A Straightforward Criminal Case Against Wall Street CEOs and Senior Executives

Various people who ought to know better, such as the New York Times’ Joe Nocera, haven taken to playing up the party line of the banking industry and I am told, the SEC, that we should resign ourselves to letting senior financial services industry members get away with having looted their firms and leaving the rest of us with a very large bill.

It is one thing to point out a sorry reality, that the rich and powerful often get away with abuses while ordinary citizens seldom do. It’s quite another to present it as inevitable. It would be far more productive to isolate what are the key failings in our legal, prosecutorial, and regulatory regime are and demand changes.

The fact that financial fraud cases are often difficult does not mean they are unwinnable. And a prosecutor does not need to prevail in all, or even most, to serve as an effective cop on the beat.

Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operations. I’ll call them “dealer banks” or “Wall Street firms” to distinguish them from very big but largely traditional commercial banks like US Bank.

Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.

The responsible officers must certify that, among other things, they:

(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;

These officers must also have disclosed to the issuer’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):

(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial
data and have identified for the issuer’s auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls

The premise of this requirement was to give assurance to investors as to (i) the integrity of the company’s financial reports and (ii) there were no big risks that the company was taking that it had not disclosed to investors.

This section puts those signing the certifications, which is at a minimum the CEO and the CFO, on the hook for both the adequacy of internal controls around financial reporting (to be precise) and the accuracy of reporting to public investors about them. Internal controls for a bank with major trading operations would include financial reporting and risk management.

It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere. Banks are not supposed to gamble with depositors’ and investors’ money like an out-of-luck punter at a racetrack. It’s pretty clear many of the banks who went to the wall or had to be bailed out because they were too big to fail, and I’ll toss AIG in here as well, had no idea they were betting the farm every day with the risks they were taking.

Not surprisingly, it isn’t difficult to find widespread shortcomings in risk management at major dealer banks. Risk management deficiencies most relevant to Sarbanes Oxley are related to pricing. The accuracy of the accounts, meaning the valuations, is the primary focus. Risk management weaknesses that impact reportable disclosures (in the accounts or the notes) have highest relevance. However, crappy risk management that leads to poor positioning may not be germane to the Sarbanes Oxley violations issue.

We discussed the issue at some length in ECONNED. Risk management was kept weak; if push came to shove, it was subordinate to the producers. Richard Bookstaber, a former chief risk officer, discussed at some length how most chief risk officers were engaged in what amounted to busywork. While they might indeed prevent particularly egregious excesses, their form over substance exercises also provided useful cover for the top brass and the board of directors. As he noted in 2007:

If you are the Chief Risk Officer and everything blows up, don’t you bear some responsibility?…

In the CRO job 99% of the days there is nothing going wrong. The only test you get of how well you are doing – short of pouring out risk reports and looking ponderous and prudent in meetings – is what happens to the firm during times of market crisis. Every few years something calamitous happens in the market; if the firm gets blown away, that suggests you did not do a very good job.

Readers may have better suggestions of where to start, but I’d target Lehman. First, it already has a smoking gun: a May 2008 letter written by former senior vice president Michael Lee to senior management, including the CFO Erin Callan. It describes numerous accounting shortcomings, none of which look to be new and many of which look to be Sarbanes Oxley violations.

Second, its derivatives books were by all accounts an utter disaster at the time of its collapse: multiple non-intergrated systems, to the point where the bank did not even have a good tally of how many positions it had (bankruptcy overseers Alvarez & Marsal first said the bank had 110,000 positions; they later changed their tally to 120,000). This is important because despite all the efforts to identify why the Lehman losses were so massive, most analysts have focused on the asset side, and the numbers don’t add up. That means understatement of positions and/or gross understatement of risk on the liability side is the probable culprit.

This is an egregious accounting 101 control breakdown, It indicates that the most basic operatonal controls, reconciliation of accounts, were not effective (see here for further support). Lehman would have to take the position that its basic control weaknesses were all immaterial. At all times there’s an inventory of control weaknesses that exist. That inventory must be constantly monitored and reviewed (and attested to in the 404 internal control assesments signed by the responsible officers). Materiality determinations are decided by managers, internal and external audit and ultimately the CFO and CEO. Dick Fuld also made statements in Congressional testimony about his ignorance of his ignorance of Repo 105 and a failure to include commercial real estate in stress tests starting with the end of 2007 that also seems consistent with a lack of adequate risk controls.

At other banks, prosecutors will probably need to proceed in a bottom’s up manner. The structured credit and CDO desks are targets even now for criminal securities fraud actions (the statue of limitations has not expired). These units, as Bloomberg’s Jonathan Weil has pointed out, were also ground zero of misreporting at Citigroup. The bank’s defenders claim it has a free pass by virtue of a letter from the bank lapdog OCC that did not rise to the level that would force disclosure but its basis was that the valuations Citigroup used were with market ranges. This seems a dubious argument. The fact that a defective speedometer happened to provide a 60 mile per hour reading when the car was going 57 miles per hour does not prove the device was reliable.

Moreover, anyone with an operating brain cell knows “market prices” were being gamed by dealer banks passing small trades between them or with friendly clients, typically hedge funds who might also like to show high valuations, to establish flattering marks. If the marks Citi was relying on were the result of collusion, and the bank was either involved in or aware of the collusion, this undermines the OCC view of the validity of the marks at Citi and other banks. If yours truly knew of this practice, it had to be widespread and well known at the firms themselves.

My understanding (and reader input is welcome here) is that the authorities could file a civil suit for Section 302 certification violations. If they prevailed in that, a criminal case under Section 902 should be an easy win. The 906 certification basically says the reports are fully compliant with all regulations, including those specifically certified in the 302. (Note that the SEC initiated a criminal case against HealthSouth CEO Richard Scrushy which included Section 302 charges. Scrushy was acquitted in a jury trial, but having followed the proceedings a bit, and also seeing another example of a trail in Birmingham, I’d be careful of generalizing from Alabama courts to other jurisdictions. The deck, even more than in other jurisdictions, is stacked in favor of the local bigwigs).

Will any of this happen? Of course not. The decision was made at the time of the TARP, and reaffirmed early in the Obama administration when there was serious talk of resolving Citigroup and Bank of America, that no one at the helm of the senior banks would be subject to serious scrutiny, much the less actually expected to be held accountable for actions that wrecked the economy and have imposed serious costs on ordinary Americans. The case we described above is relatively simple to explain to a jury and has the advantage of being the sort where the plaintiffs could build on their experience in one action in subsequent cases.

But that sort of truth, that most, probably all, of the major Wall Street banks were engaged in the same sort of misconduct and the violations extended to the very top of the firms, would expose numerous other parties as complicit. So we’ll permit the cancer in our society to metastasize rather than threaten the power structure. But at least we citizens can make it clear, even if we cannot change the outcome, that we are not buying the canard that nothing can be done to fight this disease.

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  1. fresno dan

    “Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operations.”

    Remove “pretty much” and I would agree.
    I assume the defense the bankers would use is ignorance – and in my view it is now indisputable that it was willful, designed, well crafted “ignorance” to provide an alibi.

    The question is, what is the defense of the FED, OCC, SEC, NCUA, OTS, et al???
    Were they just ignorant, or were they purposefully ignorant?
    And who in the government has been prosecuted, investigated, fired, demoted, reprimanded? Anybody miss a step increase?

