A reader writes with some experience in SoCal financial circles writes:
-- Essentially, Michael Milken felt a certain level of guilt and agreed to go to jail. That sense of guilt seems lacking with the current crew.-- I have been informed that the reason Countrywide would not be the ideal firm to get a judgment against is for at least two reasons:
1) As you mentioned, he seems to have believed he was doing his patriotic duty to the multicultural cult by issuing mortgages to minorities. [Here's Mozilo's pledge of January 14, 2005 "to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010."]
2) Mozilo/Countrywide made it policy to keep only FICO scores on borrowers (i.e., it was policy; whether or not they paid attention to them seems to be another matter). In short, and unlike almost any finance firm I have heard of, Countrywide made plausible deniability the counrnerstone of its recordkeeping process and procedures. This might imply that he really didn't believe that they were going to be paid back, but smoking gun type proof would be tough to come by ....
-- Still, it is hard to believe that fraud is so difficult to prove in at least some cases during the bubble period.
For my money I would go after any and all Wall Street firms. Fraud and failing in their fiduciary duties seems like relatively easy cases to me. It's not the packaging of securities I would focus on; rather, I would push fraud and related issues. Essentially, I would make the case boil down to fraud or stupidity. For example, if presented with the choice between admitting fraud or admitting stupidity, would the head of Goldman Sachs choose stupidity over fraud? I'd bet fraud; whereas, Mozilo would be the one that gets him home without an ankle bracelet (i.e., stupidity with probably a large measure of gross incompetence).
I like the idea of trying them for fraud, while leaving stupidity as a defense. It would certainly be educational to the public. I wouldn't mind seeing the witness list that a hotshot defense lawyer like Mark Geragos would come up with to prove that everybody was this stupid: Henry Cisneros, George W. Bush, Barney Frank ...
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45 comments:
Where's the fraud? Caveat emptor. Geez, where's the talk about the stupidity of the people buying these things?
"Hey, these securities are backed by mortgages, and those will be worthless unless the real estate market grows geometrically, forever."
"Cool, I'll take a billion!"
Assumption of risk? Caveat emptor? Anything?
In 1932 they had the Pecora Commission which, in addition to leading to the major financial reform acts of the early 30s, also provided a forum to embarrass and disgrace all of the wall street titan responsible for the mess.
Huh? Why would Goldman Sachs chairman admit stupidity? It's common knowledge that GS bet against the subprimes and won. Are you sure your reader has experience in financial circles? Perhaps in SoCal.
Off-topic, but some House Republicans introduced an amendment to cut an extra $22 billion in spending in the continuing resolution. The amnedment, co-sponsored by 2012 Arizona senate candidate Jeff Flake, would have cut 5.5% from most non-defense spending accounts, and 11% from the rest. With one exception: aid to Israel was not to be cut at all.
The amendment failed, with even 92 Republicans voting against it.
America's spending itself into insolvency, but Israel will be saved, thank God. But don't question the wisdom of that: it would be anti-Semitic.
Milken pleaded guilty because they threatened to go after his brother. If he'd fought, he likely would have been conicted but then had the charges thrown out on appeal llike most of the other Wall Street guys the feds went after during that period.
Stupidity is the excuse that's been made by the rating agencies like Moody's and Standard & Poors, that were paid by the banks to rate the subprime junk they were issuing, and classified it all as investment grade. Admitting stupidity hasn't hurt their business, and all the wrong incentives remain in place.
While criminal trials would be nice, it would have been much easier for the government to let Goldman Sachs, JP Morgan, Citigroup, and the rest of them go under, and if need be order the Fed to take over the financial system and bring in liquidity. Or there could have been serious strings attached to TARP and the Fed's discount window on executive compensation and speculative activity. There's no shortage of solutions for cracking down on out of control finance, but both Obama and Republicans are on Wall Street's side.
I had a friend who worked at Countrywide for a while. Before that, as a member of an MBA program, we had a bunch of folks present to us the "innovation" of making dog poop mortgages into gold. The presenters really believed this. I had another friend who worked briefly at Enron, before it collapsed. He got out quick as he could see the trading business was garbage. Meanwhile another guy I knew blew the whistle on WorldCom, knowing you can't have $500 million or so of PC purchases floating around in the company.
