Secretary of the Treasury as well as other prominent bankers and merchants, whose risk-taking behavior ultimately resulted in the expansion of credit by the newly formed Bank of the United States. At the time, this type of “crony capitalism” revolved around the use of federal funds that enriched politicians and close friends of Alexander Hamilton’s inner circles. Although both Duer, also one of the co-founders of the Bank of New York and Alexander Macomb, one of New York’s richest businessman and prominent citizens, ended up broke and in debtor’s prison, most of Hamilton’s other associates would make fortunes from their insider speculation as the Treasury Secretary and the other members of the Sinking Fund Commission, including Vice President John Adams, Secretary of State Thomas Jefferson, Attorney General Edmund Randolph, and Chief Justice John Jay came up with a plan to bailout those banks facing insolvency. In the process, the Sinking Fund Commission stabilized the securities markets, prevented the panic from becoming a recession, and set an early precedent for the central government bailing out the financial markets (Sylla, Wright, and Cowen 2009).

The treatment of most of the financial speculators and inside traders as “beyond incrimination” at the end of the 18th century is consistent with the history of large-scale fraud and looting throughout 19th and 20th century America.  In fact, the noncriminal reactions to securities fraud and financial looting represent a constant, dependable, and unswerving pattern of non-enforcement of the criminal sanction for society’s most powerful wrongdoers of the public trust (Barak 2012). A history of this type of fraud and looting in the U.S. would, for example, include: (1) the insider trading and “cooking of the books” perpetrated by the bank executives, directors, and branch managers of the Second Bank of the United States (1816-1836); (2) the 1867 collapsing of Credit Mobilier while its owners absconded with $23 million in loan proceeds; (3) the 1912-13 Pujo Committee investigations by the U.S. Congress of the “money trusts” and their influence and manipulation of the New York Stock Exchange involving connected Wall Street bankers led by J.P. Morgan; and (4) the 1932-34 U.S. Senate Banking and Currency Committee’s Pecora Commission’s investigation of speculation and the marketing of hundreds of millions of dollars of worthless stock by such Wall Street banks as Chase National Bank, J.P. Morgan, and Kuhn Loeb & Company, leading up to the 1929 stock market crash (Goldmann 2010).

Similarly, the illicit Wall Street banking realities at the turn of the 21st century were well established early in the 20th century and foreshadowed in 1947 when 17 leading Wall Street investment banks were sued by the federal government, charged with “effectively colluding in violation of antitrust laws” (Cohan 2012). 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” (Quoted in Cohan 2012). 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” (Cohan 2012). 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.  

As journalist, former Wall Street banker, and best-selling author of House of Cards, The Last Tycoons, and Money and Power, William D. Cohan, contends the government was “spot on” in its 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” (Cohan 2012). The very same arguments can be made, only more so today, 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. For example, at the beginning of 2012, the top three banks held 44% of market share, the top 20 banks held 92% of market share, and some 8000 other banks held the remaining 8% of market share (Ritholtz 2011). Two years later, there were less than 7000 banks, most of them the victims not of failures but of mass consolidation and the expansion of the behemoth banks, such as Bank of America. For comparative purposes, there were around 18,000 different federally insured banks operating in the U.S. in 1985. Today, there are the fewest number of banking options since the government began tracking these statistics back in 1934 (Moran 2013).           

 

BOTTOM LINE: HIGH-RISK SECURITES FRAUDS ARE NOT CRIMES

Since the financial meltdown of 2008, people are quick to point out that the Wall Street of today is not your father’s Wall Street from a generation ago, let alone your grandfather’s Wall Street from the 1930s. In a world of fully digitized trading where super-sized Wall Street firms are enabled by the latest algorithmically based software programs, these insiders can make millions in microseconds from high-volume trades. Moreover, the players of the new Wall Street are in the business of constantly developing innovative instruments and securing advantages over their investors and other competitive traders. Whether or not these state-of-the art securities transactions are noncriminal or criminal, civilly legal or illegal, they should at least be subject to interpretation, to adjudication, and to differing rules of law. In the case of the recent financial implosion, however, neither the instruments old or new have been subject to criminal or even civil adjudication, not to mention judicial review on the merits rather than on the settlements. Instead, the bottom line at the end of the day is that the U.S. banking oligarchy with its capitalist state allies, decides what does or does not constitute a “crime” in the world of securities based market transactions.

