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Sunday, December 04, 2011

The law

From time to time, you still hear people argue that what the banksters did (in the run-up to the great unpleasantness of 2008) was legal. No, it wasn't. In this fine piece on the secret $7.7 trillion loan to Wall Street, writer Cynthia Kouril lays down the law:
And then there is this excerpt from NY GBS §352-c:
6. Any person, partnership, corporation, company, trust or association, or any agent or employee thereof who intentionally engages in fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale, or who makes any material false representation or statement with intent to deceive or defraud, while engaged in inducing or promoting the issuance, distribution, exchange, sale, negotiation or purchase within or from this state of any securities or commodities, as defined in this article, and thereby wrongfully obtains property of a value in excess of two hundred fifty dollars, shall be guilty of a class E felony.
Seems to me that this wording applies to anyone who sells shady, snakey financial instruments that have been mis-rated AAA even though they were based on crap mortgages. The wording applies to Moodys and the other rating agencies, and to the Wall Street firms that told the rating agencies what to do.
Comments:
Obama, Pelosi, and Reid had their chance but didn't want to bite the hand that feeds them. We expect this behavior from the republicans but it breaks my heart that my former party does it too. I hope they don't expect any help this next election cycle because the amount I contribute will reflect the amount of help they gave the little guy.
 
I wonder if you are refering to that NYT oped piece I assume it was an op ed cos they didnt allow comments.

Its an interesting question and one I wish you and others would debate more often. Was a crime committed and why isnt it prosecuted?

I happen to agree with Bill Black on this one. What we see is a pattern of control fraud. Moreover it is an ongoing control fraud is continues to this day. Another point worth making is the spectrum of sin. Errors of omission vs comission. And then there is fact that the law has been allowed to be sufficiently vague to allow behaviours which were clearly disasterous for society as a whole. So why didnt the police (SEC) raise the alarm before? Who did congress not act? I have a very simple answer.

Bank Robbers are people who believe that the penalties for robbing banks are too high. If you let them lobby I am pretty sure they will lobby for lighter sentencing guidelines and fewer police.

I happen to believe that illegal acts took place. I am pretty sure that the people who structured deals took legal advice when they structured them. This legal advice would have ensured that they at least had a fig leaf defense in place for any offense committed.

The burden of proof is the wrong way round for these financial crimes. The asymmetry of information to great to allow people to shelter behind the conventional burden of proof. Make them prove their deals are legal, rather than making the SEC prove they are not. And stop SECers moving backwards and forwards. Otherwise its just a Wall Street gravy train.

That would stop this nonsence once and for all.

Harry
 
Of course they were illegal - that should be obvious to anyone with a decent understanding of what was going on in high finance at the time.

I'm not sure I understand the point of those who argue otherwise. Is it:

A) These practices were not illegal because they should not be? (seems a hard one to defend)

B) Those engaging in such behavior shouldn't be held accountable, because they were following the law as it stood at the time, which was inadequate? (so where does the fault lie - insufficient gummint regulation? how did THAT happen, and can such a thing be a "problem" rather than a solution? Perhaps socialistic Democrats or the all-powerful Welfare Queen lobby made it so).

I'd say the real take-away of the blatant illegality is what Glenn Greenwald's new book focuses on - it's not about "what law was broken?" it's about "who broke it?"

There's a small but powerful group of people in this country who are effectively above the law. Or, to put it another way, the "law" is a weapon to be used against the powerless by the powerful.

Sometimes I wonder if American people's belief in their enduring democracy is the only thing keeping it alive, and that by having that belief trampled upon is the only way for it to be re-asserted and re-established.
 
Bush banned the states from protecting consumers. No US federal agency regulates mortgage lending, that's a province of the states. In 2003 when 50 state Governors, Republican and Democrat, collectively sought to legislate against predatory bank lending practices they were blocked by the US Treasury Department’s Office of the Comptroller of the Currency acting on Bush's advice.

In Oct 2008 Mr Lynn Turner, former chief accountant of the SEC, gave evidence to the US House Oversight Committee investigating the collapse of insurance giant AIG. He testified that the SEC Office of Risk Management, which had oversight responsibility of all US securities, including swaps, had been progressively cut by the Bush administration from 146 personnel. By Feb 2008 only one person was left for assessing corporate financial risk management for the entire US securities market!

