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Guest Post: Fraud Finally Being Discussed in Polite Company … Now Where Are the Prosecutions?

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Washington’s Blog

As I have repeatedly pointed out, the economy cannot stabilize unless the fraud which led to the crisis (see this, this, this and this) is openly discussed.

As Shahien Nasiripour notes today today, Alan Greenspan didn’t think regulators should even pay any attention to fraud:

He didn’t believe that fraud was something that needed to be enforced or was something that regulators should worry about, and he assumed she [Brooksley Born] probably did. And of course she did. I’ve never met a financial regulator who didn’t feel that fraud was part of their mission, but that was her introduction to Alan Greenspan.”

But, this week, Greenspan admitted in testimony to the Financial Crisis Inquiry Commissioner that regulators do need to crack down on fraud:

This week, in response to a question from Financial Crisis Inquiry Commissioner Heather Murren, who asked Greenspan whether subprime lenders should now be supervised by the Federal Reserve, Greenspan said:

“Well, first of all, remember you have to distinguish between supervision and enforcement. A lot of the problems which we had in the independent issuers of subprime and other such mortgages, the basic problem there is that, if you don’t have enforcement, and a lot of that stuff was just plain fraud, you’re not coming to grips with the issue.”

In a paper on the financial crisis he presented last month at the Brookings Institution in Washington, Greenspan did not mention the word “fraud”, in any of its forms, even once in the 66-page presentation.

His prepared remarks this week, though, mentioned it three times.

“[I]t is one thing to promulgate rules, and quite another to successfully implement them. Rules to prevent fraud and embezzlement have failed as often as not. Parenthetically, in the years ahead, we will need far greater levels of enforcement against misrepresentation and fraud than has been the practice for decades,” he told the investigatory panel.

Greenspan also called for “enhanced” enforcement against “misrepresentation and fraud” going forward as one desired part of the government’s arsenal in trying to avoid future crises in which taxpayers are forced to bail out private companies.

And the Wall Street Journal is running an important story showing that all of the big bank primary dealers – not just Lehman – have engaged in fraudulent accounting for years:

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

The fact that the existence of widespread fraud is finally being addressed in polite company is a good first step.

But where are the prosecutions?

Neither happy talk nor propaganda will fix the economy. The governments of the world have spent trillions trying to wallpaper over the fraud, and have become insolvent doing so.

But it’s not working. Indeed, polls show that people no longer trust our economic “leaders”. See this and this.

Only honest talk – and holding the people who committed fraud accountable – will stabilize the economy.

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26 comments

  1. AK

    >> Only honest talk – and holding the people who committed fraud accountable – will stabilize the economy.

    I very much doubt that “talk” (even an honest one) can stabilize economy. :) I am rather a “fundamentalist” who believes in proper actions.

  2. The humanity

    The complete lack of finance accountability leads to a complete lack of government credibility which leads to a complete lack of citizen equity. How are we any different from the old Soviet-style kleptocracies now?

  3. Ben

    Because capitalist markets will regulate themselves.

    GreensRand’s little social experiment is an abject failure, and due to his blind adherence to ideology, he is a failure, entire.

    The man should crawl into a dark nursing home and fade away.

  4. Glen

    “Neither happy talk nor propaganda will fix the economy. The governments of the world have spent trillions trying to wallpaper over the fraud, and have become insolvent doing so.”

    If the people if Greece go down this weekend just like the people of Iceland did last year, then you’re watching the financial elite decide that banks will prevail and people will lose, and that governments of and for the people no longer exist.

  5. EmilianoZ

    The point of deregulation is to make “fraud” a thing of the past. Since there are no rules, whatever you do, no matter how morally reprehensible, is legit.

    The downside is that the populace suffers the consequences and can get no relief in seeing perpetrators punished. Popular anger will fester until one day it explodes. It will be like the subprime bubble. The longer the wait, the more spectacular the meltdown.

    “You might not see things yet on the surface, but underground, it’s already on fire.”
    Y.B. Mangunwijaya
    (quote at the beginning of Naomi Klein’s “No logo”)

  6. leeanne

    I can think of no public benefit to covering Greenspan other than to set him up for trail hung on his own petard.

  7. LeeAnne

    I can think of no public benefit to cover Greenspan’s remarks feelings and opinions other than for his eventual trial and hanging on his own petard.

  8. Tim

    This post is EXACTLY, sorry for yelling, why I’ve been yelling about getting the masses to “follow” the FCIC.

    If more people knew this in an understandable way – let’s just say, it would a piece of cake to get a 1,000,000 Tax Payer march on DC to get reform.

    < < > >

  9. PQS

    Is it just me, or is Greenie sounding more, um, comprehensible these days?

