Posts filed under “Think Tank”

DOJ Admits: “We Got it Wrong”

Now the DOJ Admits They Got it Wrong
William K. Black
September 10, 2015




By issuing its new memorandum the Justice Department is tacitly admitting that its experiment in refusing to prosecute the senior bankers that led the fraud epidemics that caused our economic crisis failed. The result was the death of accountability, of justice, and of deterrence. The result was a wave of recidivism in which elite bankers continued to defraud the public after promising to cease their crimes. The new Justice Department policy, correctly, restores the Department’s publicly stated policy in Spring 2009. Attorney General Holder and then U.S. Attorney Loretta Lynch ignored that policy emphasizing the need to prosecute elite white-collar criminals and refused to prosecute the senior bankers who led the fraud epidemics.

It is now seven years after Lehman’s senior officers’ frauds destroyed it and triggered the financial crisis. The Bush and Obama administrations have not convicted a single senior bank officer for leading the fraud epidemics that triggered the crisis. The Department’s announced restoration of the rule of law for elite white-collar criminals, even if it becomes real, will come too late to prosecute the senior bankers for leading the fraud epidemics. The Justice Department has, effectively, let the statute of limitations run and allowed the most destructive white-collar criminal bankers in history to become wealthy through fraud with absolute impunity. This will go down as the Justice Department’s greatest strategic failure against elite white-collar crime.

The Obama administration and the Department have failed to take the most basic steps essential to prosecute elite bankers. They have not restored the “criminal referral coordinators” at the banking regulatory agencies and they have virtually ignored the whistleblowers who gave them cases against the top bankers on a platinum platter. The Department has not even trained its attorneys and the FBI to understand, detect, investigate, and prosecute the “accounting control frauds” that caused the financial crisis. The restoration of the rule of law that the new policy promises will not happen in more than a token number of cases against senior bankers until these basic steps are taken.

The Justice Department, through Chris Swecker, the FBI official in charge of the response to mortgage fraud, issued two public warnings in September 2004 — eleven years ago. First, there was an “epidemic” of mortgage fraud. Second it would cause a financial “crisis” if it were not stopped. The Department’s public position, for decades, was that the only way to stop serious white-collar crime was by prosecuting the elite officials who led those crimes. For eleven years, however, the Department failed to prosecute the senior bankers who led the fraud epidemic. The Department’s stated “new” position is its historic position that it has refused to implement. Words are cheap. The Department is 4,000 days late and $24.3 trillion short. Economists’ best estimate is that the financial crisis will cause that massive a loss in U.S. GDP — plus roughly 15 million jobs lost or not created.

Americans need to come together to demand that the Department act, not just talk, to restore the rule of law and prosecute the bankers that led the fraud epidemics that drove the financial crisis. There is very little time left to prosecute, so the effort must be vigorous and urgent and a top priority.

Here is an example, in the cartel context, of the Department’s long-standing position that deterrence of elite white-collar crimes requires the prosecution and incarceration of the businessmen that lead the crimes. It contains the classic quotation that the Department has long used to explain its position. Note that the public statement of this position was early in the Obama administration (April 3, 2009), but plainly was already long-standing. The Department’s official made these passages her first two paragraphs in order to emphasize the points – and the fact that deterrence through the criminal prosecution of elite white-collar criminals works.

“It is well known that the Antitrust Division has long ranked anti-cartel enforcement as its top priority. It is also well known that the Division has long advocated that the most effective deterrent for hard core cartel activity, such as price fixing, bid rigging, and allocation agreements, is stiff prison sentences. It is obvious why prison sentences are important in anti-cartel enforcement. Companies only commit cartel offenses through individual employees, and prison is a penalty that cannot be reimbursed by the corporate employer. As a corporate executive once told a former Assistant Attorney General of ours: “[A]s long as you are only talking about money, the company can at the end of the day take care of me . . . but once you begin talking about taking away my liberty, there is nothing that the company can do for me.”(1) Executives often offer to pay higher fines to get a break on their jail time, but they never offer to spend more time in prison in order to get a discount on their fine.

We know that prison sentences are a deterrent to executives who would otherwise extend their cartel activity to the United States. In many cases, the Division has discovered cartelists who were colluding on products sold in other parts of the world and who sold product in the United States, but who did not extend their cartel activity to U.S. sales. In some of these cases, although the U.S. market was the cartelists’ largest market and potentially the most profitable, the collusion stopped at the border because of the risk of going to prison in the United States.”