In Oct 2008 the New York Times reported on Justice Department data showing "prosecutions of frauds against financial institutions dropped 48 percent from 2000 to 2007, insurance fraud cases plummeted 75 percent, and securities fraud cases dropped 17 percent." -- all on the Bush watch.

The powers that be, the finance markets, the regulators, and the political elite have all wanted it this way. More here.
 
I dont think its quite so easy, although I share your conclusion.

So when I have discussed this with friends in the market they say

a) caveat emptor
b) full disclosure was adhered to. The investors just didnt read the small print.
c) It was takes two sides to make a trade. You need a willing buyer and seller. If there was full disclosure of all relevant issues then on what basis can anyone sue? If there was not full disclosure then any investor can sue and will win.

So in answer to Hoarseface,

1) Yes. These transactions should be legal cos no one did anything wrong. People lost money but thats cos they did a stupid trade. That happens all the time.

2) Yes, the law as it stands was followed.

So while I agree with you, I dont think its a gimme. I think that the issues sailed very close to the wind in their disclosures and behaviours. Whether they crossed the line is subjective but I think they did. But you need to demonstrate this. Which behaviour do you think was illegal?

Harry
 
I dont think its quite so easy, although I share your conclusion.

So when I have discussed this with friends in the market they say

a) caveat emptor
b) full disclosure was adhered to. The investors just didnt read the small print.
c) It was takes two sides to make a trade. You need a willing buyer and seller. If there was full disclosure of all relevant issues then on what basis can anyone sue? If there was not full disclosure then any investor can sue and will win.

So in answer to Hoarseface,

1) Yes. These transactions should be legal cos no one did anything wrong. People lost money but thats cos they did a stupid trade. That happens all the time.

2) Yes, the law as it stands was followed.

So while I agree with you, I dont think its a gimme. I think that the issues sailed very close to the wind in their disclosures and behaviours. Whether they crossed the line is subjective but I think they did. But you need to demonstrate this. Which behaviour do you think was illegal?

Harry
 
Harry, I disagree. Caveat emptor is the usual standard to apply when claiming that no-one was deceived. But courts have long recognized that ordinary consumers of complex financial services are not always in a position, legally or financially, to fully assess offerings made to them. That's why we have consumer protection laws. That's what 50 State governors were trying to do when they passed laws in 2003 to protect consumers from predatory banking practices, laws that Bush knocked down. The law also recognizes that if you offer a contract to someone that they have no reasonable prospect from the outset of fulfilling then the contract is void in the first instance (ie no contract exists) since the ingredients essential to form a meaningful contract are not present. Moreover, if such a contract is offered in the expectation that the other party will fail and that you can then obtain a benefit courts can and do regard such behavior as fraudulent. There is more than sufficient evidence that US banks were selling 'liar loans' and 'no-doc loans' knowing full well that these were going to fail and that they were, accordingly, fraudulent.

The banks believed that their liability had been removed for two reasons: (i) because they had on-sold the risk through the process of pooled mortgage funds or securitization, and (ii) they had every reason to believe that a US Federal reserve made up of their own in-house bankers would bail them out via the tax payer if the worst happened, which it did. Moreover, this culture of criminality on the part of the big banks has been demonstrated from multiple credible sources.

Bill Black, former chief prosecutor of crimes in the US Savings and Loans meltdown of the 1980s, has written extensively claiming that the GFC was wall to wall corporate crime.

Richard M. Bowen, former chief underwriter for Citigroup’s consumer-lending group, said he warned his superiors that the mortgage loans the companies were selling to customers and then "securitizing" (ie pooling to place on the investment market) were, essentially, fraudulent.

"In mid-2006, I discovered that over 60 percent of these mortgages purchased and sold were defective," Bowen testified on April 7 before the Financial Crisis Inquiry Commission created by Congress. "Defective mortgages increased during 2007 to over 80 percent of production."