The one guy who was working at Countrywide was shocked by the collapse as much as anyone.
I think that the key was, the guy who blew the whistle (at considerable cost btw) on Woldcom knew Bernie Ebbers was full of it, because there wasn't $5 million worth of PC equipment there, much less $500 million. [He was an accountant.] The guy at Enron could see the trades failing. But, the market and valuation of dog-poop mortgages chopped up into little bits that were "uncorrelated" WERE trading and in demand for quite some time. Wing Chaus were buying them left and right. People wanted to "believe" in financial innovation, that they actually mattered and did stuff that was new and valuable to society.
They fooled themselves, and a lot of others. I can remember the briefings myself around 95-96. I just shrugged, I didn't get it. I figured smarter people than me must know something I don't.
What stands out is that only a few went short on Subprime, and thats why they won so big. If everyone had been in on it from the start, there'd be more winners and less big time winners, fewer Paulsons and Burrys and so on. People wanted to believe.
So yes, it was Stupidity. Not fraud.
Yeah, I'm thoroughly disgusted our President and Attorney General seem more pre-occupied with EEOC cases than pursuing the biggest financial fraud in the history of the world.
Martha Stewart has done more hard time than any of the titans of finance that so nearly ended capitalism it took a $700 billion act of Congress, and a $1.2 trillion flood of liquidity from the central bank to keep capitalism as we know if from failing.
WTH! Wasn't Sarb-Ox supposed to prevent this type of fraud? And that my friends is why Wall Street was writing checks left and right to make sure it was Obama and not McCaine issuing orders to the Attny General. McCaine has never forgotten the Keating 5 and would love the chance to send a bunch of bankers to the pokey.
neither - they'll claim that no one could foresee the 100 year flood
What about a review of 'Inside Job', Steve?
Prosecution for large-scale fraud is about dead in the US thanks to the Republican party and its complete domination by corporate interests.
1. The staffing levels of the major antifraud agencies (FTC, FDA, SEC, DOJ, FBI, etc) have been cut to a tiny fraction of what they were 30 years ago.
2. Anti-fruad laws have become much weaker.
3. There is a revolving door between the top anti-fraud agencies and the companies they regulate. Someone might spend half his career in the gov, but the whole time he knows that 95% of his lifetime income will be from his private sector jobs.
4. Ask yourself, if simple but huge and long-running MLM frauds like Amway and Herbalife are allowed to prosper for decades, how on earth is the gov going to do anything to stop complex financial fraud?
Really, this line of trying the crooks actually breaks down to a single concept, that loan dispersement to unqualified individuals is stupid. The question is, whether they knew it was stupid and did it anyway (Fraud), or whether they were too stupid to know the consequences. Either way, because this is the underlying message, that it was stupid to give loans to unqualified individuals, expect that NOT to be the way the court proceeds, as the powers that be that pushed the banks to do this in the first place will never let their delusional beliefs and self benefit go through a careful, thorough public examination in court. If anything, expect them to be tried simply for fraud in a way that obscures what went on, and focuses on an underlying message that it was their personal greed and not a failure of leftist redistribution ideology or multiculturalism.
Since we're in a rush to institute sharia, in the interest of importing different legal approaches here's a thought. Why not use the chinese legal approach to banker's malfeasence; execution.
Steve, two great LOL's from The Onion: http://www.theonion.com/articles/nation-somehow-shocked-by-human-nature-again,19170/?utm_source=recentnews
and...
http://www.theonion.com/articles/new-york-times-moves-all-content-you-wont-give-a-s,19188/
Steve, two great LOL's from The Onion: http://www.theonion.com/articles/nation-somehow-shocked-by-human-nature-again,19170/?utm_source=recentnews
and...
http://www.theonion.com/articles/new-york-times-moves-all-content-you-wont-give-a-s,19188/
It's fraud. Playing missionary was just a moral cover for them to grab some money, helping others while helping yourself; one for you, two for me. They're no Albert Schweitzer. Saying they had some true belief is laughable, the only thing they believe in is money. The low end, lower income folks who got involved in the mortgage and real estate bubble were merely vehicles, that's all. It's a peculiarity of American public life that everything has to be dressed up and presented in some high minded, moralistic sounding manner. One can't just come out and say that there are lot of pennies to be plucked from the illiterate and not so swift mass of folks who can't read a contract, so let's just see how much we can get out of them so long as we have an obliging government; better for the money to be in our bank accounts than in theirs.