    1. jimwilson

      The ratings agencies must also be very vulnerable. Once their fraud is exposed, the people who work there will rat out their superiors and the banks that were their co-conspirators. When white collar defendants face doing hard time in nasty jails (not Club Fed), they tend to betray their superiors. After all, their particular sociopathic technique does not include immediate violence.

      1. Procopius

        IANAL, but hasn’t the Supreme Court eviscerated any liability for the ratings agencies by declaring their ratings to be “protected free speech,” and mere opinion? The same as they did for liability of Attorneys and accountants who give disastrous, patently illegal, “advice.”

        1. Paul Repstock

          If the “Ignorance” defense is sufficient; then they have defrauded shareholders by claiming competence. Therefore, they should be required to return all the compensation they recieved in the occupation of their positions. Also, if they were ignorant, they then perjured themselves by signing off on Sarbox. If one is responsible for an opperation it is their responsibility to learn every aspect, specially if one is required to certify the integrity accounts.

        2. ScottS

          It’s tax time! Will the IRS buy my argument that my tax return is protected free speech?

  2. Richard


    This administration has a long track record of looking at a situation and seeing two extremes: old testament justice or do nothing. It then chooses what it sees as the least offensive extreme.

    Unfortunately, what you are suggesting falls in the middle between the extremes. Your modest proposal is that the Administration should actually enforce the laws on the books. Hence, it is not ever going to be under consideration.

    Obama came in with an agenda not to explore the past – after all, why would we rush to produce non-reform in the form of Dodd-Frank before the Financial Crisis Inquiry Commission had actually found out what caused the problem?

    While your well reasoned position is a direct challenge to Obama, he has moved on to cutting the budget and punishing the poor and their children for the looting of the banking system.

    1. eric anderson

      What the hell is wrong with Old Testament justice?

      Fraud in this case is equivalent to stealing and the penalty for stealing was to restore manifold what was stolen (four or five times the value of stolen livestock, for example — Exodus 22:1). If the perp could not afford this, then he would probably be forced to work off the rest of the penalty.

      That works for me. Doesn’t it work for you?

      “Thy word is a lamp unto my feet, and a light unto my path.” Psalm 119

      1. Anonymous Jones

        Of course (and I can’t believe I have to say this), the problem with “Old Testament” justice is not the examples (like the one you cite) that seem reasonable today but the examples that seem unreasonable today.

  3. Transor Z

    Civil v. Criminal

    Yves, criminal cases are more difficult to win than civil cases because the standard of proof in criminal cases is “beyond a reasonable doubt” while it is only “preponderance of the evidence” in civil cases. For this reason, evidence established at trial in a criminal case can be imported into a civil case, but generally not vice versa.

    1. Dr. Pitchfork

      Isn’t this a non sequitur, especially when you consider that civil suits are the only game in town right now — the doj and prosecutors having gone out for a long, long lunch? That is, you might have a doozie of a civil case that uses information that would otherwise be incriminating, even if Eric Holder et al. are too weak, bought or captured to do anything with it.

      What’s the relevance here, in any case?

    2. Yves Smith Post author


      Please read the post. I am told by people who know Sarbox (as in both worked in banks and did Sarbox compliance) that the 906 charges (criminal) follow from the 302. You file the 302 case, and if you win that, the 906 charges follow. There is not a lot of ambiguity here. Yes, you have a higher standard of proof, but this is not an area that has as much grey as other types of charges. The big issue is the tendency to shift blame to accountants because they are involved in the preparation of reports. But the issues of how positions are marked (in particular, the gaming of marks to as not to expose losses by engaging in collusive trades) and the organizational weakness of risk management (in my understanding from people involved in Sarbox compliance at banks) is generally outside their purview. You normally have to surmount the “we told our accountants” threshold. The question here is what was known by management, whether there is reason to believe it was not passed to them by design (as in the Chief Risk Officer not looking into stuff he must have known about or was told about, or being overruled by traders, which is something that happens a lot and is a sign of structural weakness). That’s the hurdle, which exists in a civil case too.

  4. NS

    I agree and it is quite the indictment of our entire system. People who formerly had no interest in high finance or economics are waking up as so many lives are profoundly changed forever.

    The market will decide and folks WE still aren’t wholly separate from the market. So, as individuals, legally we can do something and that is to simply not do business with the offenders. There are plenty of other choices in banking, lending. If you are an investor and swim with the sharks there are still other options.

    Voting for those who aren’t part of this club and whose funding clearly doesn’t come from this rat pack is important too, no matter your normal political leanings. This requires due diligence as a voter, something sorely missing but requires a return. Divisive hot button issues, smoke and mirrors and emotions will be played on but look underneath the veil, follow the money for the real picture, then decide.

    Consider the above a form of peaceful protest and something each of us can DO about it. Many of us have little power to affect change, small decisions and actions can become powerful when people become engaged.

    I’m growing weary, its clear, very clear, that justice and our political system is very sick and requires its own reorganization. That will only come from the bottom up.

    1. Stop voting

      I agree with you that this is an “indictment of our entire system” but disagree that part of the solution “requires due diligence as a voter”. The thing to do here is stop voting altogether. Refuse to participate in a rotten system. Voting is rigged and participating only helps give an appearance of legitimacy to criminal fraud. In a rigged system such as ours, there’s no point voting, your only “choice” is between two (or more) members of the exact same kleptocracy. Like a third world banana republic where every few years the peasants are allowed to “choose” between two identical right-wing shills, each of them backed by the same billionaire oligarchs.

      “If voting changed anything, they’d make it illegal.” Emma Goldman

      1. French Maid

        Well put – The lowest serfs should brush up against the Bankruptcy court to unload via Chapter 7. National strike – Then we turn our backs on the corrupt kleptocracy since we are on our own.

      2. doom

        Exactly. In polls in Latin America, the overwhelming majority used to say that the purpose of elections is to get the stink off all the stuff that’s going to happen either way. US polls are careful not to include that as a choice.

      3. John

        Not voting means giving in, unless you specify an alternative. There’s no advantage (other than lack of effort) to not voting over going to third parties.

        1. Chevy Chase Bank

          Well, it doesn’t mean that at all. When you’re facing financial ruin, delusion and fantasy and the first 10 Amendments no longer “work” like they once did. Voting means almost nothing, the US system is a gamed, prehistoric system that people call Democracy.

          It is this idea primarily, that we do in fact live in a Democracy, that will be the qualifier to savage dissent and to crush opposition so that the status quo continues to thrive. [It is disgusting to assume we can vote our way out of anything, and exceptionally naive. We have the technology to obliterate the current idiocy of bought and sold corporate representation] In Egypt, Mubarak was claiming Egypt was a shining example of Democracy, as the folk rebelled against his tyrannical police state.

        2. ScottS

          I agree that “not voting” = giving in, in absence of an alternative.

          I support a write-in campaign for “Repeal Citizens United.”

          1. Paul Repstock

            How about: Start a group in whatever jurisdiction you are interested in reforming, then collect a certain fixed fee from each member/voter and hold “Interviews” to determine who is the most qualified applicant for the job (Representative). The chosen applicant would then be required to sign a very stringent contract (with penalties). In return for this the applicant would recieve a salary/bonus, of 3x or 5x the normal pay for the job. There are plenty of qualified managers who would not be acceptable to existing political parties because they might not be relied upon to toe the party line.