    I recall listening to him years ago and wondering why I was so dumb I had no idea what the man was talking about. Now he seems to speak with much less paranthetical phrasing and grandiloquence than before.

    Is the veil lifting?

    Oh, and Brookseley Born for President.

  10. kevinearick

    Banking is the handmaiden. The root is where this is headed.

    Layoffs of permanent, full-time workers are starting to surge again, this time from the nexus.

    Troubleshooting to Design & Designing to Troubleshoot

    In troubleshooting a circuit as large as an economy, realize that the economists are prone to re-wire the meters as they tap off energy to non-productive loads, to make the circuit appear to be functioning normally, and the labrynth of capacitors is huge, which means that they can re-wire / cross the capacitors with little notice, so as you check voltage, they can deliver the expected voltage to that isolated point, by taking it from another, or by bleeding the system in equilibrium if necessary.

    While you are physically moving from point to point, they are sitting at a control panel, wired specifically to misdirect you. The trick to troubleshooting is to always be two steps ahead, which isn’t hard. They are a lazy lot and you design the circuits in the first place, including the control panel.

    They always employ divide and conquer tactics. Think alike enough to eliminate the need for direct communication, and think differently enough to get the job done, so you can test the system from anywhere in the system. The main controller is a simple machine, something with buttons for them to play with and fight over.

    A population chooses not to think, and pursues something-for-nothing, and a population trains them like cattle, from quarter to quarter, product to product, leverage to leverage, until money is chasing money. What they all have in common is that they do not care how things work; they just want them to work. They are efficiently expediant, and the latter will employ the former to randomly short the safeties until they get what they want, to drive the herd to slaughter. The artist cares, and so recognizes, but cannot fathom logic, so the programming automatically protects the artist that is unique.

    The objective is not to prevent the build-up of gravity; that is a natural course of events. The objective is to be prepared to launch a better system by employing that gravity when it will result in the required orbit. Teach a kid your trade, and you will learn more than you teach. Don’t worry about training a shark. The sharks end up eating each other, and every ecosystem requires a shark. They’ll short out the safeties, but that’s to be expected. Individuals self-select themselves, and the best will build up the required energy to jump the gap of their own accord.

    The current capitalists and socialists think I’m nuts, talking to myself in the corner of a room, in a backwater, giving away everything, right up until they see that the circuit is an intersection of intersections, while their retired predecessors laugh, having seen me themselves at the very same intersection, in the last round, when they were in charge. (the former governors re-entering the race should be interesting)

    The point is don’t think twice about a kid trying to out-wit you, it’s natural, and that kid may actually do so, becoming better than you at what you do, which is the highest level of achievement that you can hope for, because your work will become part of the fabric, delivering recurring returns in your retirement. The others will all self-select themselves out.

    Preview:

    Wall Street owns and bets on energy trades, the “fixed” costs, from NY to Oslo, with both vertical and horizontal control, which is one side of the vice, and its wage arbitrage market, “variable” costs, is the other. Banking is the intermediary that closes the vice; its like a juicer. We have taken a good look at banking and wage arbitrage, but we have not spent a lot of time on Wall Street’s energy trading platforms, Enron times a billion, the most important part of the system.

    People who think houses are investments are feeding the circuit, turning the screw in on themselves. Something for nothing is paid back, with interest and penalties. Ponzi schemes are all about timing, easy to get in, and hard to get out – the law of retribution. What one hand gives, the other takes, several times over, and vice versa. Take a step back, and look at all the inputs and outputs.

    Why is the price of oil $85/barrel? Why are we in Afghanistan? Why was the nuclear reaction never completed, leaving a stockpile of nuclear waste? And why are nuclear plants so big and so concentrated? In adaptive, symbiotic systems, the cost of energy and per unit use both fall, in a feedback loop, while diversity increases.

    Banks are about money. Energy is about power.

    (Keep in mind that it’s the war-is-a-video-game, hired-from-the-neck-down, shoot-at-a-rock-for-fun crowd that you have to watch out for, numbers and random killing fields. There are some highly competent professional military types that are just as aggrieved as everyone else with all this foolishness.)

    1. aet

      All well, except that gravity does not “build-up” (or “drain away”, for that matter): the strength of field only varies by the changes in masses and distances – and both only have measurable effects on inhuman scales of action.

      So leave gravity out of yer paths mapped/found/described, which seem appropriate for mass-less electrons.

      What about humans, who love and hate? Or are those emotional states also just circuitry to be “trouble-shot”? But don’t those emotional states “ground” the strongest, most energetic, and occasionally most effective, human actions?

      The localized control circuit remains one’s private sphere, as others are too busy minding their own unavoidable business.

