Jeffrey Sachs Channeled His Inner Bill Black – and Obama and Holder Ignored Him Too

Yves here. This post by Bill Black serves to illustrate the difficulties of effecting change. As much as Black in particular has been a forceful and articulate advocate for tougher bank regulation and prosecution of executives, arguments like his get at most polite lip service from the enforcers. Recall that Black is far from alone. Others who’ve called for a more tough-minded approach include Charles Ferguson of Inside Job, Eliot Spitzer, Neil Barofsky, Joe Stiglitz and Simon Johnson.

We are seeing more and more of the elite willing call for more aggressive measures to combat bank misconduct. Astonishingly, Chuck Schumer has endorsed prosecutions, and the New York Fed’s Bill Dudley, even if under pressure from the Board of Governors, is also warning banks that they can expect a lot rougher handling from regulators if they don’t shape up (but the open question is whether the Fed’s idea of punishment is anywhere near as forceful as what the public wants).

Bill Black uses Jeffrey Sachs’ tough remarks about bank fraud 18 months ago to illustrate that the Administration is still in the bank protection racket.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

“Yves Smith,” the nom de guerre (and plume) of the finance expert who created and runs the invaluable blog Naked Capitalism, wrote an introduction to a piece roughly 18 months ago that mentions me. The points she made in that introduction, including the reason she invoked my name, are important but the lapse of time since she wrote it teaches us another important lesson. Here is the introduction.

One of the things that Matt Stoller has stressed that the possibility of reform is remote until breaks within the elites take place.

Jeffrey Sachs, Columbia professor and director of the Earth Institute at Columbia, is a controversial figure for his neoliberal stance on macroeconomics and his role in promoting the use of ‘shock therapy’ in emerging economies. But it is also important to recognize that criticism from a connected, respected insider has more significance than that of someone like Bill Black, who has made a career of taking on bank fraud but has never reached a top policy-making level.

I think Matt Stoller is right, though I can personally testify that “remote” does not mean impossible. The powerful response to savings and loan debacle was not led by “elites.” The elites acted overwhelmingly to try to stop our reregulation of the industry and our taking on the CEOs leading the frauds. It was critical that the head of our regulatory agency, Edwin Gray, led the reregulatory effort. It was overwhelmingly an effort by over 2,000 of us, none of us remotely “elite,” that led to our successes in regulation, supervision, enforcement, and prosecutions. Though far from elite, we contained the debacle before it caused even a minor recession by shutting down a raging epidemic of accounting control fraud committed primarily through fraudulent commercial mortgage lending, prevented an incipient epidemic of liar’s loans in 1991, and produced the greatest success in convicting financial elites in history. All of this was done over the fierce opposition of the elites even though it cost Ed Gray and Joe Selby their careers. Many of us were attacked repeatedly by the corrupt elites.

Yves Smith is right that Sachs is a “connected, respected insider” and that his criticism has vastly “more significance than … Bill Black.” She is also right about that my criticisms (though more expert than Sachs) have less “significance” precisely because I “never reached a top policy-making level.”

The setting for Sachs’ remarks was important.

Professor Jeffrey Sachs, Columbia University

Fixing the Banking System for Good conference

Philadelphia Federal Reserve

April 17, 2013

We have an elite speaking to other elites at a conference dedicated to “Fixing the Banking System for Good.” Here are several key takeaways about what Sachs said about elite bank fraud.

Sachs introduces the topic of why we have recurrent, intensifying financial crises with a discussion of the dual depravity of effectively repealing Glass-Steagall – and then President Obama appointing the people who brought us that disaster to positions controlling our response to the financial crisis where they promptly screwed up again.

Glass-Steagall [worked] successfully … for quite a long time, and its removal was a very, very cynical play* by Rubin, Summers, Clinton, Gramm and others who all had very strong interests, personal interests, in the outcomes of that deregulation, and exploited the gaps that they created, and then to the chagrin of some of us at least were invited right back into the White House in early 2009, after they had made this calamitous mess, to be the ones supposedly to fix it. And I know that Summers, for example, continued to really institute moral hazard policies right and left by fighting against any limits on compensation of these [bankers].