          2. ScottS


            Hearing about the Spanish Cajas, I think they are actually great model for local development … until they get a huge influx of cash from Germany.

            But the Cajas are a bit like what you describe. Concerned, local laypeople plus a few local politicians manage a bank that takes deposits from the community and use it to back community development projects.

            But that German thing is a problem.

      4. nonclassical

        Problem is, not voting IS voting..for corporations who already have disempowered us all.

        The truth is, there needs to be grassroots focus on ending ALL forms of “campaign contribution”=corporate, union, military, contractor…

        $$$$ is PROPERTY=NOT “speech”…

      5. anon2

        “It makes no difference who you vote for – the two parties are really one party representing four percent of the people” – Gore Vidal

        (Vidal said this a number of years ago. Today I’m not sure the one party represents even one percent of the people.)

    2. readerOfTeaLeaves

      I agree and it is quite the indictment of our entire system. People who formerly had no interest in high finance or economics are waking up as so many lives are profoundly changed forever.

      Roger that. Big time!

      If anyone had told me three years ago that I’d be spending time *daily* at a finance blog, I’d have thought they were nuts.
      Thank God for Yves and some of her blogroll associates (!).

      1. SetMeFree

        I too was not interested in politics or finance at all until my own life fell into shambles due to the purchase of my own home. I used to rent, travel the world and live free from the shackles of the “rat race.” Once I gave birth, I wanted my son to have a more stable life, so I made the mistake of buying into “the system.” My husband and I committed to jobs, bought a home and tried to be “normal.” Now I realize that my son is less happy because of the choices we made. We are prisoners in our home and my son has stomach issues from worry. He hears us talk about our home and says “are people going to take our house?” We reassure him but he can feel the stress from us, even though we do not talk about it around him now. We have always paid on time, but have ended up on the wrong banking computer system because I caught the scheme early on before closing and wanted “out.” They may as well have marked me between the eyes because for some reason, whether we pay or not, they want our house. Now, I have caught them in blatant mail fraud and have an impending law suit but wait: they hired a private security firm to profile my family. FABULOUS, NOW I HAVE TO WEIGH THE RISKS OF BODILY HARM TO MY FAMILY IF I SUE? YOU HAVE TO BE F’ING KIDDING ME. I have considered asking for asylum in another country.

    3. different clue

      Not Voting,

      I think that when NS said “voting”, he meant “voting with our dollars” in the political economy. I think he meant that putting one’s money (if any) in a non-criminal small credit union is a vote against the large criminal financial institutions one is thereby keeping that money away from. I think that is what NS meant by “voting”.

      Also, there are many levels of political activity where voting still matters a great deal. Some of the state governments are still legitimate, as are many local governments at various levels. One still has real choices to vote for or against there, as well as referenda and initiatives to vote about. As to the Emma Goldman quote about how “if voting changed anything, they’d make it illegal”; the Republicans and Conservatives clearly fear that voting by certain people can indeed change things so those Republicans and Conservatives are working very hard to make voting illegal for many sorts of people. Clearly the Republicans and Conservatives know something that Emma Goldman did not know.

      1. NS

        I meant both in who we select and in who we do business with, who we bank with, who we buy from. On the national level, I agree its totally cooked and for higher state positions as campaign war chests are filled before a candidate even announces. Then, we are left with no choices except the lessor of evils.

        We sorely need reform in congress and, in particular, term limits are required instead of life-long appointments no matter how bad the behavior is by ‘elected’ officials. For the average voter who has little time to do the research it means reliance on the media also funded by the same bad actors Yves discusses and who are not only above the law, but also THE puppet-masters in our government.

        I do suggest we all get active. Due diligence is difficult, time consuming, enraging and one must always be aware the sources might also be corrupted. One must be critical and objective, verify and reproduce. The pundits are bought and paid for mouth pieces. The integrity of journalists is gone so we must all be our own journalists now.

        Shunning the lawless bandits, turning ones back on them as much as it is feasible is possible from everyone. Look at who and what is owned and controlled by Citi, Goldman, Merrill, Wells, BoA, etc. You’d be shocked at the trail which includes wholly owned subsidiaries like coal fired electrical plants, sugar processing plants, insurance companies, health care. Big Ag, Big Pharma, Big, big and bigger with army of lobbyists writing the legislative loopholes to protect their interests at our expense.

        Supply-side economics is proven false, until that is recognized and changed we’ll continue to be squeezed into debt-slave fossils, our basic rights and freedoms increasingly made irrelevant by these masters of the universe for profit.

        We as part of the law-abiding and tax paying nation can do these small individual and peaceful legal acts of protest at least now. As more people become informed and aware that our system was hijacked from within, in the dead of the night, systematically over decades, heavily cloaked perhaps more organized means will arise.

        Now these leeches are in our face, its time we spit in theirs. Currently, finger pointing at each other in the old school of divide and conquer is used as a diversion while business as usual and annual multi-billion dollar paydays for the fractional few continue.

        Sorry for the lengthy note. I cannot think of any other way to fight this beast or cut out the life threatening cancer.

        Thanks for listening and the great discussion. Thank you Yves for the clarity and your hard work which produces enlightenment.

  5. Zone Press

    We have to remember the context in which SarbOx was passed. Congress wanted investors to be able to rely on the integrity of what companies told them in their periodic reports to the SEC. There was to be no more, “I didn’t know” defenses out of senior management.

    Companies other than the big banks spent billions putting Rule 404 compliance systems in place. Now we have the biggest failure of internal controls in history (a failure that nearly took the financial system down)and the SEC does nothing.

    This is an outrageous failure of government. Get some people to spend billions of dollars on a system. Then not enforce it when the biggest violation of all time occurs. No wonder people outside the Beltway think government in Washington is hopeless. Maybe it’s time for a house cleaning at the SEC.

    1. MichaelC


      Just to clarify, I assume you meant ‘in addition to the big banks’, The banks did spend billions building the infrastructure as well.

      As a result there is an extensive paper trail at the banks that documents the quality of the internal controls. To some degree it was considered a CYA excercise, one that was unlikely to be seriously scrutinized in court, but it did instill a modicom of fear in the hearts of everyone who participated in the excercise.

      But it was also equally unlikely, in the minds of Lehman and Bear at least, that they would blow up so spectacularly.

      Most people want to see a perp walk. Dick Fuld is the ideal candidate to lead that line, followed close behind by Jimmy Cayne. Their firms are dead, so this should be a fairly simple case to bring.


      1. MichaelC

        Why isn’t this major law being enforced?

        Its a simple question and I haven’t seen anyone respond with a credible argument to defend its lack of enforcement.

        AIG was forced to ‘come clean’ back in ’08 before the collapse that they had material internal control deficiencies that forced them to restate. At the time that signalled to me that SOX might actually have some teeth, in that it forced AIG to ring an alarm it wasn’t willing to ring absent the rules.

        It also signalled to me that every AIG counterparty had the same internal control weaknesses ( at least around their transactions with AIG).

        The law is not being enforced because of the fear of contagion effects on the surviving institutions. It shouldn’t be the concern of the SEC or the DOJ to weigh the collateral damage resulting from enforcing the rules they’re charged with enforcing before acting. But it seems that calculation trumps the law.

        1. Nicole

          The other possibility is that the law isn’t being enforced because the government is protecting people at banks and not just because they’re worried about the consquences.