As prosecutors, (real) financial regulators, and criminologists, we have known for decades that the only effective means to deter elite white-collar crimes is to imprison the elite officers that grew wealthy by leading those crimes (which include the largest “hard core cartels” in history – by three orders of magnitude). In the words of a Deutsche Bank senior officer, the bank’s participation in the Libor cartel produced a “mountain of money” for the bank (and the officers). Holder’s bank fines were useless – and the Department’s real prosecutors told him why they were useless from the beginning. No one, of course, thinks Holder went rogue in refusing to prosecute fraudulent bank officers. President Obama would have requested his resignation six years ago if he were upset at Holder’s grant of de facto immunity to our most destructive elite white-collar criminals.

Our saying during the savings and loan debacle was that in our response we must not be the ones “chasing mice while lions roam the campsite.” Holder, and his predecessors under President Bush, chased mice – and fed them to the lions. They overwhelmingly prosecuted working class homeowners who had supposedly deceived the most fraudulent bankers in world history – acting like a collection agency for the worst bank frauds.

As a U.S. attorney, Loretta. Lynch failed to prosecute any of the officers of HSBC that laundered a billion dollars for Mexico’s Sinaloa drug cartel and violated international and U.S. anti-terrorism sanctions. The HSBC officers committed tens of thousands of felonies and were caught red-handed, but now Attorney General Lynch refused to prosecute any of them – even the low-level fraud “mice.” Dishonest corporate leaders are delighted to trade off larger fines – which are paid for by the shareholders – to prevent the prosecution of even low-level officers who might “flip” and blow the whistle on the senior banksters that led the fraud schemes. To its shame, the Department’s senior leadership, including Holder and Lynch, have pretended for at least 11 years that the useless bank fines were a brilliant success. Those bank fines are paid by the shareholders. The Department’s cynical sweetheart deals with the elite criminals allowed them to keep their jobs and massive bonuses that they received because of the frauds they led. The Department compounded its shame by bragging that it was working with Obama’s (non) regulators to create guilty plea “lite” in which banks that admitted they committed tens of thousands of felonies involving hundreds of trillions of dollars of fraud were relieved of the normal restrictions that a fraud “mouse” is invariably subjected to for committing a single act of fraud involving $100.

The Department’s top criminal prosecutor, Lanny Breuer, publicly stated his paramount concern about the fraud epidemics that devastated our nation – he was “losing sleep at night over worrying about what a lawsuit might result in at a large financial institution.” That’s right – he was petrified of even bringing a civil “lawsuit” – much less a criminal prosecution – against “too big to prosecute” banks and banksters. I lose sleep over what fraud epidemics the banksters will lead against our Nation. The banksters have learned to optimize “accounting control fraud” schemes and learned that they can grow immensely wealthy by leading those fraud epidemics with complete impunity. None of them has a criminal record and even those that lost their jobs are overwhelmingly back in financial leadership positions. In the aftermath of the savings and loan debacle, because of the prosecutions and criminal records of the elites that led those frauds, no senior S&L fraudster who was prosecuted was able to become a leader of the fraud epidemics that caused our most recent financial crisis.

We have known for decades that repealing the rule of law for elite white-collar criminals and relying on corporate fines always produces abject failure and massive corporate fraud. We have known for millennia that allowing elites to commit crimes with impunity leads to endemic fraud and corruption. If the Department wants to restore the rule of law I am happy to help it do so. We have known for over 30 years the steps we need to take to succeed against elite white-collar criminals through vigorous regulators and prosecutors. We must not simply prosecute the current banksters, but also prevent and limit future fraud epidemics through regulatory and supervisory changes. I renew my long-standing offers to the administration to, pro bono, (1) provide the anti-fraud training and regulatory policies, (2) help restore the agency criminal referral process, and (3) embrace the whistleblowers and the scores of superb criminal cases against elite bankers that they have handed the Department on a platinum platter. We can make the “new” Justice Department policy a reality within months if that is truly Obama and Lynch’s goal.


Category: Bailouts, Legal, Really, really bad calls, Think Tank

Category: Think Tank

Category: Think Tank

Are Markets Rallying Themselves Into a Fed Rate Hike?

If a higher stock market is the Fed’s implied 3rd mandate, then are we rallying into a rate hike next week? We’ll see but the 2 yr note yield this morning is up to .75%, up 4 bps this week and to the highest level since April ’11. In terms of market sentiment as a…Read More

Category: Federal Reserve, Think Tank

Category: Think Tank

Central Bank Purchases of Government Bonds

Category: Think Tank

Category: Think Tank

E-Book Sales Tank

“E-Book Sales Fall After New Amazon Contracts” Beware of your dream coming true. For years we’ve heard that music is undervalued, that people must pay more. But maybe the consumer doesn’t want to. That seems to be the case with e-books. When Amazon launched the Kindle no e-book was over ten bucks. A business burgeoned….Read More

Category: Books, Think Tank, Web/Tech

Andrew G Haldane: Who owns a company?