Sachs then showed he was just warming to his subject.

I would add this other point, which is that a lot of what’s happened actually and what’s been revealed is in my view prima facie criminal behavior. It’s financial fraud on a very large extent. There’s also a tremendous amount of insider trading, and you can even watch it when you’re living in New York, how that works.

So it’s not so mysterious, but we don’t even act – take John Paulson, for example. Paulson worked together with Goldman Sachs to defraud massively many European banks which bought the toxic mortgages that Paulson had put together. When this Abacus deal was taken up by the SEC, Goldman ended up paying a small fine. The chair of Goldman, of course, continued in his position and continued at White House state dinners, and Paulson wasn’t even mentioned once in any of the proceedings, and he took home a $1 billion dollar paycheck the next year, even as Goldman was paying a roughly $700-million-dollar fine, if I remember correctly, for the abuse that Paulson was part of. I can’t believe, no matter what the financial regulations, we can’t do better than that. That’s really pathetic.”

Sachs was not clear in distinguishing John and Hank Paulson (no relation) during this discussion. John ran a hedge fund. Hank ran Goldman Sachs before President Bush named him Treasury Secretary. The audience response to these statements was to ask Sachs about Glass-Steagall. Sach’s response to that question ended with Sachs coming back to “the crooks.”

The final point, of course, is separating the politicians from the crooks, but maybe that’s so close together that they can’t actually be separated. Maybe it’s just the same community.

The audience reaction was to again ignore the criminality and ask a general question about international macroeconomic policies.

It was only after Sachs answered that question (and on his own initiative emphasizing the destructiveness of tax havens) that the token ethical finance guy spoke to thank him for raising the subject of morality.

Audience: My name is Dennis Peacock[e], and I represent the faith-based side of macroeconomics, and I just want to congratulate you that you pulled us back to the reality that in spite of all the complexities and theories and mechanics that we deal with in economics, that economics is really about values and the values and ethics of people. Thank you very much.

Needless to say, the Philadelphia Fed doesn’t invite or attract a crowd that emphasizes financial morality. It’s hard to knock a really slow pitch like this out of the park, but Sachs did his best.

Jeffrey Sachs: ‘Well, thank you very much for saying it and practicing it. I do believe – by the way, I’m just going to end here because I’ve been told I have to run to the U.N. in fact right now – I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to people, counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, you know, in a quite literal sense. And they have gamed the system to a remarkable extent, and they have a docile president, a docile White House, and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say, and no party is – I mean there’s – if not both parties are up to their necks in this. This has nothing to do with Democrats or Republicans. It really doesn’t have anything to do with right wing or left wing, by the way. The corruption is, as far as I can see, everywhere. But what it’s led to is this sense of impunity that is really stunning, and you feel it on the individual level right now, and it’s very, very unhealthy.

I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language, and I’ve not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not going to happen anytime soon it seems.

Over 18 months have gone by since Sachs unleashed this broadside. On May 2, 2013, in the Wall Street Journal, Sachs launched an even stronger attack. During that time we have seen a major financial institution’s fraud made public at least monthly. But Sachs’ point about waiting in vain for “four, five years” “to see one figure on Wall Street speak in a moral language” can now be extended to six years – which is what Sachs predicted. But that same “shocking” failure includes our President, his administration, and the financial anti-regulators.

It is a sick indicator of the degraded state of regulation that William Dudley is alone in describing the corrupt “culture” of Wall Street (though he refuses to use the word “corrupt”). When Dudley, President of the NY Fed, is your least dishonest anti-regulator, you know that the anti-regulatory culture in finance is profoundly corrupt. Dudley is a Government Sachs alum who is infamous for openly stating his refusal to allow the NY Fed to respond to Wall Street’s corrupt culture and rampant fraud by acting as the essential “regulatory cops on the beat,” but instead should act like a “fire warden” telling us to make an orderly exit from the finance industry before it is consumed by the flames of fraud. But not to worry, as Geithner made infamous, the real function of the U.S. Treasury and the Federal Reserve in their “fire warden” capacity is to “foam the runways” with massive subsidies so that the elite bankers can walk away when they loot “their” banks so badly that the banks crash. To add to the obscenity, Geithner admitted that “foaming the runways” was done under the cynical pretext of helping people who suffer third-degree burns from the raging fraud epidemics led by elite bankers,