To recapitulate, by the end of 2014, some six years after the Wall Street debacle, no senior executives from any of the major financial institutions had been criminally charged, prosecuted or imprisoned for any type of securities fraud. This is in stark contrast to the Savings and Loans scandals of the 1980s when special governmental task forces referred some 1,100 cases to prosecutors, resulting in more than 800 bank officials going to prison. Comparatively, some critics have argued that there has been a lack of collective governmental resolve to criminally pursue these offenses. Other critics have argued that a collective governmental resolve not to hold these offenders criminally accountable has succeeded. Both of these claims are sustained by an examination of the available evidence.

The nonprosecution of securities fraud is precisely what the economic elites of Wall Street and the political elites from the Bush II and Obama Administrations as well as from the majorities of both the U.S. Senate and House of Representatives had desired since the collapse of Wall Street. The outcome of zero criminal prosecutions is neither by accident nor conspiracy but mostly by consensus or collusion. Even before the economic crisis, a concerted effort not to prosecute “big time” financial fraud had begun in 2003; a reaction to the “overzealous” prosecution of several corporate fraudsters in the USA in the early years of the new millennium.  The movement not to criminalize picked up momentum in 2005-06 when the U.S. Supreme Court overturned the criminal fraud conviction of Arthur Anderson for helping to cook the accounting records of Enron (Barak 2012).

From that point on, instead of strategies to “better” control these financial crimes, strategies were developed to control the damage done to the faith of Wall Street investors in the financial system. The outcomes of this non-penal strategy of not controlling financial fraud resulted in: (1) conciliatory efforts by the government, mainly between the Security and Exchange Commission and the Department of Justice, to restore these institutionalized practices rather than to change them, and (2) compensatory efforts by private investors, individual or corporate, to seek damages for their losses. In terms of those conciliatory efforts, these have been pretty successful in reinforcing the “business as usual” relations of Wall Street. It is these structural market relations, unfortunately, that are at the center of the financial securities crisis confronting both the USA and the world today. In terms of the compensatory efforts, these have included dozens of successful cases against every major Wall Street investment firm for securities fraud, amounting to hundreds of billions of dollars in corporate fines and payments. Either way, however, these financially respectable crimes of Wall Street remain outside the purview of criminal prosecution.

 

A PARADIGM SHIFT AND A 20-POINT “MANIFESTO” FOR FINANCIAL CHANGE

At the end of Alan Greenspan’s The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (2013), the longest serving Chairman of the Federal Reserve Board (1987-2006) reveals that he no longer ascribes to the “free market” assumptions that he once did. Unfortunately, he has nothing to replace those assumptions with, including those of the old Keynesianism that he once upon a time bought into. Greenspan also had these pearls of wisdom

to share about the banking crisis of 2008 and the Great Recession that followed: “I have come to a point of despair where, if we continue to make banks wards of the state through TBTF policies, I see no alternative to forcing banks to slim down to below a certain size threshold where, if they fail, they will no longer pose a threat to the stability of American finance” (Greenspan 2013, p. 298). Of course, as everyone knows, the same Wall Street banks that brought about the financial implosion are much bigger institutions today than they were then.

What most people do not know, however, including those U.S. legislators on both sides of the political isle who knowingly voted for the Financial Services Modernization Act of 1999 that eliminated the separation between commercial and investment banks established by Glass-Steagall, was that it also permitted the newly merged banking concerns to delve into any and all economic activities that are “complimentary to a financial activity.” As a consequence, banks like Morgan Stanley, JPMorgan Chase, and Goldman Sachs now “own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals” (Taibbi 2014, p. 34). These banks are also buying, if not selling, entire industries. For example, they are “buying oil that’s still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they’re also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures markets, swaps on the swaps markets,” and so on and so forth (Ibid.). Naturally, allowing a handful of banks to control the supply of crucial physical commodities and to trade in the financial products that might be related to those markets, such as aluminum in the case of Goldman Sachs, is not only a furtherance of the financial services industry’s dominance of the political economy and concentration of wealth, but also an open invitation to commit mass manipulation and fraud.  Finally, such concentrations of wealth reinforce the manufacturing of speculation and the neoliberal polices of privatization, austerity, and securitization—all of which exacerbates economic inequality and class stagnation for the disappearing “middle” and working classes, the asymmetries in social and political power, and the probability that the crimes of the powerful will be less controllable in the future than they are now.  

Consequently, what are called for are alternative policies to the ones of neoliberalism and economic fundamentalism that contribute to unenlightened self-interest, under-regulated financial markets, and unfettered victimization on behalf of unsustainable capital accumulation. The alternative policies suggested below are reflective of a “new” paradigm based on a restructuring of financial markets as well as the relationships between governments and the people. This alternative economic-legal-social paradigm encourages finance capital to move away from speculative investments that exist primarily to enrich the wealthy and expand capital and toward large-scale investments in pubic goods and services, infrastructure, and greener economies, for the purposes of enriching sustainable ecosystems and expanding the public commons.

