As this financial disaster grinds through its fifth year, US economists haven’t seemed to change much about their analysis or explanations. The people who got it wrong continue to push their false theories, insisting that if we clap louder their reputations will be saved. It’s working for the hyper-rich. We’ve all seen the figures:

The numbers, produced by Emmanuel Saez, an economist at the University of California, Berkeley, show overall income growing by just 1.7 percent over the period. But there was a wide gap between the top 1 percent, whose earnings rose by 11.2 percent, and the other 99 percent, whose earnings declined by 0.4 percent.
…
Median household income, which was $50,054 in 2011, is about 9 percent lower than it was in 1999, after accounting for inflation.

Economists comfortable with progressive ideas offer the same solutions they always do: infrastructure repair paid for with borrowed money, hikes in the minimum wage, tax cuts for the workers who still have jobs, and so on. Perhaps they are familiar with some of the thinking that offers a better way forward. But let’s be realistic. There is little point in trying to teach any new ideas to Democrats in the legislature. They absolutely refuse to deviate from the standard American view: Chicago School Capitalism Good, Everything Else Bad. Heaven forbid anyone accuse them of being a liberal on economic matters.

Fortunately, some economists in the rest of the world saw that the economic theories they learned in college aren’t working, and are saying so in public. Lord Adair Turner is the Executive Chairman of the Financial Services Authority, presently the top banking and securities regulator in England. He recently gave a lecture entitled Debt, Money and Mephistopheles: How do we get out of this mess? Martin Wolf discussed it in this article.

In normal times, says Turner, monetary policy should work. The central bank lowers interest rates and that leads to an increase in bank lending. That isn’t working now, Turner says, because this is a balance sheet recession. People are paying down their debt, not taking out new loans. It doesn’t matter how low the interest rate goes, they don’t want to borrow, they want to get out of debt. Turner calls it pushing on a string. Turner points to long-term problems created by continuing on this feeble course. Japan is the primary school for this kind of failure.

Turner then addresses fiscal policy, deficit spending to provide tax cuts or infrastructure repairs. This tool has been ridiculed by economists for the last 30 years for several reasons the validity of which was unquestioned by any serious economist. Turner discusses a recent paper by Brad DeLong and Larry Summers arguing that those reasons aren’t applicable in the current crisis. He also points out that even so, they may have long term problems. That is because all deficits are financed using borrowed money. Deficit spending means the issuance of debt, and at some point that will be a serious problem, even if it isn’t right now.

But, of course, it is a huge problem right now, a problem not acknowledged by Turner, or by DeLong and Summers. The deficit hawks are insisting that the existing deficit is going to kill us and our children and their children, and it has to be stopped now, by suffocating cuts to Social Security, Medicare and Medicaid, and tax cuts for their corporate sponsors like @FixTheDebt.

Turner then opens the door to another idea that he calls Overt Money Finance. In the US, it would work like this. The Treasury has an account at the Fed. Congress appropriates money to pay for a program, say, purchase of new building in Pittsburg. Right now, that would be financed by issuing new Treasury bills. With Overt Money Finance, the Fed would simply credit the account of the Treasury with the amount appropriated. There would be no new debt, but the Treasury would have the money to pay for the building. You will note the similarity to the idea of the Trillion Dollar Coin. You will also notice the similarity to the way the Fed lends money to banks.

Overt Money Finance isn’t really a new idea. The most famous proponent was Milton Friedman in a 1948 paper, but it has been studiously ignored by all right-thinking people as much too dangerous. Turner explains that economists think that if politicians realized that they could just issue fiat money, they would destroy the currency by issuing more and more until we had hyperinflation. To prevent that bad outcome, we hobble ourselves with all sorts of laws and institutional rules about debt. One of those is the rule that the Fed can’t just lend money directly to the government. It finances the government by buying and selling Treasury debt in the open market. I suppose the theory is that the Fed is independent, so it won’t destroy the currency. Maybe, but let me point out that the Fed could easily have popped the last two bubbles, and didn’t, so its record on protecting the economy doesn’t give me much hope.