          1. Bob Fanning

            There will be consequences Nicole. We are 2 1/2 years into what Bill Gertz defined as a financial act of war. Govenment covered it up and papered it over the best that they could while the perps walked and society in its weeakened state falls deeper and deeper into despair.

            What’s the diffrence between Egypt, Greece, Tunisia, Ireland , Iceland , Lybia ….and the “United” States of America Nicole ? EIGHTY MILLION GUNS in the hands of the betrayed.

  6. Ishmael

    Well Yves, having implemented SOX at approx 12 companies your description of the situation is exactly correct.

    Any CEO who signed the statement that they did not have any material internal control weaknesses or failed to list the ones that blew up their institutions is now quilty of violating the law and it should be not be difficult to prosecute since the evidence is prima facia.

    At this point if we are not going to prosecute we should just save the money and get rid of the SEC, get rid of the Big 4 (their audits have become worthless) and get rid of SOX. In fact all of these just give a sense of security which does not exist. Having dealt with the SEC for 30 years, the SEC in the last 10 years has turned into a bunch of clowns and whenever I talk to them I see Bozo the clown sitting across the desk.

    1. Paul Repstock

      Doesn’t that extend to the DOJ? Obviously the money could be better spent on social security.

  7. Christopher Harlos

    Since the “rule of law” is as quaint around this place as the Geneva conventions, it’s high time that all federal laws and rules were suspended under the Equal Protection clause. I know John Roberts reads this blog…you listening, Mr. Chief Justice? Being crooked as all get out is par for course, but the stink of our collective hypocrisy is really too much.

    1. John

      There is a slight problem with that argument: the Equal Protection clause doesn’t apply to the Federal government — only to the state governments. (If I had my way, I would interpret the Necessary and Proper clause to impose the Equal Protection clause on the Federal Government when it governs as primary government, but it hasn’t been done.)

      I suppose that judges could identify selective enforcement of laws as pretext, and act accordingly in their own practice.

      1. beowulf

        “There is a slight problem with that argument: the Equal Protection clause doesn’t apply to the Federal government — only to the state governments.”

        You’re wrong, look up “reverse incorporation”.

        “Whereas incorporation applies the Bill of Rights to the states though the Due Process Clause of the Fourteenth Amendment, in reverse incorporation, the Equal Protection Clause of the Fourteenth Amendment has been held to apply to the federal government through the Due Process Clause located in the Fifth Amendment. For example, in Bolling v. Sharpe, 347 U.S. 497 (1954), which was a companion case to Brown v. Board of Education, the schools of the District of Columbia were desegregated even though Washington is federal.”

  8. eugene

    I’m surprised that so many people are surprised at the inequities of our justice system. It has always been that and will remain so. Anyone who has spent any time around the justice system knows justice is purchased. More money, better attorney equals less consequences. The poor and the rich know this, it’s the middle class that’s clueless. It took me a long time to understand that much of America is a carefully crafted illusion and was from day one. Your indignation is, simply, a clear indication of your belief in the illusion. You write long articles/comments about the way things “should be, oughta be and could be”.

    Many of us simply say “of course” and press on. Some of us don’t even pay attention.

      1. John Merryman

        Rot, disease and death are part of nature. It is how they are managed, isolated and frankly, composted which matters. The system is like a big hollow old oak tree. When it falls, there will be the space for lots of acorns to grow. I suspect we will go to state banks, if not state currencies, when they finally blow the dollar out of the water, trying to save all the crooked wealth.

    1. YankeeFrank

      This is cynical crap frankly. Many powerful people have gone to jail over much less than the collapse of the economy and trillions in losses. Of course the deck is stacked, but it doesn’t mean we shouldn’t fight. Your way guarantees failure, troll.

  9. Jim

    I think the problem is the US citizens falsely believe we live in some kind of democracy. The reality we live in a system where cooporate america controls the politicians. The lobbyists probably write the laws. All the government officials are taking directions from their handlers.

    The government doesn’t have any legal accountability, and therefore the banksters and their lobbyists are all shielded from liability.

    It all a cleverly designed system the elites have to keep everybody in a box and control the world while the get away with complete immunity. It doesn’t apply to just the congress and senate, but many branches of government agencies have elite control. CDC, FDA, CHAMBER OF COMMERCE. I’m sure the list goes on. The government also works with the cooporate owned media to control the public’s perception of reality too.

    One big illusion.

    1. YankeeFrank

      Its not a very effective one if we can all see through it. You and a commenter above act as if there is an inevitability here that history shows is not the case. The “oh why bother” defense of criminality is morally bankrupt. The truth is that for most of the past 70 years we have had rule of law — society expected justice and in many cases got it. Once society stops expecting justice next stop is fascist totalitarianism. Good luck with that.

      1. Jim

        I happen to be actively involved in trying to change things and it has become crystal clear, through my activist efforts, government DOES NOT operate the way we are taught in school. It is the special interests that somehow control these different agencies. They work in concert with the standard news media to control public perception in my opinion.

        For instance “Chronic fatigue syndrome”, possibly caused by the same virus as autism, cancers, MS. CHronic fatigue has been given a bad image by bogus research since the 1980’s. I believe the deception comes from government “researchers” that release misleading research in a calculated fashion to control public perception. The result being insurance companies don’t have to pay as much money in disability benefits, and social security doesn’t have to pay as much money. Not just a little fudging either…. but ongoing campaigns to control public perception. Not just the US, but the UK working with the US together.

        The only way to change it is to get involved in a legal battle or go Egyptian in my opinion.

        1. Jim

          One can’t just go to the senators and congressman because they are mislead from all the research that proves differently. But the research is bogus. The corruption runs deep, and many of the so called senators and congressman are probably in the dark to some extent, or some how held captive to the whole scheme.

        2. nonclassical

          Kevin Phillips (Nixon editorialist “economist”) stated that
          end of Clinton there were 450 “K-Street” lobbyists..today that number (following Bushit) is 40,000. Under “W”, lobbyists WROTE “legislation”=deregulatory legislation.

          Proves to me it’s true that until such time there were regulatory controls.

          Reading Howard Zinn we do see historical inequities..but we
          also had FDR “New Deal” regulatory positions till banksters
          gamed legislation.

    2. MaryB


      And, everyone else, read Treasure Islands by Nicholas Shaxon, which I have made it my purpose to repeatedly suggest. (Available in the US April 2011. If you can’t wait, order it from the UK, which I did). The illusion and the reasons and the pieces will fall right into place.

      The question is: what do you do about it? When you’re dealing with a GLOBAL illusion, you have no control over the other parties and their moves.

      1. Alan

        Mary, it would be most helpful if you gave us a THREE SENTENCE introduction to Treasure Islands, explaining to us WHY it is such a dynamite, critical, must-read book.

  10. Corporate Serf

    The issue of gamed marks is actually serious, but can be fixed with the requirement that the mark that can be used to establish market value needs to be from a “publicly” tradeable two-sided quotes of equivalent sizes.

    I don’t think this is how marks are used for derivative collateral purposes now, but I could be mistaken

  11. Siggy

    Nice piece and on the money.

    Civil or criminal, there are a large number of people who have to be in the courthouse. I would prefer criminal, but then with this administration and Justice Department I doubt that we will see much of anything.