This emerging paradigm is grounded in changing the existing system of ownership, democratizing wealth, and building community-sustaining economies from the ground up, inclusive of co-ops and of old and new forms of employee stock ownership plans, which currently involve some 10.5 million people in virtually every sector of the U.S. economy.  As Gar Alperovitz argues: “new forms of ownership are important not only on their own, but also in that they begin to offer handholds on a new longer-term vision, a set of ideas about democratization that—if they were to become widespread, embraced, refined, and widely understood—form the basis, potentially, of bringing people together, both to challenge the dominant hegemonic ideology and to build a democratized economic basis for a new vision and new system” (Alperovitz 2013, p. 41).

Furthermore, this utopian paradigm of the possible understands that the material expansion of finance capital for the sole intent of maximizing finance capital rather than for the purposes of expanding sustainable material economies is counterproductive to our global well being for numerous reasons not the least of which is that the former tends to  harm our earthly environments as it expands the growing deprivations and inequalities across the globe. Similarly, an alternative “regulatory regime” tackles or encourages a prohibition against hospitable environments for speculation, for unsustainable debt, and for economic bubbles, or for what Susan Will has referred to as the Ponzi Cultures of advanced capitalism. As Will argues, legitimate and quasi-legitimate Ponzi schemes that are already embedded in the prevailing markets such as the rise of the US debt-to-GDP ratios of households, financial firms, and corporations, or the recent dot.com and housing bubbles, and the use and abuse of private and public pension funds or equity withdrawals more generally, threaten whole economies. These need to be resisted because they inspire questionable behavior and desensitize individuals to the dangers of illegal Ponzi schemes as they obscure a financial system that exists, in significant part, because of other structural and institutional Ponzi schemes (Will 2013).

Nearly all of the policy changes of the “manifesto” advocated here have either some kind of contemporary political backing or have been implemented in one form or the other somewhere around the developed world:

 

·      Break up and/or turn the too big to fail banks into public utilities;

·      Ban the speculative use of credit default swaps;

·      Exempt securities trading, insurance operations, and real estate transactions from the Federal Deposit Insurance Corporation;

·      Standardize derivatives and trade them openly on public exchanges;

·      Institute a financial transaction tax to discourage excessive trading and risk;

·      Tax earned, unearned, and carried interest income at the same rates;

·      Establish independent auditing and rating systems of corporate financial affairs;

·      Develop high-tech tagging systems able to monitor and track algorithmic trades;

·      Make companies and individuals admit wrongdoing as a condition of settling all civil charges or be forced to fight the charges in court;

·      Initiate the empowerment of the Financial Stability Oversight Council under Dodd-Frank to reign in the problem of excessive risk taking by the “shadow banking” industry or by those non-banking financial institutions like AIG;

·      Institute tougher restrictions and require more long-term debt, vis-à-vis the Volcker Rule, on speculative trading throughout the banking industry, especially those which include securities and derivatives trading as a part of their “casino banking” activities, to further prevent banks from engaging in proprietary trading or making risky bets with their own money;

·      Amend the Volcker Rule adopted on December 10, 2013, which now positively makes it more difficult for banks to buy and sell securities on behalf of clients, to trade with their own cash, and restricts them from investing in risky hedge and private-equity funds, but it also needs to require bank executives not only to guarantee that their firms are in compliance with the Rule, but to hold them liable for such assurances;

·      Resurrect a modernized version of Glass-Steagall and/or build stronger firewalls around insured deposits involving commercial banking;

·              Integrate financial market incentives with climate change adjustments;

·      Support environmental defense organizations like the Business Alliance for Local Living Economies or the American Sustainable Business Council;

·      Form state-owned banks and create Benefit or not-for-profit “B” corporations;

·      Pass a comprehensive infrastructure-human development fund and Americans job act, appropriating $1 trillion over the next decade;

·      Pass a forgive student loan debt and/or payback schedule based on income and/or ability to pay;

·      Establish for all working people a livable wage;

·      Establish a single-payer health care system in which the government rather than private insurers pay for all health care costs.

 

Of course, none of these institutional and structural changes will come easily or without challenges and resistance, especially in light of the expected pushback from the very powerful that benefit from the prevailing political economy.