      Energy = power (to do work) = money. Exchanges, equivalences, yes? So..tautology is the result: nothing new.

      1. kevinearick

        gravity is transformed.

        the more you worry about semantics, the more you try to find the location of the electron, the farther away you get.

        1. kevinearick

          gravity has an enormous effect on humanity, and yes, laws of physics apply to psychology and sociology. you may not like that.

          1. kevinearick

            choice lies in the transformation of gravity. from the perspective of the individual, choice is relatively infinite, depending on perception. from the perspective of the universe, there is no choice. the universe calculates itself.

            you are certainly welcome to your opinion, but at the end of the process, a functioning economy must result, for 7 billion people, and so far, I don’t see one.

            but keep trying.

  11. run75441

    Good Morning George:

    Along the lines of past Greenspan conversations on fraud, here is a recollection of a conversation with Greenspan by one of the cassandras of the 2008 collapse and it’s occurrence shortly after the LTCM default.

    “Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences.

    ‘Well, Brooksley, I guess you and I will never agree about fraud,’ Born, in a recent interview, remembers Greenspan saying.

    ‘What is there not to agree on?’ Born says she replied.

    ‘Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,’ she recalls. Greenspan, Born says, believed the market would take care of itself.

    For the incoming regulator, the meeting was a wake-up call. ‘That underscored to me how absolutist Alan was in his opposition to any regulation,’ she said in the interview.” http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html “Prophet and Loss”

    Brooksley Born had her head screwed on right and had the guts to take on Greenspan and his crew of Rubin, Summers, Levitt, Gramm (don’t forget Enron and Wendy). I am sure Greenspan wouldn’t admit to this conversation either The old goat will go to his grave and never admit to making a mistake.

  12. Neil D

    I guess I just assume all business are fraudulent. When I signed up for a membership at a national chain of fitness centers, the kid made a “math error” while calculating the total. Then there was the retail shop that charged full price rather than the sale price. There was a doctor that charged me and my insurance for an EKG that was never performed. Let’s not even talk about car repairs and our favorite home inspectors, realtors, and mortgage brokers.

    Caveat emptor!

    It’s not a conspiracy, it’s who we are.

    1. readerOfTeaLeaves

      Some things are simply errors; the EKG could actually have been an error if it was a one-time problem.

      The FCIC testimony shows systemic, institutionalized fraud.
      That cannot be papered over, and if there aren’t prosecutions then government won’t function, because the level of resentment will simply be too high.

  13. Jerry

    I read about 3 seniors that were caught in bank robbery….will they get the same treatment as those who stold all the money from them……When there is no justice in a civilization, there is anarchy….. these seniors are getting things started in that direction….when the “unemployment” drug is taken away….Watch out!!

  14. Brett

    “The failure to do any sort of sustained investigation into crisis causes, be it Pecora style, or the more disciplined process of the Brady Commission, formed in the wake of the 1987 crash, suggests that the authorities do not want to know how wide spread the rot is. That in turn points to two further possibilities. One is that effective investigation would show that quite a few powerful people were culpable. A second is that exposing the full extent of problems would call many fundamental operations of the financial systems into question, confirming the current paradigm is no longer viable. That revelation, even if true, is politically unacceptable.”

    – You-Know-Who, From You-know-which-book; page 292.

    I’m certain it’s both a deep fear that the entire system is about to go, with all the attendant chaos that would follow, plus a healthy dollop of CYA. Which puts us back in the same situation we were in 2007, when it became apparent to bankers that the system was unsustainable, and Cramer had his famous meltdown: “. . . I know too many people and I’m too old!” Only Treasury and the Fed are neck deep in trying to keep the wreck afloat.

    If that’s the case, one wonders what signs they’re looking for, and how prolonged the uncertainty will be. For certain, we’re all being kept in the dark about many things it might be needful to know.

  15. Jerry

    It is time to begin some REAL thinking about what we want our country to be…do we want it to be like so many other countries where the leaders are corrupt and in it for themselves and what they can get…..because that is where we are so there is no need to point fingers at or lecture Mexico, Afgan, etc. …..I would like a country that is not socialistic but not greedy capitalism either….one that says what are the basic needs of our people and how do we meet those while giving people a system of competition..one that stops spending on wars that have no end and no realist, measurable goals, ones that only the poor in our society fight why the rest of us keep our kids out of harms way…….where justice is justice not where money buys justice…..where the CEO’s don’t make 300% more than those who actually build the product or deliver the service….and I’m ready to participate in a system of several political parties so there really is choice…and where we’re not stuck for 4 years….I like it that a leader who looses the confidence of the people is OUT….I don’t mind living simply so others can have a decent life too….what is your dream for your country????

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