Who owns a company?
Speech by Mr Andrew G Haldane, Executive Director and Chief Economist of the Bank of England, at the University of Edinburgh Corporate Finance Conference, Edinburgh
BIS central bankers’ speeches, 22 May 2015

* * *

I would like to thank Jeremy Franklin, Conor Macmanus, Jennifer Nemeth, Ben Norman, Peter Richardson, Orlando Fernandez Ruiz, John Sutherland, Ali Uppal and Matthew Willison for their help in preparing the text. I would also like to thank Andrew Bailey, Mark Carney, Iain de Weymarn, Sam Harrington, Alan Murray, Rhys Phillips and David Rule
for their comments and contributions.



This might seem like a simple question with a simple answer.  At least for publicly listed companies, its owners are its shareholders.  It is they who claim the profits of the company, potentially in perpetuity.  It is they who exercise control rights over the management of the company from whom they are distinct.  And it is they whose objectives have primacy in the running of the company.

This is corporate finance 101.  It is the centrepiece of most corporate finance textbooks.  It is the centrepiece of company law.  It is the centrepiece of most public policy discussions of corporate governance.  And it is a structure which, ultimately, has survived the test of time, having existed in more or less the same form for over 150 years in most advanced economies.

That the public company has been a success historically is not subject to serious dispute.  It was no coincidence that its arrival in a number of advanced economies, in the middle of the 19th century, marked the dawn of mass industrialisation.  The public company was a key ingredient in this second industrial revolution.  Perhaps for that reason, the public company is, in many people’s eyes, the very fulcrum of capitalist economies.

Yet despite its durability and success, across countries and across time, this corporate model has not gone unquestioned.  Recently, these questions have come thick and fast, with a rising tide of criticism of companies’ behaviour, from excessive executive remuneration, to unethical practices, to monopoly or oligopoly powers, to short-termism.  These concerns appear to be both strongly-felt and widely-held.

Among the general public, surveys suggest a majority do not trust public companies, especially big companies.1  Among professional investors, sentiment is well-encapsulated by the following quote from Larry Fink, CEO of Blackrock – the world’s largest asset manager – in a letter sent to the Chairmen and CEOs of the top 500 US companies earlier this year:2

“[M]ore and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”

Among academics, John Kay’s UK government-initiated review into short-termism in equity markets and their effect on listed companies (Kay (2012)), Colin Mayer’s Firm Commitment (Mayer (2013)) and Lynn Stout’s. The Shareholder Value Myth (Stout (2012)) each raise deep and far-reaching questions about the purpose and structure of today’s companies.

Are these concerns legitimate?  What is their precise micro-economic source?  And are they now of sufficient macro-economic importance to justify public policy intervention?  To answer those questions, it is useful to start with the origins of modern-day companies, before looking at the potential incentive problems among stakeholders embedded in those structures.  Finally, I consider public policy actions that might mitigate these problems.

These problems are not specific to any industry.  But banks’ balance sheets and governance structures mean they may be especially prone to these incentive problems.  So I will use them to illustrate some of the micro-economic frictions and their macro-economic impact.  Indeed, it is no coincidence that the most significant changes to corporate governance practices recently have been within the banking sector.

A short history of companies

Let me begin by defining “corporate governance” in its broadest sense:  as the set of arrangements that determine a company’s objectives and how control rights, obligations and decisions are allocated among various stakeholders in the company (Allen and Gale (2000)). These stakeholders comprise not only shareholders and managers, but also creditors, employees, customers and clients, government, regulators and wider society.

Over the past two centuries, several dozen pieces of company legislation have been enacted in the UK alone.  This legislation has successively defined and redefined these purposes, rights and obligations among stakeholders.  This legislative path has been long and winding – Table 1 provides a summary.  It has been shaped importantly by the social, legal and economic climate of the day.  And it is the interplay between these contextual factors that, through an evolutionary process, has delivered today’s corporate governance model.

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Category: Corporate Management, Legal, Think Tank

Searching for Higher Wages

Searching for Higher Wages Luis Armona, Samuel Kapon, Laura Pilossoph, Ayşegül Şahin, and Giorgio Topa Liberty Street Economics, September 2015   Since the peak of the recession, the unemployment rate has fallen by almost 5 percentage points, and observers continue to focus on whether and when this decline will lead to robust wage growth. Typically,…Read More

Category: Employment, Think Tank, Wages & Income