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« New From ANONYMOUS: Mortgage Insurance Fraud 101: How Banks Rip You Off And How To Fight Back | Main | What Really Happened To Osama »

The End of Wall Sreet Accountability: A Response To Roger Lowenstein

Bloomberg's Roger Lowenstein argues in "Wall Street: Not Guilty" that the outcry for Wall Street prosecutions is both misguided and dangerous.

Citing the misgivings of Charles Ferguson, Joe Nocera, The New York Times, NPR, Matt Taibbi and even Bernie Madoff, Lowenstein concludes:

[T]hese sentiments imply that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated.

I love a periodic sentence as much as the next guy, but these conclusions are specious.  The vast majority of people asking for more action by prosecutors do NOT believe these things.  Let's take them one by one.

"[T]he financial crisis was caused by fraud."  While some of the people Lowenstein cites might argue that fraud caused the crisis, not all of them would, nor indeed would most serious observers.  But the issue of causality is really beside the point.  Those of us arguing for more aggressive action from the DOJ and state AG's make that argument, not on the basis that criminal activity was the sole or even primary cause of the crisis, but because specific instances of fraud and criminal activity actually took place.  They should be investigated and prosecuted.  By and large, they haven't.  That's the problem.

To suggest, as Lowenstein does, that the arguments for prosecution hinge on a theory of causality is not merely to move the goal posts, but to play a different game altogether.  People are demanding more prosecutions because they believe that particular crimes took place, not because they believe that fraud, in the abstract, caused the entire crisis.  It didn't.

"[P]eople who take big risks should be subject to a criminal investigation."  This is a straw man.  And the quote from Joe Nocera, that "Wall Street bigwigs...took unconscionable risks," is from an article arguing that many executives are probably NOT liable to prosecution.  Nowhere does Nocera, or any other serious critic, suggest that risk-taking, as such, should be criminal.  Whenever critics have cited the enormous risks taken by Dick Fuld, for example, it is usually in the context of pointing out that certain actions they took were not only illegal, but that those illegal actions were related to risk-taking that was extremely dangerous to both their firms and the financial system.  Lowenstein unnecessarily conflates these two points.

"[E]xecutives of large financial firms should be criminal suspects after a crash."  Again, this is a misleading straw man.  Some notable critics, such as Bill Black, have concluded -- based on extensive research and long experience -- that financial crises, including this one, are almost always accompanied by what he calls "accounting and control fraud."  This is a pretty unremarkable and uncontroversial conclusion, but this is not the same thing as saying, as Lowenstein suggests, that financial executives should be investigated or prosecuted, willy nilly, simply because there was a crash.  Just about everyone would agree that aggressive action by prosecutors should be based on reasonable suspicion of criminal wrongdoing, and nothing less.

"[P]ublic revulsion indicates likely culpability."  Ironically, Lowenstein gets this one precisely backwards.  The public revulsion stems from the likely culpability, not the other way round.

"[I]t is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy."  I don't even know where this conclusion is coming from, unless it's just an attempt to attach the name of Madoff to the arguments made by serious critics.  Moving on.

"Wall Street bears collective guilt for which a large part of it should be incarcerated."  Again, who actually makes this argument, or has made arguments that imply this view?  A citation would be helpful, but it's worth pointing out that many of the most angry observers and critics work in the financial services industry and either work on Wall St. or worked there in the past.  Yves Smith, Larry Doyle, Barry Ritholtz and the founder of The Daily Bail come to mind.  Moreover, many of us calling for prosecutions are fierce believers in individual rights, capitalism and free markets, and therefore find the idea of collective punishment both stupid and revolting.

Now, Lowenstein goes on to argue that "the meltdown was multi-causal" and this fact should therefore throw a monkey wrench into the arguments of "armchair prosecutors."  Again, to draw this conclusion is to assume that calls for prosecution hinge on the idea that fraud, and fraud alone, caused the crisis.  In Bailout Nation, Ritholtz discusses a number of factors leading to the crisis and puts Alan Greenspan, loose monetary policy, Phil Gramm and the ratings agencies at the top of his list.  CDO managers are much further down (232).  However, he also points out that "the vast majority of Wall Streeters are hardworking souls who are deeply upset about the way their industry has been hijacked and what that has done to our nation" (288).

Ritholtz is not only influential, but I would argue that his view of Wall Street is probably representative of even the most fierce critics of the DOJ.  Not everyone who works in finance or the capital markets committed fraud or some other crime.  But some certainly did.