    The current insider trading cases are interesting but strike as being a missdirection away from what has been the most egregious event in my life time.

    1. readerOfTeaLeaves

      I suspect the insider trading is symptomatic of predatory, narcissistic, anti-social attitudes that also bleed into the derivatives problems.

      As for those who are blase about this mess, everything that I have ever observed about human beings is that most would go hungry, thirsty, and suffer great inconvenience to be treated fairly, and live in a fair system. We are, after all, social creatures and human psychology relies on some sense of social reciprocity; without it, societies break down, which endangers everyone.

      I am also convinced that some of the shameful DoJ and SEC laziness and cowardice is rooted in Math Phobia, so prevalent in US society. Lawyers are not required to take advance math courses, which include differential equations; in contrast, engineering students have to master differential equations before admission to a college of engineering.

      I’m happy to donate one of my old textbooks on Differential Equations to the cause; I’d also be happy to use Amazon to send some math texts to DoJ. I also think they ought to hire a few good high school and university math instructors to come in and do a few tutorials on differential equations (which are at the heart of all that derivatives code) for personnel in SEC and DoJ.

      Then, they can do the same tutorial process with a few computer science profs, to get our nation’s attorneys up to speed.

      I recently test drove a Nissan LEAF, and one of the most striking things about it is that the motor is **constantly** routing data from your location, via satellite, to Japan in order to continually monitor engine performance. In other words, outside of Wall Street, engineers and computer scientists are **used to** constantly monitoring data in real time and they can’t afford to have it ‘blow up’.

      Differential equations that made such a disaster in derivatives are in every single iPhone game app that has rockets firing at asteroids. Similiarly, they are inside the workings of every jet that flies, monitoring engine performance, fuel ratios, and other key data.

      So I suppose that my meagre contribution to this thread does something like this: for the government — specifically OCC, SEC, DoJ — to weasel out of enforcing justice is disgraceful.

      If application developers, Boeing engineers, Nissan engineers, and engineers all over the world can figure out how to use, check, and monitor the results of differential equations all over the globe, every day of every year, then that suggests to me that there is a growing body of people like myself who look at this ‘financial engineering’ and see it as an insolent, incompetent, disgraceful crock of horsepucky that has damaged our savings, etc.

      DoJ, the SEC, and the OCC disgrace themselves.

      I’ve learned as much about the meltdown talking to young engineers as all the b.s. published in the WSJ, the NYT, and other mainstream media.

      Maybe Yves will have a guest poster, who is a derivatives geek…?

      1. nonclassical

        I work with engineers daily, and you’re right-BUT engineers
        have no concept what has happened. They are politically and economically unsophisticated to the degree they watch and often believe Fox faux non-news…

        a friend is early 70’s era gene-splicer. He was placed with neuro-surgeon to “see what came up”. After 2 years crossover, they were sent back to disciplines, told they “didn’t come up with what was being sought”. Hmmmn.

        Crossover skills are certainly necessary, as suggested. Who has the “say”, and who pulls the trigger when a Supreme
        Court totally empowers (“Citizen’s United”) the $ay of $$$$$…over all else.

        Canadians ended corporate campaign contributions=their banking system still stands, conservatively, above others, according to recent revelation.

        1. readerOfTeaLeaves

          Agree that many engineers probably have no idea what has happened. Yet.

          Those that I’ve spoken with are corrosively contemptuous of ‘financial engineers’ although obviously my contacts are so small as to be merely anecdotal. However, this is one segment of the public who, when they look at derivatives, see b.s. almost straight away if my contacts are any barometer.

          Also, Matt Taibbi nearly channels this thread today on MSNBC:

  12. steelhead23

    Not to be too much of a smartass – but wasn’t the Cioffi-Tannin case pretty “straightforward” too? Perhaps this frame is unknown by those in the biz, but many view Wall Street as “naturally corrupt” and those on Wall Street as having the ethics of a con man. Thus, a defense attorney can simply paint his fraudster as merely conducting “business as usual” and the victims as sore losers. As such, obtaining convictions is harder than it might seem. That said, the stunning lack of indictments displays cowardice, not judicial restraint. It appears that the U.S. Dept. of Justice does not understand either the magnitude of the crimes or their consequences on society – or – more cynically – chooses to ignore it.

    1. Yves Smith Post author

      In our previous posts, we’ve discussed it as an example of terrible prosecution (and we have spoken to both securities lawyers and former securities regulators who agree with our reading).

      The investigation by the SEC was patently inadequate. They based their lawsuit on some damning e-mails in isolation. They were surprised in the courtroom when OTHER E-MAILS contradicted the ones they were relying upon.

      This is classic confirmation bias: look for evidence that supports you thesis only, ignore the rest. That’s fatal in a prosecution.

      And the fact that the contrary evidence was in e-mails (as in this was easily findable in discovery) is a stunning failure. They ought to have found this with any kind of pre-trail prep. The SEC side seemed absolutely flat-footed when the confounding evidence was presented.

      Now I don’t know whether a case against Cioffi and Tannin existed. I suspect not because they were more victims than perps (but they certainly seem to have engaged in civll-level misrepresenations of what was going on with their fund).

      But the point is don’t generalize from a lame prosecution about the difficulty of making and winning cases. That case says more about how the SEC’s lack of competence in mounting anything other than an insider trading case rather than the difficulty of these cases per se. “Not easy” is not the same as “impossible” by a LONG stretch.

      In fairness to the SEC, it has been kept weak by design for nearly 20 years. Read Arthur Levitt’s Take on the Street for details. When he tried being serious about compliance and enforcement for retail investors, Congress threatened to cut SEC budgets to keep him in line. You can’t expect someone suffering from malnutrition to compete at a pro sports level.

  13. Simple Simon

    I have read this blog religiously for about 4 years now and loved it.
    I have very much enjoyed major issues and problems within the system being highlighted in great detail by some obviously extremely smart people. But frankly I am now starting to grow tired of the fact that the same extremely smart people have/are putting very little of their considerable brain power towards finding a solution.
    What was pointed out in this piece was excellent and probablyvery effective if it were to take place. But how do we get it to take place? Where do we start? How do we gather like minded people? We know people are angry. We know even the most ignorant of people would get this and be rightly outraged if it was dumbed down enough for them.
    If you are all so angry, all so outraged, all so intelligent, maybe it’s time you all moved away from basically repeating the same basic complaint day in day out and started looking for practical, simple, street level solutions to getting the average guy on the street, firstly aware enough and then angry enough to get out in the street and bring about the genuine changes that are needed. Because this “it’s not fair – the rich get everything – the rich control everything – they can’t be stopped – they’re too powerful, too well connected” complaining is getting very hard to listen to.
    If our Arab freinds get it and can and are doing something about it (mind you in the face of some very nasty opponants) surely Americans can too?
    Or is this not the point of this blog? Is this blog more about clever, well researched, complaining amongst “lefty interlectuals” than finding solutions, practical answers for “Joe sixpack” as you call him?
    Unfortunately you all sound like school teachers. What is that saying? Oh yes- “those that can, do. Those that can’t, teach”.
    Start thinking/talking solutions. It will acheive far more and the blog will again become an extremely interesting and influential read.
    Just my opinion – but then I’m just Simple Simon.

    1. john

      Send pizzas to the protesters in Wisconsin, the Egyptians are. What exactly are you doing ” for practical, simple, street level solutions to getting the average guy on the street, firstly aware enough and then angry enough to get out in the street and bring about the genuine changes that are needed”?