FDL readers will recognize Overt Money Finance, because we know about Modern Money Theory, thanks to the efforts of letsgetitdone and other diarists and commenters, and an excellent Book Salon with L. Randall Wray. Wray discusses Milton Friedman’s paper in Chapter 6 of his Modern Money Theory, A Primer on Macroeconomics for Sovereign Monetary Systems, and goes on to explain how it would work today and the steps that would be taken to prevent inflation. Turner has some ideas about that too.

Martin Wolf provides some helpful framing in his article in the Financial Times:

…[I]t is impossible to justify the conventional view that fiat money should operate almost exclusively via today’s system of private borrowing and lending. Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending? Why is it good to support the leveraging of private property, but not the supply of public infrastructure? I fail to see any moral force to the idea that fiat money should only promote private, not public, spending.

I fail to see any moral force to that idea either. Why should those criminals get any help from government after wrecking the economy and ruining the lives of hundreds of millions of people around the world? Let’s do something nice for ourselves, preferably at the expense of the hyper-rich. Maybe we could fix some of those 70,000 structurally deficient bridges.

Big lawsuits are great opportunities to look at the state of mind of reporters, pundits and bloggers. I have posts on the case focused on the facts, the law and what they say about the Department of Justice. Of course, my biases are obvious: I think the DOJ refused to enforce the laws against fraud by Wall Street executives, that the refusal to investigate and enforce the law was a deliberate policy choice by President Obama, and that policy was intentionally put into practice by Attorney General Eric Holder and the head of the DOJ Criminal Division, Lanny Breuer. Others show their biases as well.

John Tamny, writing for Steve Forbes’ rag, tells us that S&P was a bunch of second raters, and if the big Wall Street players couldn’t see the coming market crash no one should expect the “financial equivalent of the last player picked for a pickup basketball game” to catch it. Funny, yes, accurate, no. Tamny uses John Paulson’s massive bet against the market as proof that the big boys were ignorant. That’s just false. I discussed the SEC suit against Goldman Sachs here. Paulson and Goldman Sachs were not wild-eyed speculators, they were consciously selling garbage to unsuspecting small banks. In fact, Goldman Sachs made $3.7 billion shorting CDOs just before the Great Crash. The S&P complaint says that the big Wall Street players knew the crash was coming, and they were desperate to get the garbage off their books. The complaint says that S&P knew that, and still they continued to use the same rating system instead of one they had that was more accurate. Forbes isn’t going to let the facts get in the way of a good story.

The Wall Street Journal Op-Ed page explains that the S&P suit is a result of failed regulation and revenge. The evil feds regulated the ratings agencies and “ forced investors to rely on them”. That, of course, is nonsense. There is a rule that some financial institutions, including credit unions, can’t invest in securities that receive low ratings. That rule assumes that the ratings agencies are doing their jobs. If they don’t, they can and do cause enormous losses, and they should be sued.

And look, they say, Moody’s wasn’t sued, and they were just as bad. The decision to end the Moody’s investigation, if that happened, was made at the time S&P downgraded the US. And, get this:

… that’s also coincidentally when White House Chief of Staff Jack Lew was aggressively promoting the President’s campaign to prevent entitlement reform. Mr. Lew had worked in the heart of Citigroup’s subprime investment factory, and the President has not only been willing to forgive and forget. He’s even nominated Mr. Lew to become Secretary of the Treasury. But the company that put a shot across the Beltway bow over deficit spending is now the only target of a credit-ratings prosecution.

Those pesky facts again: Obama and the rest of his minions were perfectly willing to slash Social Security, Medicare and Medicaid to achieve his Grand Bargain, and that’s still on the table. The Wall Street Journal: once a valuable source of business reporting, now the print version of Fox News.

One more example from Red State’s Ed Morrisey, who managed to read a story from Bloomberg on the lawsuit. Bloomberg points out that the complaint says that Citibank and Bank of America are both the underwriters and purchasers of some of the overrated securities listed in the complaint. On its face this does seem odd. But recall that the investment banking arms of the company aren’t the same as the commercial banking group. Another Bloomberg writer, Jody Shenn, has an explanation. The suit is brought under FIRREA, the statute passed in the wake of the S&L disaster of the late 1980s in recognition of the fact that insiders at banks used their control to benefit themselves at the expense of shareholders and at the expense of federal insurance programs and taxpayers. The CEO of Citi testified to Congress that he didn’t know that the ratings system was corrupt. I imagine that this is true, and some employees of the bank were dumping the bad deals on the bank to enrich themselves.