And that is the fundamental problem.  Largely through stupidity and hubris, the largest financial institutions helped cause the crisis, their executives grew enormously wealthy while doing so, and when they got into trouble they were bailed out by ordinary taxpayers.  By 2009, individual Wall Street executives were again raking in millions of dollars in annual bonuses, even though they still relied on goverment subsidies (low interest rates, government guaranteed debt issuance, accounting forbearance).  Meanwhile, the real economy suffered the greatest recession in our lifetimes and official unemployment reached 10%.  Those facts alone are bad enough, but the reason so many people are so angry is that even where known instances of fraud and criminal wrongdoing have taken place, there have been almost no prosecutions and very few investigations.

Finally, Lowenstein writes:

[I]t's worth remembering that in the American legal system, people who merely act badly or unwisely do not do time. And people who contribute to a financial collapse aren't guilty of a crime absent specific violations that make them so.

We couldn't agree more.  But the danger is not that prosecutors are being swept up by popular sentiment and recklessly prosecuting people with little regard for the facts.  Just the opposite, the danger is that they have so far failed to pursue cases where there is likely to have been fraud involved, even those, such as Goldman's Abacus CDO, where there is already enough information in the public domain to at least warrant an investigation.  The SEC believed the deal was fraudulent, but why is the DOJ so uninterested?

We have heard from industry insiders that a serious effort by the Obama administration to investigate deals like Abacus would likely uncover other, similar cases.  A serious effort is the least this administration owes the American people.  But folks like Roger Lowenstein can probably rest easy.  The Obama administration has so far shown no indication that they are going to do anything other than pay lip service to serious investigations and so this entire argument is, unfortunately, entirely hypothetical.


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Reader Comments (26)

i think the doj is going to surprise us with goldman sachs...eric holder, we are paying attention...perjury and obstruction of justice charges could be filed against at least 3 goldman execs based on what i've read...
May 16, 2011 at 1:26 AM | Registered CommenterDailyBail
Amen...this is not about causality; it's about illegality. Nobody with any sense argues that Dick Fuld, or any of his Wall St. brethren should be in jail because they are idiots and Lehman went bust. Sensical folks argue Fuld et al. should be in jail because they are lying thieves and stealing is illegal.

Does Lowenstein get it? Or, he gets it but has other motivations...
May 16, 2011 at 2:06 AM | Unregistered CommenterJosie
These Wall Street wanks are gonna wish that the DoJ busted them because when the People get to them, it's gonna be beyond retribution. If the wankers wanna make good, they better start now before We go into meltdown like Fukushima Dai-Ichi. The whole world knows how bleak that is. In you no wanna make good, then I say, "WS, keep on fxckin' with Us until We have nothing to lose." I'm sure you all know how the rest of the phrase ends...
May 16, 2011 at 4:58 AM | Unregistered Commenterbo2
Shill.......send em' ALL to pound them in the azz PRISON.......AB
May 16, 2011 at 7:32 AM | Unregistered Commenterain't bullshitt'n
Geithner Admits: There Are NO Trust Funds


May 16, 2011 at 8:52 AM | Unregistered Commenterjohn
john...it's always amazed me that people aren't aware that the gov't takes all surpluses from programs and uses said surpluses to fund normal govt spending, while depositing a special treasury IOU into the program...they've been doing this for decades to make the deficit look smaller on an annual basis...

medicare, ss, and a few other programs have been raided for every surplus penny...
May 16, 2011 at 8:57 AM | Registered CommenterDailyBail
May 16, 2011, 7:29 a.m. EDT
IMF chief’s arrest unlikely to derail debt talks

May 16, 2011 at 9:12 AM | Registered CommenterDailyBail
May 16, 2011 at 9:14 AM | Registered CommenterDailyBail
"[P]eople who take big risks should be subject to a criminal investigation."

One problem is that TBTF means that they are not in fact taking the risk. We are. It's not risk when you reap the profits and fob off the losses on taxpayers. It increases the gambling and gaming that has replaced serious risk-taking investment.
May 16, 2011 at 10:13 AM | Unregistered CommenterG Street
What's Lowenstein's explanation for a Citi exec's sworn testimony that 80% of mortgage originations in 2007 involved fraud in the inducement? Right. He ignores massive control fraud--and thus ignores the millions of downstream frauds up to and including millions of frauds knowingly perpetrated on the courts.

What's his explanation for GS's convincing its clients to buy into the Timberlake deal, which GS internal docs describe as "shitty"? Shills like Lowenstein (and Geithner) vaguely invoke the rule of law, but somehow fail to drill down into things like fiduciary duty.