Otherwise very smart people don't know anything about the legal biz. Business fraud is extremely hard to prove. And, Mark Geragos? Third tier law grads aren't allowed anywhere near big-time white collar defenses. More like John Keker (Ollie North's lawyer), who got Frank Quattrone off on appeal.
Here's Mozilo's pledge of January 14, 2005 "to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010."]
ya. and charge them 15% for 30 years!
I had an interaction with a black guy. HAD to have that GMC Denali. Dealer charged him 29.99% !!
Could someone explain how Mozilo is supposed to be prosecuted for fraud?
Securities fraud would involve someone saying positive things that he knew weren't true in order to sell securities. Did Mozilo do that?
Fraud and failing in their fiduciary duties seems like relatively easy cases to me.
They aren't.
Really, this line of trying the crooks actually breaks down to a single concept, that loan dispersement to unqualified individuals is stupid. The question is, whether they knew it was stupid and did it anyway (Fraud)
Making stupid loans is not fraud.
"Fraud" as a crime is the epitome of arbitrary government. It has no precise definition, and can be applied by prosecutors to whoever they do not like, if anyone with connections happens to lose money and be upset about it.
Does anyone seriously think that members of Goldman would go down to fraud charges when the upper echelons of government are selected based on the Harvard/Goldman filter? Fraud will only be used to imprison your political opponents, not your friends. Steve, you are very good at looking at consequences of things like this, please consider what a bad idea it would turn out to be in practice.
"Where's the fraud? Caveat emptor. Geez, where's the talk about the stupidity of the people buying these things?"
The fraud exists in people not being made aware of what they were purchasing. Many financial managers did not understand all of the ins and outs of the derivatives they were in, they were so complex. Arguably, one could blame the financial managers (and people who directly bought derivatives) for not finding out enough, but for the mainsteam (non-Wall Streeter) who have to rely on managers to steer their investments through rocky waters, they were taken for a ride without sufficient warning. There's definitely a case for fraud in there.
If I mislead you into believing one thing and deliver something else, that is fraudulent.
"'Really, this line of trying the crooks actually breaks down to a single concept, that loan dispersement to unqualified individuals is stupid. The question is, whether they knew it was stupid and did it anyway (Fraud)'
Making stupid loans is not fraud."
- Your response is premature. Reread the original statement. Making stupid loans is not fraud. Knowingly making these bad loans is where the fraud kicks in...
All this talk about bad loans not being fraud, and fraud being difficult to prove etc., is completely uninformed. First of all, convincing some fool to take out a loan he can't repay, then failing to set aside loss reserves is in fact fraud. But the clearest fraud wasn't in the origination, or even the accounting the original loans, it was in the securitization. These "Mortgage-Backed Securities" were not just "a bunch of loans", they were based on trusts which had to conform to specific rules. The pension funds and whatnot that loaded up on MBS were not the savviest purchasers in the world, and of course they were getting their standard hookers and cocaine from the sell-side jokers at the investment banks, but they weren't just buying any old thing any which way.
For instance, the PSA for the trust might stipulate a certain average Loan-to-Value ratio for the pool of loans. The banks just lied about LTV ratios, repeatedly. Yes, that's fraud and I doubt it's impossible to prosecute.
Or the PSA would stipulate that the loans had to be, you know, actually assigned to the trust. It's an open question now as to whether they were EVER properly assigned to the trusts. One trick was for a bank to assign mortgages to the trust after they defaulted, thereby getting bad loans off their books and into some poor fool's 401k. Gee, that sounds like fraud to me.