Citibank knew home borrowers were unlikely to pay after two years of low teaser rates that morphed into killer rates yet they lent the money anyway – knowing they (or subsequent owners of the mortgage) would foreclose and get the house and the share market investors in the securitized products would lose their shirts.

It was the same Citibank that in the last two years sought to bail out Greece with loans, and then went out and bet the derivatives market that those loans would fail! That's inherently fraudulent behavior.

And don't forget MERS and the presentation to the courts of hundreds of thousands of false affidavits by foreclosing banks, affidavits claiming ownership or the sighting of mortgage documents proving those banks had a claim on the properties, documents they mostly never held. The chain of custody of the mortgage deed was broken by MERS which simply transferred ownership in their database, overlooking the fact that legal ownership is only achieved when the property transfer is registered with the State and stamp duties paid.

And don't forget AIG and their insurance swaps -- for which they had insufficient backing capital!

All of this is black letter law fraud, top to bottom. Nothing to do with buyer beware. The major US banks were engaged in playing the markets fraudulently and expecting a taxpayer bailout on any collapse.
 
And if you want something that should scare the living bejeezus out of you then consider this. Under George Bush's 2005 bankruptcy laws, written by the big US banks for the big US banks, ordinary plebs suddenly found it impossible to declare bankruptcy, things like student debts at usurious interest rates keeping people in debt bondage for life.

But if you thought that was bad, under the same 2005 'reforms' derivative trade claims are placed in front of cash depositors or trust holdings in a business failure - including a bank failure. Just a month or so ago Bank of America placed $77 TRILLION of derivatives trades (many of them losing trades) in with ordinary bank depositors funds. When those trades explode or the bank goes under then ordinary cash depositors will lose ALL of their money in an instant.

Now normally, margin call funds or cash deposits held by banks are bailed out by the US Federal Deposit Insurance Corporation but even the FDIC has no chance of meeting demands for $77 trillion, or a significant part thereof.

So the US banks are essentially placing a thermonuclear device on the kitchen table, telling the US government "allow us to run dodgy bookwork and fleece the public, pay off all our debts over the next 30 years with massive austerity measures and the looting of public assets or we will simply bring down your entire banking system and the global economy." Got the picture? This is class warfare with the gloves off.
 
I agree with both of your points wxyz. But you havnt said anything about the recent Citibank deal that Judge Rakoff recently ruled on. Similarly there is a Goldman Sach's Abacus deal with was partially on behalf of Paulsons hedge fund.

These specific deals were between similarly skilled (supposedly) market professionals. It is claimed there was no criminal deception (I have my doubts on this point - there is a point that economy with truth is deception). The guiding principle is caveat emptor. None of these counterparties needed to do these trades if they didnt want to.

Re the disclosure point, in both cases the counter parties claim that it was disclosed that these were synthetic CDOs. That means that someone would have to write CDS on the underlying credits by definition. The issue is whether it was made clear that Citi/GS/Paulsen always intended to short the credits. It seems clear in retrospect that they did, but the banks concerned take different lines. Citi says it did not make a final decision on how to hedge the transaction untill after it did the trade - but it depended on market conditions. GS says they did it on behalf of their client (and subsequently themselves). This is important because its all about what you intended to do. If you intend to short the credit then you should probably disclose that to the client. If you ended up shorting the credit cos it was the best way to do the trade how could you disclose that?

There are other much better points that one can make about why these trades are criminal. Part of the problem is that Robert Khuzami is up to his neck in these trades. He would have approved a bunch for DB when he was head of legal there.

Speaking of the initiating mortgage brokers, like Countrywide or the hundreds of smaller brokers who committed criminal frauds, well every last one has now put itself into bankruptcy or been bought by some sucker (Bank of America for example). There is no one else to sue now. Thats the joy of limited liability. The corporate entity is dead. The owners walk away with the money.

You need to prove a criminal enterprise to get the money back. But proving a criminal enterprise in a control fraud type situation is very very difficult to do. The defense will always be "Whocouldanode?". You can prove incompetency but that isnt a crime. You have to prove deliberate fraud. Tough.

What can I say? A stupid system set up by stupid people which benefited clever unprincipled people, supported by politicians who are obviously dumb-asses themselves.

Good luck with proving any of it.



Harry
 
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