It strains credulity to believe that Lowenstein and Wall Street towel boys like him aren't paid to circulate drivel like this piece.
May 16, 2011 at 3:05 PM | Unregistered CommenterCheyenne
Cheyenne, Stanley Fischer served as vice chair at citigroup back in 2002-2005.


He is now a candidate to head the IMF.
May 16, 2011 at 3:29 PM | Unregistered Commenterjohn

Not surprising but for the IMF's announcement that some cat named Lipsky has been the interim (dick) head since before DSK's pilgrimage to Manhattan.
May 16, 2011 at 4:14 PM | Unregistered CommenterCheyenne
Is he the guy who kept harassing the bellhop?
May 16, 2011 at 4:34 PM | Unregistered Commenterjohn
Thanks, Cheyenne. We thought of including the Citi testimony or more info on Timberwolf and Abacus, but we can wade into those weeds another day. The main goal here was to point out the fundamental flaws in Lowenstein's argument and how he chose to deal with claims that weren't actually being made in most cases.

A logical followup to this, of course, would be a more careful enumeration and discussion of deals like Abacus and Timberwolf, the testimony from folks at Citi, other cases mentioned by the FCIC, Karl Levin's report on Goldman's testimony to the Senate, Lehman's Repo 105 shenanigans, backdating of deposits at (WaMu ?), the internal emails at one of the ratings agencies about mortgage origination fraud, etc.

And I would also add, even though it involves the DOJ directly, the whole Wikileaks-Bank of America-HB Gary plot involving the DOJ and Huntin' and Gruntin' (or whatever the firm's name is).
May 16, 2011 at 4:35 PM | Registered CommenterDr. Pitchfork
Dr. P--

I was reacting more to Lowenstein's sweepingly dishonest headline than to your fine surgical annihilation on it. Anyone who purports to decree Wall Street "not guilty" given the prevalent lack of transparency in anything financial is a fraud, i.e. knowingly and willfully deceitful.

It would be interesting to compare Lowenstein's piece with the closing argument of Charles Keating's lead counsel. Likewise it would be curious to hear Lowenstein's explanation of where--exactly--Bill Black went wrong between his conviction of 1100 bank execs and now. Wasn't it here that I read Black's flat declaration that the American belief in TBTF quite "insane"?