Well, we all have our biases, don’t we, but that doesn’t mean we can’t agree on some things. I too want to know why Moody’s and Fitch weren’t sued. And why no one was indicted for fraud.

Read the rest of this entry →

I discussed here the compelling facts alleged in the complaint against Standard and Poor’s filed by Los Angeles US Atttorney André Birrotte, Jr. Now let’s look the legal claims, and try to explain why there is no criminal prosecution.

Wire Fraud

The suit is grounded in wire fraud. There are three elements to the crime. Shah, Mail and Wire Fraud, 40 Am. Crim. L. Rev. 825 (2003) (available through your public library). The prosecutor must prove the existence of a scheme to defraud, intent to defraud, and use of the internet or the phone in furtherance of the scheme to defraud.

a) Scheme to defraud. The concept of fraud comes to us from the Common Law, and has not been defined by statute. Here is a definition from Black’s Law Dictionary Free On-line:

Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury.

It is easy to see how S&P’s actions described in the complaint fit this definition. S&P knew that the issuers would only hire it if the issuer was satisfied with the proposed ratings The complaint says that the issuers had input into the software used to calculate the ratings. See, for example, ¶¶ 125 and following, and 171. The goal of the scheme to defraud was to enable S&P to earn those fees. As part of that scheme, S&P defrauded investors about the nature of their ratings. At the same time, S&P was aggressively touting its independence and objectivity. This element doesn’t require that the injury itself results in gain to the perpetrator. It is enough if it injures the victim.

b) Intent to defraud. Lanny Breuer, the soon-to-depart head of the Criminal Division of the Department of Justice, constantly whines about the difficulty of proving intent. It isn’t hard. Shah explains:

The second element the government must prove for a mail fraud conviction is the defendant’s specific intent to defraud. This element is met using circumstantial evidence and “a liberal policy has developed to allow the government to introduce evidence that even peripherally bears on the question of intent.” Similarly, the defendant can also use circumstantial evidence to show that she did not have the requisite intent.

Id. at 835-6. The US Attorney Criminal Resource Manual agrees:

Read the rest of this entry →

The US Attorney for Los Angeles, André Birotte, Jr., sued Standard and Poors for wire fraud against financial institutions earlier this week. Thanks to FT Alphaville, we have a copy of the complaint. This is a fraud case, and the rules require that the circumstances showing fraud be alleged “with particularity”. The complaint is full of particularity, about 110 pages worth. You can get a good idea of the sense of the complaint from the table of contents. Let’s take a look at the alleged facts; I’ll have a separate post on legal stuff.

S&P is a Nationally Recognized Statistical Rating Organization, regulated by the SEC. Some federally regulated financial institutions, such as Credit Unions, are only allowed to hold securities rated as AA- or better by at least one NRSRO. Other regulated financial institutions used ratings as an integral part of their investment decisions. S&P knew this.

Issuers pay S&P for the ratings, and for follow-up monitoring of the performance of their real estate backed mortgage securities (RMBS) and collateralized debt obligations (CDO). S&P knew that if it understated the risks of securities, it would be easier for issuers to sell them, so issuers would use S&P instead of one of its competitors. S&P knew that it would make more money if its ratings were higher than justified by the data. And it knew that if it understated the risks, investors could more easily lose money. The complaint alleges that S&P deliberately understated the risks in order to preserve and increase its sales. At the same time, it constantly and loudly insisted that its ratings were objective and accurate. The complaint says that this constitutes a scheme to defraud investors by S&P.

The complaint puts flesh on these bones. The rating system used by S&P in 1999 to estimate defaults on real estate backed mortgage securities was called LEVELS 5.6. It used a sample of “166,000 almost exclusively first-lien, fixed rate, prime mortgage loans”. ¶ 135. The issuer gave S&P information about the proposed pool of securities. S&P ran the data through LEVELS 5.6 to create the ratings. Over the next few years, S&P used LEVELS 5.6 even as the securities it was rating included more and more risky non-prime loans, including Alt-A and subprime loans.

By 2002, S&P had acquired a sample of 642,000 loans which included many riskier loans. It did not incorporate this into LEVELS 5.6, so actual evaluation was based on the old sample for the next two years.