Sachs’ public evisceration of our most elite bankers was widely reported in financial publications. It should have been front page news nationwide and should have prompted other financial elites and the media to use the “f” (fraud) word and the “c” (criminal and corrupt) words to describe the banking elites. It should have provided the political cover our cowardly lion (President Obama) needed to roar. Daily Kos has a fine article showing the exceptional parallels between the disgraceful policy proposals and propaganda attacking the poor that FDR eviscerated in his October 31, 1936 speech during his first reelection campaign. He famously “welcome[d]” the hate of the corrupt bankers’ of his era. Sadly, in the financial sphere, Obama consciously decided not to follow FDR’s example of integrity, courage, success, and service to the Nation.


* Yves here. Sachs has this issue wrong. By the time Glass Steagall was formally dismantled in 1999, it was already a dead letter. A commercial bank, Credit Suisse, had taken control of a bulge bracket investment bank, First Boston, in 1992. Commercial banks were allowed to operate securities businesses through subsidiaries as long as the total revenues of the sub didn’t exceed a stipulated percent of total bank revenues. The only reason for the execution of Glass Steagall was to allow the merger between Travelers and Citigroup to go through. That is not to say that the erosion of Glass Steagall was not important but that the official takedown took place long after the horse had left the barn.

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  1. James Levy

    Kudos to Sachs, who I have often excoriated. He shouted down the well not once, but twice, hoping for an echo. He provided cover fire for others to come out of defilade and engage the enemy. I just wish some brave lads and lasses would have followed him “over the top.” No indication, however, that his leading has encouraged anyone big to follow.

    Banger’s indictment of Americans for cowardice seems justified. Sachs’ courage just makes it too plain.

  2. not_me

    Speaking of ethics, banks should be 100% private with 100% voluntary depositors otherwise equal protection under the law is violated in favor of banks and borrowers at the expense of non-borrowers and those less creditworthy

    Interestingly, a direct transition to ethical banks is impossible without a huge creation of new fiat to provide the needed reserves for moving risk-free deposits to a Postal Savings Service or equivalent but one that makes no loans and pays no interest. That required new fiat could serve as just restitution for the current unethical banking system, at least in part, by simply distributing it equally to all citizens.

  3. Doug Terpstra

    Alas, another excellent post by Bill Black tends to evoke further cynicism, outrage fatigue, and exasperation as the agonizing six-year grind continues, not coincidentally under the reign of Barack Obama, its essential Enabler-in-Chief. Professor Black is right to conclude with his pivotal role in this.

    No person, corporation or nation is indispensable, but Obama comes close, as the linchpin anti-FDR propagandist and mob enforcer. It is this man who has single-handedly held justice at bay and actively toiled to fulfill the neoliberal dream of an unaccountable fascist police state. The most recent evidence of this is his endorsement of the mockery of a travesty of a charade of the incestuous grand jury exoneration of Darren Wilson in Ferguson. I sincerely hope that is the all-important tipping-point in his regime. It’s exhausting but essential to keep cynicism at bay.

    Speaking of indispensable enablers, it should be noted that Alan Greenspan, the ultimate insider joined Paulson & Company as “consultant” after the unindicted felonies noted in Black’s post. Coincidental, I’m sure. Aren’t you?

      1. NotTimothyGeithner

        I am going to watch his Colbert appearance to see how woefully he behaves despite the softball questions. My guess is Obama will do the “I’m super smarter than Colbert O’Reilly” routine largely missing the fun of the show because Obama’s ego is too fragile for anything else.