Go to http://market-ticker.org/
http://nakedcapitalism.com/
look through the archives and you'll see plenty of fraud there. One can, conceivably make bad loans through stupidity. But fraudulent securitization is, well, fraud.
Michael Milken didn't "feel guilt," rather, he agreed to go to jail as part of a bargain (corrupt on the government's side) to free his brother Michael from an unjustified Federal indictment.
Milken wasn't guilty of anything. He was the victim of envy, and the fact that contemporaneous hotshots like Ivan Boesky really did make their money by crime rather than cleverness so prosecutors eager for a high-profile scalp could always inflame jurors with the line "no one is that smart-- only crooks make so much money."
Milken was treated even worse than Martha Stewart.
if you want a clear yardstick to measure how much a sense of 'custodianship' or a sense of responsibility on the part of those entrusted with prudence has declined.. in about 1960, it was considered unethical for plastic surgeons to do cosmetic surgery for anything other than deformities (eg harelips etc)
A lot of the fraud was indirect: Execs getting paid in stock, then hiding debts to raise the stock price.
Discipline the economy to the needs of the nation.
u been slacking a bit Steve
3 days no new blog
god damn
Steve: "Fraud or Stupidity: Pick One"
What about a third: "naivete" as invoked by MM Wilpon & Katz.
It's rumored Irving Picard got hold of a recording of the line that sealed the deal: Bernie whispering in the ear of the prospective investor: "We're going to f*ck the goyim. Big Time."
Although the smirky wink is not heard, we can imagine it.
By the way, how many people involved in this story are not Scot-Irish?
and,
Is the possibility to get your money back in case of a failed investment open to non-Scot-Irish, as well?
Sorry, I meant "bury".
First, for those who clearly misunderstand the term “fraud”, let's get that term defined: Fraud –
"A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.
Fraud is commonly understood as dishonesty calculated for advantage. A person who is dishonest may be called a fraud. In the U.S. legal system, fraud is a specific offense with certain features.
Fraud is most common in the buying or selling of property, including real estate, Personal Property, and intangible property, such as stocks, bonds, and copyrights. State and federal statutes criminalize fraud, but not all cases rise to the level of criminality. Prosecutors have discretion in determining which cases to pursue. Victims may also seek redress in civil court."
So, yes, the biggest financial bubble in the history of mankind has both fraud and stupidity (and especially the mortgage part of it). Let's at least establish that as a fact. Now proving it is the issue at hand; and seems to be beyond the Fed's ability, or even willingness, to do. Clearly, at a minimum, there is some lack of willingness to bring fraud charges against the ‘too-big-to-fails’.
Second, regarding Milken's reasons for going to jail, there is more than one reason he didn't fully fight the charges (as most have, and won); but he did feel some level of guilt (this he so much as said). He was a progressive/socialist who made a ton of money with junk bonds; and, yes, he did feel a level of guilt that contributed to his accepting jail time. Regarding his brother, sure that may be part of it; but the Feds never thought they had enough to prosecute his brother (the Berkeley Phi Beta Kappa & lawyer). The brother part is part of his need to rationalize ex post the decision. In short, most people who agree to go to jail don’t do it for one reason, but there can be many. The point made about guilt and/or contrition seems to be completely lacking in the current crop of financial fraudsters.
Finally, Goldman Sachs, like all the others, committed fraud and showed stupidity. Profiting from one or a set of bets considered a “hedge” does not a genius make. Specifically, without the federal authorities backdoor bailouts they would have, along with JP Morgan, etc., been bankrupt and, by law, shut down (e.g., the AIG bailout which funneled tens of billions back to GS and others to pay 100 cents on the dollar for near or worthless CDSs, essentially zero cost of funds from the Fed, and being allowed to convert to a bank holding company virtually overnight, etc.). Financially smart, hardly. Financially smarter than Citi, sure; but financially smart overall …? Given what they did, the short answer is: NO. Fraud, stupidity and corruption are not evidence of a ‘smart’ institution.