    2. MichaelC

      Oh, come on Simon.

      We start here. If we can do nothing else,alone, we can make a substantive contribution to the discussion here and at other places where these issues are discussed and attempt to help arm those with a voice and some convictions to be heard.

      Giving voice to the frustration of the futility of the effort may be satisfying but what’s the point of scolding those who share your frustration.

      What can be done? Complain! Often, loudly and to the point, that the PTB are willfully not enforcing the law. Someone is listening. Dylan Ratigan has been hammering the lack of SOX law enforcement relentlessly.

      In my view, any thing, from any source that helps clarify, simplify and amplify that message is a positive step.

      Get with the program.

      If nothing else a comment of hear, hear when a piece stikes you as sound is an opportunity to be heard.

    3. Nicole

      I think the only solution is for people who worked at TBTF to tell people their stories because I think most Americans are very honest, decent hardworking people and their taxes pay the salaries of everyone at OSHA so they should know that they ignore whistleblowers who file SOX complaints. That is why I decided to share my story on my blog.

      Also this is great blog that I used to read all the time. I admire Yves Smith because she is one of best financial journalists we have and there aren’t many women doing that.

    4. John

      Agree Simon.

      We need to educate as many people as possible as to what Wall Street has done to them and is continuing to do.

      Then, we need to start fighting back in this class war.

    5. nonclassical

      Your point is well taken, to the degree you perceive “nothing is being DONE”. But the first step in any
      process is dissimination of TRUTH=information.

      To me, the real damnable feature of it all is that the American people, drowned-manpulated in debt, accept that this is “all too complicated to understand” and that “government” will take care of it. Government has been
      bought by corporatocracy=thanks John Roberts+Supremes.

      U.S. history shows that the way (naked) capitalism “re-sets”
      is when ALL, including powers that be, are disenfranchised.

      This is NOT in all our interests..noone wants to experience what that means-AND it likely wouldn’t go there this time around; likely manipulated to look more like military “dictatorship”..or, Orwellian nightmare.

      Why is Obama continuing to spend Bushit levels of military-industrial complex $$$$…I think we all know that answer.

  14. nowhereman

    I’ve been coming to this site for years now, and having read Yves’ book, I feel I have received quite the education.
    Reading the comments on this site gives me the impression that others, beside myself, have achieved the same learning curve and are outraged by the total collapse of the “rule of law”.
    This then begs the question; Just how many of us are out there? When will the number of informed and outraged individuals reach the tipping point? Is, or will, there ever be enough disgusted individuals to form a collective strong enough to rise up against the “machine”, as has been demonstrated by the people in Egypt, Libya and the other middle eastern countries where the citizenry have risen to throw off the yolk of tyranny?
    Just asking, because I’m ready now.
    This reminds me of the scene in Animal House where Bluto gives his speech of outrage, and says, “If you are with me, follow me” and he runs to the door, only to find that the others have resigned themselves to their fate.

    1. MaryB

      And THAT, (resigned themselves to their fate) is exactly what they are counting on. What you see in Tunisia, Egypt and Libya, is exactly what they were not expecting. So when you hear about a protest- GO. Create a pithy sign and carry it. Visibility is important. Criminey, am I the only one old enough to remember what protests accomplished? And continue to? Support Wisconsin for pity sakes. They are trying to force the narrative of cannibalizing EACH OTHER, fighting for the crumbs, while those IN CONTROL make off with the banquet. SHOW UP.

      1. nonclassical


        You’re not the “only one”…I tried seriously to get to Madison last weekend..

        Madison, Ohio, Indiana, New Jersey, are where the fight is,
        on the ground. But there is another fight-information is very, very valuable..and missing in U.S. media. That’s the
        reason people are here.

  15. Pat C

    I am ready to participate in a demonstration of the people. The fact that not a single investment banker has been prosecuted is outrageous. Someone tell me where to go, I will be there. I’m too old for the actual fighting, but I will help bring the ammo to the front line.

  16. Nicole

    The reason that SOX is ineffective is that OSHA doesn’t enforce it so there is reason for executives at TBTF to change their behavior. Another problem is that whistleblowers have no protection or any form of income once that company has fired them for trying to report what they’re doing. I think it’s really horrible that the Obama administration is encouraging lower level bank employees to become whistleblowers by telling them the Frank-Dodd Act will offer them more protection because these employees don’t have the money to wait years before their cases are resolved.

    I waited over a year for OSHA to investigate my SOX complaint and then I realized they were never going to do anything and by that time I was so discouraged that I decided to drop my lawsuit and forget about it and get on with my life. I think employees are better off just trying to negotiate a severence agreement instead of trying to get protection from the government.

  17. Pat C

    I have a question/point to make about securitizations. While working for an auto lender I particpated in putting together a securitation for pools of auto loans & leases. There were many players involved (all getting generous fees) but a major player were the big law firms. We did’t do anything without their blessing. I haven’t heard anything about their part in this tragedy. Are they completely immuned from any punishment, criticism or reprimand of any sort?

  18. pjwrites

    So basically, what you’re saying – assuming innocence before guilt, of course – is that nobody did their jobs properly and nobody else cared?

    This doesn’t surprise me at all. At the highest level

    They “meet” and “strategize” and “look for opportunities” and love to hear themselves talk, then they clap each other on the back and call it a day.

    Breakfast meeting, lunch, afternoon strategy session, golf course, cocktails, charity function, bed, and start all over again the next day.

    It’s a tough life, but somebody’s got to do it for millions of dollars.

  19. Francois T


    Your last paragraph is spot on. It’s about the powerful wanting at all costs to avoid exposure and embarrassment. Mind you, I’m not even talking about crimes here: Elites do not get convicted of crimes in the US, unless the conviction is a fabricated one motivated by crass politics…like Don Seigelman for instance. But your run-of-the-mill cases involving high finance, war crimes or torture do not qualify.

    Of course, we, of the hoi polloi, will sometimes get a bone to chew on, in the form of congressional bribery, but the congressperson in question better be a small fry. You’ll never read about a federal investigation about how the Feinstein family multiplied their wealth several hundred fold with “investments” in the defense and security industries since Dianne got on the Senate Intelligence Committee now, will you?


    Or how Jay Rockefeller endorsed felonies of the Bush Administration and made it integral part of the Obama Administration.


    That kind of stuff belongs to the famous “policy differences” and the blissful nirvana of bipartisanship.

    What the same powers that be refuse to admit to themselves is this: there will come a time (sooner than later the way things are going on now) when a big majority of voters/citizens will look at their representatives of each and every political stripe in the eyes and tell them in no uncertain terms: “We don’t trust you, we don’t trust anything of what you say and what you do…you’re out of here!”

    The game will be over then.

    1. Francois T

      Note the irony: As I wrote about how worthless the word of the powers that be can be, Glenn Greenwald put up a post:


      Chris Dodd shows how Washington works

      Over the last two years — particularly during the debate over the financial reform bill — Sen. Chris Dodd served on multiple occasions as chief spokesman for, and defender of, the interests of Wall Street and corporate America. That led to widespread speculation that the five-term Connecticut Senator, who announced that he would not seek re-election in 2010 in the wake of allegations of improper benefits from Countrywide Financial, was positioning himself for a lucrative post-Senate lobbying job — i.e., peddling the influence and contacts he compiled over five decades in “public service.”