I'd pay $50 to see Lowenstein and Jonathan Weil meet up at Bloomie's water cooler. Stupefying that these 2 have the same employer.
May 16, 2011 at 5:23 PM | Unregistered CommenterCheyenne
Lowenstein just made the F-List at CapitalismWithoutFailure.com: http://www.capitalismwithoutfailure.com/p/f-list.html
May 16, 2011 at 6:16 PM | Unregistered CommenterJaime
I wonder at what amount of loss the defrauded ELITE will go after the defrauding ELITE.
OH HELL!! I forgot they are all in the CLUB.
May 16, 2011 at 7:02 PM | Unregistered CommenterTR
"Bloomberg's Roger Lowenstein argues in "Wall Street: Not Guilty" that the outcry for Wall Street prosecutions is both misguided and dangerous." WOW, it's worse than I thought... I thought they were just psychopaths... now they appear to be delusional as well. "Wall Street prosecutions are both misguided and dangerous... is that a threat?
May 17, 2011 at 2:30 AM | Unregistered CommenterWTH
OK, criminal aspects of the banksters "business" is one thing, let's not talk only about this, which is disputable and thus allows the devil's advocates to create a fog over the problem.
But IF the banksters were not guilty of illegal activities, they must have been at least ''guilty'' of total and absolute incompetence. They should be banned forever from any management postion, from any accountancy, financial servises etc.
Look for example at AIG - they issued ''insurance'' which de facto bankrupted AIG. It was either criminal intentional act or total incompetence. They say it was not criminal act? Then they should pay penalty for what they caused anyway. Stay with minimal wealth, say, some level near powerty line. Because all they earned was error - they proved to be so incompetent, that they should never ever get anything more than minimal wage in WalMart. And they should be prohibited from any management, from any job in financial services, accountancy etc. Just like when someone causes car accident (and this was "accident" with many, many victims and huge damages done) - he/she is restricted to drive car for years and is due to pay damages.
And it should be applied not only to the AIG's London guy "who traded the derivatives which (de facto) bankrupted AIG". But someone hired him and someone approved him and someone put him into the position. Someone supervised him. Someone was superior to him. And someone was superior to all those mentioned. And someone supervised them...etc. They are all "big bosses, big brains, smart guys, clever managers" when the fraud and swindles are hidden, when it crashes (as Obama claimed - 'creating the worst financial crisis since The Great Depression', not quote), nobody of them "knew anything". They were 'not responsible for this' - if they were not responsible for this, then they did nothing in the position they had. And thus, if the AIG wanted taxpayers help, those ''managers'' should leave, giving back all bonuses to the last penny.
But what happened? Those people, who maybe, MAYBE did not commit criminal acts but at least are so stupid and incompetent that they caused the Great Depression II are in their positions, they are getting bonuses, flying private jets, buying yachts and the average American (or Greece) is to give up everything left. Which is guarantee that those people wil bring Great Depression III. Soon.
Interesting mix between communism and feudalism...capitalism has been transformed into feudalism where those well connected always make money, even if they loose money. And all the others? Slaves paying the price...
Or like in communism - for some, it is "to each according to his needs", of course, ''each'' who is the member of the club. And "from each according to his ability" - of course, "each" who is not member of the club, but "according to his ability" means "even at cost of life".
May 17, 2011 at 3:06 AM | Unregistered CommenterMike
I was grateful to read your response, as I had precisely the same reaction to the Lowenstein piece. He created a straw man of causality in order to avoid discussing the lack of accountability for illegality. No one of any stature is making the arguments he works so hard to rebut. But, for me at least, there is another problem as well. Lowenstein concludes at the end of his piece that the lesson of the Great Depression is not that we need criminal prosecutions but that we need to adopt serious reforms to address the problems that led to the crisis. But the same Wall Street insiders who have escaped accountability for their role in this crisis are working overtime to ensure that any reforms adopted are as weak, watered down, delayed and underfunded as possible. Having emerged unscathed, indeed having gone on to earn a new round of generous bonuses, they are working to ensure that nothing changes. That may not be criminal, but it cerainly is unconscionable.
May 17, 2011 at 9:38 AM | Unregistered CommenterBarbara Roper
Thanks, Barbara. I don't know what Lowenstein's views on financial reform are, but it's possible he would agree with you. Still, you make an excellent point.
May 17, 2011 at 9:54 AM | Registered CommenterDr. Pitchfork
I am not so sure that fraud was not a major cause of the crisis. At a low level, loans were issued without due diligence. People would state incomes they did not have or the loan originator would state a false income. That is fraud. These loans, a percentage of which were known to be based on false information, were bundled and sold off as good. That is fraud. The ratings agencies rated these bundled loans as good, either knowing that the composition of the securities was not as claimed, which is fraud, or if they did not know then they did not do the proper investigation or due diligence to rate the packages. Not having done that investigation while claiming to do so is fraud. As Taibbi points out, the heads of the big banks knew these packages were not as claimed and pawned them off as good quickly before they fell apart. That sounds like fraud also.

It sounds likemost of the people in the financial cartels either were not doing the job for which they were paid, knew the deals were not sound or were trying to dump the junk and run. Which all sounds like fraud to me. The whole thing has been built on air. Now we are supposed to bail them out and act like nothing bad happened.
May 17, 2011 at 10:11 AM | Unregistered CommenterHarry Johnson

Your points are spot on, though we could argue about the extent of fraud vs. stupidity. That's precisely the problem with Lowenstein's article -- if Wall St. accountability depends on whose argument re fraud vs. stupidity wins out, then they will never be held accountable.
May 17, 2011 at 10:29 AM | Registered CommenterDr. Pitchfork
My-a Johnny -- he's a the good boy!
May 17, 2011 at 5:52 PM | Unregistered CommenterSteve
While it is true "that in the American legal system, people who merely act badly or unwisely do not do time"; people who act recklessly should and very often do do time. I would suggest that a great many people in the financial community did act recklessly.
May 17, 2011 at 9:29 PM | Unregistered Commenterchris murphy
Black suggests that the banksters deliberately gave out liar loans to pad earnings so the banksters could make more in bonuses. I am not sure that I fully agree with Black.

However, I think that it is clear from all of the records that the banksters knew by the end of 2006 that they had huge losses on subprime securities because big purchasers had stopped buying those securities. So they should have taken some huge losses then but they didn't. Rather, they paid themselves huge bonuses based on profits that they knew were ficittious.

Even if the accounting fraud was only for one quarter, its still fraud. And, I think there is considerable evidence that there was huge overstatmenet of profits by all the major brokerages by the end of 2006.

I am not optimistic that these crimes will ever be prosecuted. For whatever reason, the Obama administration has no interest in pursuing any fraud cases related to the big banks. If they did, the cases would have been brought already as they have been in Iceland.
May 19, 2011 at 2:46 PM | Unregistered CommenterDavid

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