When it began to test the new sample in 2004 in an update called LEVELS 6.0, it found that the ratings were substantially lower than those given by the old sample. The new data sample recognized that new RMBSs held riskier loans, so issuers would have to increase the number of loans in a pool to insure that the lower rated tranches of the RMBSs would receive investment ratings. That made the RMBS less profitable for the issuers. ¶ 143 A salesperson reported that S&P lost a deal because the new data required 10% more loans than Moody’s, one of S&Ps competitors. S&P did not convert to LEVELS 6.0. Instead, it issued updated versions of LEVELS 5.6 that did not increase the credit support requirements even for the riskier loan pools.

I note that the complaint does not allege what steps, if any, were taken in LEVELS 5.6 to adjust for the different kinds of mortgage loans in the RMBS and the CDOs. However, the complaint says (¶¶ 148-9):

Prior to March 2005, Executive H had suggested to Structured Finance executives that proposed LEVELS 6.0 should be released as soon as possible, because it … was simply a better model. … LEVELS 6.0 would require higher loss coverage levels for subprime loans and … S&P was underpricing risk on RMBS deals by having loss coverage levels that were too low.

The response Executive H received from Structured Finance executives was that if proposed LEVELS 6.0 was not going to result in S&P increasing its market share or gaining more revenue, there was no reason to spend money putting it in place.

The complaint contains similar claims about the rating of Collateralized Debt Obligations. ¶¶ 158 and following. Here is one example. CDOs are pools of debt securities, including tranches of RMBSs, credit default swaps and combinations of the two. CDOs include lower rated tranches of RMBSs that the issuers hadn’t sold. The complaint says that by Spring 2007 S&P knew these tranches would be downgraded, because as part of its services, it monitored their ongoing results. S&P knew that issuers were anxious to get these lower RMBS tranches off their books and into CDOs to help protect their balance sheets. S&P continued to use the original ratings of those lower tranches when they were included in CDOs until public information on the tranches was changed. That meant that the CDOs got higher ratings than would be justified in the face of known upcoming downgrades. ¶¶ 199, 229, 233(b), (i), and (n).

S&P claims that the complaint is without merit. No, really. And they are getting some PR help where you’d expect it, in the pages of Steve Forbes’ rag. I disagree. I think S&P has a problem, and I wonder if Moody’s and Fitch will face similar claims.

PART TWO: The Legal Case Against S&P Read the rest of this entry →

The soon-to-depart Treasury Secretary Timothy Geithner confirmed to Liaquat Ahamed of The National Review that his goal was to protect bankers:

… My own view was that it was going to be very hard, if not impossible to design a financial rescue that was going to be effective in protecting all the innocent victims hit by the crisis and still satisfy the completely understandable public desire for justice and accountability. Those things were in direct and tragic tension, never resolvable at that time.

I always felt that the only preoccupation for people in policy at the time should be to fix the problem as quickly as we could, as effectively as we could, and only after that would other things be possible, including how to figure out not just how to clean up the mess, but reform the financial system.

That’s just silly. There is no tension between protecting the innocent victims and locking up the criminals who caused the Great Crash. None. And his claim that he wanted to do anything for the “innocent victims” is laughable. The truth is what he told Elizabeth Warren and Neil Barofsky: he wanted to foam the runway with the financial corpses of the victims of mortgage and foreclosure fraud so that the banksters and the feral rich would have a soft landing. Geithner thinks us professional leftists who are outraged by the failure to prosecute banks and their criminal employees are short-sighted, if not stupid:

…I think that what really distinguishes countries in crisis are those that are lucky enough to have political leaders who are willing to take the brutal political cost of doing what’s necessary and those countries that waited and let the populist fires burn, or decided they were going to try to teach people a lesson and put populism ahead of other things.

So, it’s fine with him that there were no criminal prosecutions. The only relevant issue was the entire economy, and Geithner thinks he did great there:

I’m biased but I felt that in the basic strategy that the President embraced and that we put into effect, we did something that was incredibly effective for the broad interest of the economy and the financial system.

