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.

Wall Street’s Empty Threat: The Fallacy of Economic Meltdown if Prosecuted

In this thought-provoking article from ritholtz.com, published on June 9, 2014, the author highlights the recurring claim by Wall Street that prosecuting banks will lead to a catastrophic economic meltdown. The Department of Justice’s consideration of criminal charges against two banks has once again brought this argument to the forefront. However, the author challenges this assertion, presenting evidence that prosecuting Wall Street executives for their fraudulent actions is not only necessary for a prosperous economy but also vital for restoring trust in the financial system. Here are a few key points to consider:

1. The Mockery of Doom and Gloom Claims
The U.S. attorney for the Southern District of New York dismisses the exaggerated warnings of economic collapse as a tactic used by financial institutions to evade tough enforcement actions. He emphasizes the importance of upholding the rule of law and dispels the notion that the world will end if criminal actions are taken against fraudulent bankers.

2. The Role of Prosecutions in Economic Growth
Contrary to popular belief, prosecuting individual Wall Street executives involved in criminal fraud does not harm the economy. A strong rule of law serves as a driver of economic growth. Many Nobel Prize-winning economists support the notion that prosecuting white-collar crimes on Wall Street is essential for a thriving economy.

3. Lessons from Iceland
Drawing on Iceland’s experience, the article demonstrates that prosecuting fraudster bank heads and the former prime minister contributed to the country’s recovery and the restoration of trust in its financial system. Iceland’s example challenges the notion that prosecuting fraudulent bankers is detrimental to economic stability.

4. Debunking the “Too Big to Jail” Myth
The argument that certain bankers are “too big to jail” is refuted. Removing fraudulent bank CEOs from power is an effective way to protect the economy. Prosecuting senior bank officers who led the frauds and profited from them not only dismantles the fraudulent enterprises but also serves as a deterrent to future misconduct.

5. The Positive Impact of Prosecutions
Valid fraud prosecutions do not cause businesses to fail; rather, the fraud itself is the cause. When a fraudulent bank is placed in receivership, with the corrupt CEOs removed and the bank sold to a competent and reputable acquirer, the financial system is actually improved. Prosecutions are instrumental in removing fraudulent elements and allowing honest entities to thrive.

6. The Conflicts of Interest and Priorities
Banking executives involved in fraud have immense conflicts of interest when their illegal activities are detected. Their priority is to avoid prosecution, protect their compensation, and prevent junior officers from testifying against them. Offering significant fines in exchange for their cooperation does little to deter fraudulent behavior or ensure justice.

The article exposes the fallacy of Wall Street’s claim that prosecuting banks will result in an economic catastrophe. The evidence shows that prosecuting individual Wall Street executives for their fraudulent actions is essential for a prosperous economy. By dismantling fraudulent enterprises, removing corrupt CEOs, and restoring trust in the financial system, the foundations of a robust and fair economy can be laid. It is crucial to recognize that the fearmongering tactics employed by Wall Street are merely attempts to evade accountability. True economic stability can only be achieved through the application of a strong rule of law and the prosecution of those who engage in criminal activities.