      Dodd responded to those suggestions by repeatedly and categorically insisting that he would not work as a lobbyist. In March of last year, he told The Hartford Courant that “he will not lobby, but, like [former Senators Chuck] Hagel and [Sam] Nunn, he may teach.” In an August article headlined “Dodd forswears a lobbying career,” The Connecticut Mirror quoted him as saying: “No lobbying, no lobbying.” That vow earned this praise from Public Citizen’s Craig Holman: “That’s excellent on Senator Dodd’s part.”

      Here’s what Chris Dodd’s word and integrity are worth, from The Hill yesterday:

      Dodd to be Hollywood’s top man in Washington

      Former Sen. Chris Dodd (D-Conn.) will be Hollywood’s leading man in Washington, taking the most prestigious job on K Street.

      The Motion Picture Association of America (MPAA) named Dodd chairman and CEO on Tuesday. But heading Hollywood’s lobbying arm could be problematic for the former senator, who accepted the kind of job he pledged not to take. . . .

      Dodd’s hiring, which had been rumored for weeks, ends months of media speculation regarding who would take one of the most glamorous jobs on K Street, whose perks include a $1.2 million-a-year salary and getting to attend the Academy Awards ceremony.

      Dodd is barred from formally working himself as a lobbyist for two years after leaving the Senate, but the core purpose of his new job is to oversee lobbying activities and to convert his influence and inside knowledge of Washington into favorable legislation and desired regulatory action (or inaction) for the MPAA. Dodd is replacing another long-time DC official paid to peddle his influence: Dan Glickman — the former 9-term Democratic Congressman from Kansas and Clinton administration Agriculture Secretary. Leaving no doubt about what the MPAA seeks in this position — a politician willing to sell his connections to the highest bidder — the association chose Dodd only after it was unsuccessful in recruiting former Sen. Bob Kerrey.

    2. nonclassical

      The “Game won’t be over then”=SOMEONE must be elected-I suggest NC 4=”NO Corporate Campaign Contributions” candididates to begin to stand for all local and state level

      let’s all realize Kucinich, Rand Paul, others, were shut out
      of election debates throughout during 2008 election politicing..

  20. Schofield

    We can eat all the Sarbanne Oxley we want till we choke on it. The bottom line is that Barack Obama , most of the Democratic party and all of the Republican party work for the looters. No way are you going get any heavy duty prosecutions from Sarbanne Oxley short of a new ethical political party or a second American Revolution.

    1. Paul Repstock

      I fear the only way to launch “A new Ethical party”, is by mixing church and state. I think that is not a good idea!!!

      Much as we all fear it, I suspect the ‘Second American Revolution’ is a better option. Please, no muskets. Tat gets so messy. Perhaps a better way would be to sell them, or just give them Manhattan Island (heavy restitution to the present human population which would need to be relocated.) They can keep Wall St. and finance to their heart’s content.

  21. Doug Terpstra

    Yves: “Will any of this happen? Of course not.”

    You took words out of my mouth as I was reading. Is it too defeatist? No. It is critical to face reality squarely. You also write, “So we’ll permit the cancer in our society to metastasize rather than threaten the power structure. But at least we citizens can make it clear, even if we cannot change the outcome, that we are not buying the canard that nothing can be done to fight this disease.”

    Indeed. This puts the PTB on notice in no uncertain terms and informs ordinary people like me of the nature of their crimes, the impact on friends and family, and on the eventual destruction of markets. It sets forth a clear record of the double standard of our “justice” system and why that travesty ensures that the street justice of the Middle East will one day be necessary here. Articles like this reveal the inevitability and the legitimacy of such justice.

  22. JustAnObserver

    A question: Does US law allow private prosecutions for criminal/civil offenses against staute law (e.g. SarBox) as UK law does (or at least did ?)

  23. David

    Lehman committed fraud with respect to the reporting of both mortgages and CDOs on its balance sheet. There were huge increases in the mortgages and CDOS held by Lehman during 2007.

    In the report of the Bankruptcy Examiner, Fuld and his cohorts explained that Lehman decided to invest in mortgages that it had previously bought for resale through securitization. Rather than moving the mortgages, those individuals all maintained that Lehman should store them, i.e., the storage strategy. Would you believe GM if they decided to invest in this own cars in a slow market? Would you believe Walmart if they said that a high balance in the inventory was because they wanted higher inventories? So why did anyone believe Lehman that it was investing in mortgages? Especially with the leverage.

    Basically, Fuld and his cohorts just lied. Lehman did not decide to invest in the mortgages. This is the exact time that everyone else in the market decided not to invest in mortgages. Lehman had acquired a vast amount of mortgages as a result of its ownership of a subprime mortgage lender and its activities of securitizing those and other mortgages. And nobody was buying the securitized instruments any more. And, Lehman couldn’t unload those mortgages except at a very large loss.

    So what did Lehman do? They valued the securities based on phony estimations of cash flow rather than what they would have gotten had they unloaded those securities. If they properly valued the securities based on what they would have gotten if they were resold, they would have been insolvent in 2007. And, they wouldn’t have been able to pay bonuses of more than $5 billion in 2007.

  24. MichaelC

    Amd here’s one more piece for readers interested in an overview of fraud controls and their effectiveness and why its critical to enforce SOX.

    Where There’s Smoke, There’s Fraud

    The relevant bit is that the Key fraud deterrent is tone at the top. Exactly the reason that SOX violations by top management must be persued.

    The tone at the top, at least re the banks will not change till real fear grips the CEO and CFO. Once that threat is made real the effectiveness of the fraud controls will improve.

    The stats proved in the article by the Kroll study are pretty discouraging, but not surprising as long as the top of the house gets off scot free.

  25. 60sradical

    I would guess very few of us who comment on this blog can feel, really feel!…the daily pain and economic suffering of the Arab Working Class. If that dimension of pain or fear, such as WW2 and America in the 40s, pentrates our being, then the discussions will stop and the streets beckon, because then we are at bottom with little to lose.
    In the meantime, we, who comment must do so with an even greater intensity! Pump up the pitch on this very blog and never stop supporting Yves!! Do not give up trying to be heard! The streets await, but the timing is not here yet.

  26. psychohistorian

    I am a bit surprised that the following has not been suggested on this blog and in the comments:


    I am following them but I don’t think that it is a realistic approach given the money and power they are up against….at least in my lifetime. the fact that this organization is unknown on this blog speaks volumes of their chances against big money in the next election cycle….I hope I am wrong.

    Bringing the system to a halt is not going to be as big a problem as folks think. The heuristics of many social/economic systems are increasingly erratic and therefore fragile. The bigger problem is going to be what happens then. The rich are more ready for world revolution than those lighting the fuse. I think that there needs to be more time for education of the masses about where the pain comes from before the current system tanks. If it goes down too soon there will not be enough collective social pain to insure that the current egregiousness is eliminated from the system.

  27. CrankyFranky

    “So we’ll permit the cancer in our society to metastasize rather than threaten the power structure. But at least we citizens can make it clear, even if we cannot change the outcome, that we are not buying the canard that nothing can be done to fight this disease.” Just as “nowhereman”, I too have learned much from both Yves’ posts and from the dialogue from commentors. My thanks to you all. However, recently I’ve detected a tone of discontent, a groundswell of grumbling that whiffs of idealistic liberal flowerchild whining. Which is a good start.