I summary, it seems more a case of desire to prosecute than anything else. Also, it would be funny to push the stupidity angle in a show trial. For example: Prosecutor XYZ – “Mr. Blankfein, so you expect me to believe that you thought the AIG CDSs were money good? … Blankfein: Yes, our credit analysts rated them AAA … Prosecutor XYZ: Are you an idiot, or just lying? …
If I mislead you into believing one thing and deliver something else, that is fraudulent.
Only if I know the difference between what I promised and what I delivered.
All this talk about bad loans not being fraud, and fraud being difficult to prove etc., is completely uninformed.
I practice this kind of law for a living.
No, it isn't. Subsequent disclosures re loss reserves, if inaccurate or misleading, might be fraudulent.
Yes, this (finally!) sounds like fraud.
Me too.
Clearly stupid. I don't think Lehman Bros and Bear Stearns would have invested in all those mortgage backed securities themselves unless they thought they were worth something.
I think the most amusing thing of all this was their claim that if pay caps were put on banks, they would lose their motivation to work hard, and therefore the banks might not do so well.
Moxillo, Scots-Irish?
I dunno, Steve. You might be barking up the wrong tree here. If I've learned anything in my years arguing politics online, it's that LOTS of people think fraud is hunkey-dorey. To the extent that whatever you can achieve with fraud is also covered by this "moral insurance."
It's downright creepy. LOTS of people would justify the destruction of the planet and every soul on it as long as it was achieved via fraud.
At least, if they're consistent, anyway; maybe it's just a who-whom thing, applying to crackers only.
"Anonymous said...
Huh? Why would Goldman Sachs chairman admit stupidity? It's common knowledge that GS bet against the subprimes and won. Are you sure your reader has experience in financial circles? Perhaps in SoCal."
Ostensibly, while Goldman Sachs was betting against mortgage backed securities, they were also selling them to their clients. Would that count as fraud? Or is that too just "financial innovation"?
...a hotshot defense lawyer like Mark Geragos would come up with to prove that everybody was this stupid: Henry Cisneros, George W. Bush, Barney Frank
A 'hotshot lawyer'? That's overkill, my dog could prove that case.
"Ostensibly, while Goldman Sachs was betting against mortgage backed securities, they were also selling them to their clients. Would that count as fraud? Or is that too just "financial innovation"?"
This is called "hedging". Taking both sides of a bet. Which is a standard operating procedure of any financial company and many non-financial. If you want to call it fraud no one can stop you. But you'll look like an idiot.
"Anonymous said...
This is called "hedging". Taking both sides of a bet. Which is a standard operating procedure of any financial company and many non-financial. If you want to call it fraud no one can stop you. But you'll look like an idiot."
Okay, how about breach of fiduciary duty? How would you feel if the doctor who was treating you for cancer placed bets that you would die? Is that a good doctor or not?
Regarding the Goldman 'hedging' canard, which is it then? That is, is it hedging or a bet? If it's truely hedging then they are not geniuses; if it's a bet (e.g., according to another reader who thinks they are geniuses) then we have fraud. First, note this is but one of many possible fraud examples. Second, and more importantly, most large financial firms talk a great deal about 'hedging' because they are unsure of the outcome. If it's tails then they call it a 'hedge' and use it to justify higher bonuses, if it's heads then they call it genius and use it to justify higher bonuses. In short, most financial 'hedges' are mental hedges but functional bets. That is, Goldman made an ex ante bet that ex post they would now call a hedge, but at the time made was a bet (e.g., read Matt Taibbi on this). Again, the question isn't really whether they committed fraud, it's whetehr it can be proven in court, but most importantly whether the authorities are even motivated to prosecute. It is the motivation part that I find so disappointing and indicative of a captured and compromised government. At least one reader has been reading and actually believing the WSJ way too much; 'hedging' my a_s. Yes, some firms actually hedge, but Goldman Sachs is a firm that 'hedges' (i.e., tails you lose and I win; heads I win).
This is called "hedging". Taking both sides of a bet. Which is a standard operating procedure of any financial company and many non-financial.
not when you're betting against your clients and what you're recommending. that's fraud.
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