    1. Dirk77

      That the “prosecutors” can essentially lie to the grand jury to get Wilson off should be an easy one for the DOJ to correct, yet you are probably right that nothing will happen. Protect one’s power at all costs I guess. But again Sachs mentions the role of campaign contributions in this downward spiral of corruption. I will need to look closer at MoveToAmend.

      1. NotTimothyGeithner

        But the DoJ (Obama and friends) is terrified of floodgates. If there is justice in New York, every city will protest until they win. The other issue is what cops have the goods on important people. Snowden wasn’t the only person with access given the coordination between homeland and local communities. The elite can’t buy the silence of every dirty cop, or it would amount to a tax on the elite. Do the dirty cops know about contracting in the city of Chicago? Obama and Hillary will be tied to Rahm at every public event if say a scandal were to break.

        1. Doug Terpstra

          Very intriguing CT, that the Secret Police state has something big on Obama, Hillary, and most key politicians. It’s reassuring to imagine Obama has some reason other than perfidy or psychopathy for his treachery.

          1. NotTimothyGeithner

            It doesn’t have to be on Obama and Hillary, just their friends. Even the Hillary puff piece at politico today is about her need for a wide range of friends to trust. If her friends are under investigation, this would easily hamstring a Hillary.

            Look at Daschle. He wasn’t appointed to the cabinet for a relatively minor tax evasion. Bernie Kerik had almost same problem in Dubya’s administration. How clean are the staffs? Hunter Biden couldn’t stay clean long enough for his fraudulent military physical. How can the anonymous staffers hold up? A senator without a staff probably would get lost on day one.

      2. Doug Terpstra

        Yes, it is accepted truth that a grand jury could indict a ham sandwich … if it the “prosecutor” wanted it to. Legal experts are arguing about the way evidence was selected and distorted in this case, but the venue itself was a clear setup, as was the nighttime timing of the “aquittal” announcement, coming 8 hours after the fact. Having a “prosecutor” who has a daily symbiotic working relationship with the police department conduct a grand jury against a fellow officer of the court is the same as having a defendant’s defense attorney preside over a pre-trial hearing. It’s patently ridiculous, and everyone but the naked emperor and his minions know it. The press release was at best stupendously stupid, but more likely a deliberate provocation of violence in order to vindicate the self-righteous militarism of the police state.

        And there isn’t a snowball’s chance that obama’s Ministry of Justice (sic) will do anything about it. It’s not because he’s not a coward; he’s a co-conspiritor.

  4. susan the other

    This post is so good. Because we need to take a new angle on fraud. It is ubiquitous. I saw a clip of Sachs in 2013 making the statement about prima facie evidence, etc. I can hear his voice right now. And Bill Black, humble non-insider, is the greatest lone voice in America because he has been so relentless on the subject. It doesn’t matter that the financial fraud is so extensive – it’s still financial fraud. But when we look at how destroyed out entire system is it doesn’t make sense to send a few perps to jail or even a lot of them. What are we gonna do, send all of Congress to jail too? Something big has to happen. As in ‘systemic’.

    1. not_me

      The original fraud, which bank “reformers” have never properly dealt wih (eg. demand deposits are now considered loans to the bank, not something to be Immediately surrendered on demand during normal business hours as one might normally suspect ) is this one:

      “Your deposit is available on demand even though we lent out almost all of it.”

      The history of banking is one crooked attempt after another to avoid facing this fundamental fraud with the inevitable result that though the system is more stable it has come at the cost of being even more unjust.

      1. John Zelnicker

        Two things just for the record. One, banks do NOT lend out deposits. Two, the system is not more stable now; it is, in fact, far more fragile and vulnerable.

  5. OpenThePodBayDoorsHAL

    Ah yes, “the difficulty of effecting change”. The French invented a machine for exactly the kind of change we need, at peak efficiency it could process a client every 30 seconds and the river of blood reached all the way down to the Seine. Even if we’re just talking about metaphorical guillotines that behead our institutions, I have little hope left that “reform” is the right word to be using. We need “a change we can believe in”. Mao said “everyone over age 30” and he may have been on to something.

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