    I was becoming inured to the patently trite observations like, “Anyone who has spent any time around the justice system knows justice is purchased”; and Jim’s plaintive cry, “government DOES NOT operate the way we are taught in school”; and Pat C’s declaration “that not a single investment banker has been prosecuted is outrageous.” Pat is raging and “ready to participate in a demonstration of the people.” Outrageous, indeed!

    I’ve got news for you: elites don’t hear you or see you or speak to you. They live in a different culture from us. Most have secured their purchase of a rarefied life. Read what a purported “mega-millionaire” wrote to MarketWatch columnist Paul B. Farrell:

    “Paul, you may well be right about the coming decade, but the rich exist in a different world from the one you write about. They live privileged lives in gated communities. Meet for holidays at the world’s elite resorts. The richest just aren’t worried about today’s economy like your readers. Their issues revolve around who’s the best masseuse, best Pilates teacher, best concierge medical doctor, which private school to choose, what investments they are making at this time, etc. Folks at the top are not concerned with the underlying deterioration of America, except in the abstract, because they aren’t directly affected. That’s why no amount of information from you will ever change things. To them, it’s irrelevant.”

    This is the true disposition of our gilded leisure class. Be thankful we hoi polloi are still welcome to stomp divots Sundays at Myopia polo. “Breakfast meeting, lunch, afternoon strategy session, golf course, cocktails, charity function, bed, and start all over again the next day. It’s a tough life, but somebody’s got to do it for millions of dollars.” Very accurate and insightful PJwrites.

    The justice system holds no sway over these better Americans. Kudos to Yves and all of you who divine the machinations of the ministers of justice. I still hold some faith in law because it brings some order to my level of society. To better Americans, order is maintained not through justice but through the Social Register.

    Reader Jim offers a choice of “a legal battle or go Egyptian”. I’m inclined to side with Yankee Frank, “Of course the deck is stacked, but it doesn’t mean we shouldn’t fight. Its not a very effective one if we can all see through it. You and a commenter above act as if there is an inevitability here that history shows is not the case.” As a fellow Yankee, I suggest to my pal Franky a bit of Massachusetts history: Shay’s Rebellion. It was settled in favor of the Adam’s private liberty over public liberty. And it bears similarities to our present, from national war debt to foreclosed homes and land.

    Simple Simon pleads for simple, street level solutions. Yet I fear the mob. And seriously doubt any of you has the stomach for what a real revolution would entail. Moreover, have you rabble rousers considered the overwhelming force the republic will wield in response? Think of those crazies in Waco, TX. Think of the myriad weapons at hand, not only the blunt force of conventional ordinance, but concentrated energy beams and weaponized LSD. A Shay’s rebellion in the new millenium might, in the end, only entrench the existing power structures.

    Moreover, I expect a more novel solution than pitchforks and torches from the reader’s of this blog. I look here to be edified and inspired. I’m psyched to read insights like “the relevant bit is that the key fraud deterrent is tone at the top. The tone at the top…will not change till real fear grips the CEO and CFO.”

    I propose the foundation for this “tone at the top” begins with education. And for the better Americans the prestigious prep schools are the surest way to inculcate that effete tone sure to signal your station to those of similar means and persuasion.

    So, look to education at “Saint Grottlesex” and the “Eight Schools Association” and others.

    Seek creative ideas to shape the pliable minds of the children of the elite. Shock the parents of these students. The adults truly fear the world beyond their gated communities. Protest at St. Pauls. Picket St. Marks. Write songs that fill their hearts with shame at their parents greed. Unload one hundred buses of unemployed stiffs and peacefully join hands and surround the perimeter of Phillips Andover. Join with scores of friends and picnic the horse shows at Northfield Mount Hermon School.

    I’m sure someone can think of better ways to interject ideas. That’s what I’ve learned to expect from you readers.

  28. Tim Coldwell


    I have just read your excellent piece and the comments and am a little surprised that the role of Auditors has not cropped up anwhere. When will someone write a book about their complicity, incompetence, failure etc. It’s almost like they don’t exist in the banking and financial services industry.

    Personally I think that the financial tools of trade (aka Derivatives) need to be taxed (like a stamp duty) so that that government treasuries can be refreshed without any reference whatsoever to P&L and related financial engineering. Also, remember that derivatives were invented originally to avoid stamp duty on share dealing. Tax evasion, of course, means criminal charges for all concerned including auditors who are deemed experts so should have no ignorance defence of any kind, especially any reliance on a piece of paper signed by their clients assuring them of the truths of all supplied information so absolving them (the auditors) of any liabilities.

    Insurance of all forms should also bear a stamp duty tax. I have the impression that the wild use of so called insurance (e.g. CDS contracts) reflects another failure of risk management so deserving of a special “incompetence” tax. Perhaps a tax (non-deductible for tax purposes?) equal to the fee paid for a rating from any agency might help to improve the value of these products too.

    I’m partly motivated to suggest such taxes because, of course, the ability to carry forward the recent losses incurred by financial institutions are not helping tax revenues. Maybe such institutions should also not benefit from such generous tax rules?

  29. Mikey

    It seems to me the de-regulatory fix was in at the start of the Bush administration. Having no chance at all of eliminating the regulatory agencies they didn’t like, or that stood in their way, Bush et al simply turned those agencies over to do-nothing clowns whose incompetence, or ideological hatred of the agency they were being nominated to run, was the first job requirement.
    Though not within the financial sector, FEMA is a good example of this de facto deregulation scam. Because FEMA under Clinton was such a successful agency that demonstrated how well “government” could work, Bush had to destroy it. Enter Brownie.
    Appointing Christopher Cox to run the SEC worked exactly the same way, and for the same reasons. Putting that idiot in charge of the SEC made a financial meltdown almost inevitable. What’s more, the Republican Senate that confirmed Cox knew or should have known as much — after all, it isn’t as if he kept his loathing of the SEC (or his stupidity) a secret.
    Heck of a job!

  30. mark

    Your thesis in the best light is: if failure, then poor internal controls; if poor internal controls, indict for SARBOX violations. (Essentially you are arguing,if failure then indict, which is not a plausible legal postiion, however devoutly it may be wished. But let’s take your thesis literally).

    That is not what 302 says, if you read it like a lawyer. You’re reading it to mean what you want it to mean. If you read it closely, it’s simply about internal disclosure to the board – of opinions about internal controls. Nowhere does it say the opinions have to prove correct. One of the clauses uses the word “ensure” but look at what has to be ensured – that a report to the board gets made.

    You’re also engaging in guilt by association. You talk about CROs more than CEOs and CFOs. But SARBOX does not apply to CROs.

    You talk about one investment bank and argue for indicting corresponding figures every where else. Again, guilt by association. Were someone at a different bank to be indicted on the premises of your post, it would be thrown out of court and the prosecutor would get a scathing lecture from most sentient judges.

    This is not close.

  31. julia b

    Do you suppose, the fact that 10% of the NY Times is owned by the same family who owns the largest privately held financial institution in the country may trickle down to Joe Nocera and others at the Times. No conflict of interest there!!

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  33. manny

    We’re done for. Drown in our own impotence. How does a world-powerful man feel when he dies?

    Who are his children and aren’t they embarrassed?

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