 

References                                                        

Alperovitz, Gar. 2013. What Then Must We Do? Straight Talk about the Next American Revolution. White River Junction, VT: Chelsea Green Publishing, p. 41.

 

Andenaes, J. 1966. “The General Preventive Effects of Punishment,” University of Pennsylvania Law Review 114 (May): 949-983.

 

Answers.google.com/answers/threadview?id=296588.

 

Barak, G.  2012. Theft of a Nation: Wall Street Looting and Federal Regulatory Colluding. Lanham, MD: Rowman & Littlefield.

 

Black, D. 2010 (1976). How Law Behaves: An Interview with Donald Black, reprinted in The Behavior of Law. Special Education. Bingley, UK: Emerald Group Publishing, p. 105.

 

Calathes, W. and Yeager, M.  2013. Sweetheart Settlements, the Financial Crisis, and Impunity: A Case Study of SEC v. Citigroup Global Markets, Inc. Paper presented at the Annual Meetings of the American Society of Criminology, Nov. 22, 2013.

 

Chambliss, W. 1967. “Types of Deviance and the Effectiveness of Legal Sanctions,” Wisconsin Law Review (Summer): 703-719.

 

Cohan, W. 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.

 

Colchester, M. 2013. “Banks Scan Trader Talk for Trouble.” The Wall Street Journal. Dec 6: C1-2.

 

Eaglesham, J. 2013. “SEC Trims Its Caseload After Crisis.” The Wall Street Journal.

Dec. 18: C1-2.

 

Goldmann, P. 2010. Fraud in the Markets: Why It Happens and How to Fight It. Hoboken, NJ: John Wiley & Sons.

 

Greenspan, A.  2013. The Map and the Territory: Risk, Human Nature, and the Future of Forecasting. New York: The Penguin Press, p. 298.

 

Harvey, D.  2014. Seventeen Contradictions and the End of Capitalism. Oxford, UK:        Oxford University Press.

 

Kroszner, R. and Shiller, R. (eds.) 2011. Reforming U.S. Financial Markets: Reflections

            Before and Beyond Dodd-Frank. Cambridge, MA: MIT Press.        

 

Matza, D.  1969. Becoming Deviant. Englewood Cliff, NJ: Prentice-Hall, p. 144.

 

Moran, C.  2013. “Number of U.S. Banks Hits Record Low.” Consumerist. Dec. 3. Retrieved from http://consumerist.com/2013/12/03/number-of-u-s-banks-hits-record-low/.

 

Overdahl, J.A. and Buckberg, E 2012. NERA Economic Consulting, SEC Settlements Trends: 2H11 update 5, http:/www.nera.com/nera-files/PUB SEC Trends 2H11 0612.pdf.

 

Ritholtz, B. The Big Picture, December 25, 2011. http://www.ritholtz.com/blog/2011/12/the-banking-oligopoly/.

 

Schiller, R. 2011. “Democratizing and Humanizing Finance,” in Reforming U.S. Financial Markets: Reflections Before and Beyond Dodd-Frank, edited by Randall Kroszner and Robert Schiller (Cambridge, MA: MIT Press: 14).

 

Snider, L. 2013. “The Technological Advantages of Stock Market Traders” in How They Got Away with It: White Collar Criminals and the Financial Meltdown, edited by Susan Will, Stephen Handelman, and David Brotherton. New York: Columbia University Press, p. 155.

 

Sylla, R., Wright, R. and Cowen, D. 2009. “Alexander Hamilton, Central Banker: Crisis Management During the U.S. Financial Panic of 1792.” Business History Review, Vol. 83: 61-88 (Spring).

 

 Taibbi, M. 2011. “Is the SEC Covering Up Wall Street Crimes? Rolling Stone. August 17. Retrieved on 8/27/11 from http://www.rollingstone.com/politics/news/is-the-sec-covering-up-wall-street-crimes-20110817?print=true.

 

Taibbi, M. 2014. “The Vampire Squid Strikes Again.” Rolling Stone. February 27: 34.

 

Tombs, S. and Whyte, D. 2013. “Reappraising Regulation: The Politics of ‘Regulatory Retreat’ in the United Kingdom” in How They Got Away with It: White Collar Criminals and the Financial Meltdown, edited by Susan Will, Stephen Handelman, and David Brotherton. New York: Columbia University Press, p. 219.

 

U.S. Government Accounting Office, 2009.

 

Will, S. 2013. “America’s Ponzi Culture” in How They Got Away with It: White Collar Criminals and the Financial Meltdown, edited by Susan Will, Stephen Handelman, and David Brotherton. New York: Columbia University Press, p. 60.