Wall Street Threatens to Blow Up Economy If They’re Prosecuted
ritholtz.com | June 9, 2014
The Department of Justice is “considering” initiating criminal charges against 2 banks. In response, the normal cast of characters is saying – as they have for years – that prosecuting banks will cause a meltdown of the economy.
The U.S. attorney for the Southern District of New York recently mocked the silly claims of gloom and doom:
“Companies, especially financial institutions, will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await,” he said. “I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”
As we’ve repeatedly noted, this is wholly untrue.
Indeed, prosecuting the individual Wall Street executives who knowingly committed criminal fraud won’t harm the economy. After all, the main driver of economic growth is a strong rule of law. And numerous Nobel prize winning economists have said that prosecuting Wall Street white collar is necessary for a prosperous economy.
Proof that prosecuting criminal fraud doesn’t hurt the economy comes from Iceland:
[The U.S. and Europe have thwarted white collar fraud investigations … let alone prosecutions.] On the other hand, Iceland has prosecuted the fraudster bank heads (and here and here) and their former prime minister, and their economy is recovering nicely … because trust is being restored in the financial system.
In response to the sky-is-falling spouting banking apologists, professor of law and economics – and chief S&L prosecutor – William Black explains:
First, no banker is “too big to jail.” They are easily replaceable and removing a fraudulent bank CEO from power is the single most productive act that regulators and prosecutors can accomplish. [The Department of Justice’s chief of criminal prosecutions] Breuer and Attorney General Eric Holder were involved in a con when they claimed that their failure to prosecute the senior bank officers leading the frauds was in any way related to “too big to fail.” Hilariously, they even applied the “rationale” for non-prosecution to former bank officers – as if a bank would fail “because” its former officers were prosecuted. It is a testament to the weakness of the reportage that this claim was not treated with ridicule.
Second, valid fraud prosecutions do not “cause” a business to fail. The fraud causes them to fail. They should fail when their “profits” arise from fraud. In particular, they should fail in the case of accounting control fraud because their “profits” are the fictional product of accounting fraud. The markets and the economy are greatly improved when fraudulent enterprises are destroyed. ***
Third, very little is actually “destroyed,” when we place a fraudulent bank in receivership, fire the crooked CEO, and sell the bank to an acquirer of integrity and competence. The new bank will, net, be greatly improved because it has been freed from control by the fraudulent leadership that was “looting” the bank (George Akerlof and Paul Romer, 1993, “Looting: The Economic Underworld of Bankruptcy for Profit”).
Fourth, there is rarely a need to prosecute a bank. In virtually every case in which the bank’s frauds cause serious harm senior officers of the bank will have led the fraud and profited from it. Everyone in law enforcement realizes that any effective deterrence will come from prosecuting those officers and not only removing their fraud proceeds but also imposing fines that will leave the officers bankrupt.
Fifth, the bank’s controlling officers are in an immense conflict of interest when their frauds are detected. They control the bank and its resources. Their first priority is to prevent their own prosecution. Their second priority is to prevent any substantial “claw back” of their compensation. Their third and fourth priorities are to do the same for less senior officers. This isn’t altruism (though it certainly has an aspect of class-based affinity). Fraudulent CEOs realize that it is risky to allow the prosecutors to gain any leverage over more junior officers who may “flip” and testify against the CEO. The fraudulent officers controlling the bank, therefore, will gladly trade seemingly huge fines in exchange for obtaining their top four priorities.
[Finally, the government’s policy of not prosecuting Wall Street criminals] produces what Akerlof and Romer warned was the “sure thing” of CEO “looting” through accounting control fraud plus the assurance that the CEO will not be prosecuted, forced to surrender his fraud proceeds, or forced to pay fines that bankrupt him.Unsurprisingly, the result has been unprecedented accounting control fraud by elite banksters.***
None of this explains why they don’t prosecute bankers (much less ex bankers)
Indeed, the whole if-y0u-prosecute-the-economy-dies scam is like the 2008 bailouts. As we wrote at the time:
Congressmen Brad Sherman and Paul Kanjorski and Senator James Inhofe all say that the government warned of martial law if Tarp wasn’t passed.
As Karl Denninger wrote yesterday:
[S]ounds like “Bail me out or I will crash everything.”
Isn’t that analagous to walking into a bank, opening one’s coat to reveal an explosives-laced belt, and saying “gimme all the money or everyone dies!”
I noted in November:
In the 1974 comedy Blazing Saddles, Cleavon Little plays the new sheriff in an old Western town. The sheriff is African-American, and when he rides into town for the first time, the [racist] townspeople pull out their guns and are about to shoot him.
But he quickly puts a gun to his own head, pretends he’s scared of his own gun, and says “BACK OFF OR THE AFRICAN-AMERICAN GUY GETS IT!!!” The townspeople are dumb and fall for it, suddenly terrified that he’ll kill himself. Here’s the scene.
That’s what Wall Street is doing with the bailout.
The fat cats on Wall Street are saying “give us a lot of money, and buy all of our bad debt for a lot more than its worth, or Wall Street will get it and we’ll go into a depression!”
Are Americans stupid enough to fall for it?
In a recent interview, William K. Black uses the exact same Blazing Saddles sheriff-bank analogy.
Any way you look at it, the too big to fails are not needed and they are dragging our economy into a black hole. Like the sheriff in Blazing Saddles … they are playing us for fools.
[Yves Smith] shared another analogy with me: a man with 15lbs. of Semtex strapped to his waist. She says “any surprise people in the vicinity are very attentive to his desires?”
Indeed, it’s the old protection racket.