The results of that effectiveness are obvious, even if Geithner can’t grasp them. Unemployment is outrageously high. The middle class has been crushed by stagnant wages and huge losses in personal wealth, especially home equity. The poor are on the chopping block, with state after state trying to cut the meager assistance they provide and the President bent on cutting Social Security, Medicaid and Medicare. Retirees see their savings dwindle under years of zero to negative real interest rates. The megabanks are bigger and more dangerous than ever.

That “broad interest of the economy” Geithner talks about is to insure that the feral rich pay no price, and are rewarded with ever-increasing personal wealth and income. Geithener and Lanny Breuer are joined at the hip in carrying out the Obama program of wealth protection at any cost, including the rule of law. Read the rest of this entry →

Lanny Breuer is out as head of the Criminal Division of the Department of Justice, according to the Washington Post. After his ratlike performance on Frontline (transcript here) it won’t be long before we find him at some creepy New York or DC law firm defending his best friends, the banks and their sleazy employees. His legacy is simple: too big to fail banks can’t possibly commit crimes, so minor civil fines and false promises of reform are punishment enough. Jamie Dimon couldn’t have put it better.

Breuer tried his best to dodge questions about why he violated his promise to Senator Kaufman that he was actually conducting an investigation of Wall Street fraud. Martin Smith, the interviewer, asks:

We spoke to a couple of sources from within the fraud section of the Criminal Division, and through mid-2010 they reported that when it came to Wall Street, there were no investigations going on; there were no subpoenas, no document reviews, no wiretaps.

Breuer responds: “we looked very hard at the types of matters that you’re talking about.” He doesn’t deny that there were no investigations; no subpoenas, no document reviews, no wiretaps. Instead, he tries to shift the subject to his pointless insider trading cases, his Ponzi cases, the Lee Farkas case (the mortgage firm Taylor, Whitaker and Bean), and a few hapless mortgage originator cases, and even a policeman defrauded by some fraud or other. Smith won’t let that pass. Eventually we get to the heart of the problem to Breuer:

But in those cases where we can’t bring a criminal case — and federal criminal cases are hard to bring — I have to prove that you had the specific intent to defraud. I have to prove that the counterparty, the other side of the transaction, relied on your misrepresentation. If we cannot establish that, then we can’t bring a criminal case.
…
But in reality, in a criminal case, we have to prove beyond a reasonable doubt — not a preponderance, not 51 percent — beyond any reasonable doubt that a crime was committed. And I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides.

Smith says “You do have plaintiffs who will come forward and say that they relied on the reps and warranties, and they relied on the due diligence claims that were made by the bank.”

Breuer keeps talking, but he can’t worm out of this one. Smith then says:

“We’ve spoken to people inside the Residential Mortgage-Backed Securities Working Group who said that when they began their work in January, February, March of 2012 that they found nothing at the Justice Department in the pipeline, no ongoing cases looking at securitization.”

And lest we forget, Lanny reminds us that these cases have ramifications for the rest of the bank. I don’t know who told Breuer that indicting the investment banking arm of a megabank would destroy the bank, but that’s a piece of idiocy that he claims to believe. This is from a speech he gave last September:

In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.

This concern is so touching. Too bad he and his team of responsible enforcers never thought about the impact on the families of Aaron Swarz, or any of the countless people serving time for possessing pot, or whistleblowers like John Kirakou and Thomas Drake.

The persistent questioning exposes Breuer’s idea of a hard look: he and his crack prosecutors read the offering documents and let the lawyers for the crooks explain why they make it just fine. They don’t need to issue subpoenas for e-mails that drive the civil cases filed by retirement funds and hedge funds that got screwed by the megabanks. They don’t need to haul the clerks and the functionaries into Grand Juries and find out what they knew and who they told. They don’t need to work up the chain to their bosses and on to the top. They don’t need to identify the lawyers from those white shoe firms that wrote those weasel words into the documents, haul them into the Grand Jury room and find out exactly what they knew and what those words meant. And most important, there is no need to let a jury decide their guilt. Breuer does all that for us.

Breuer is sleazy. But remember, he takes his orders from Attorney General Eric Holder and President Barack Obama. This administration refuses to prosecute. Read the rest of this entry →

The Democratic Platform seems to have missed the central point of the banking mess: the Obama administration did not investigate the disaster, and didn’t indict anyone for the crimes that led to the Great Crash. In fact, the administration specifically refused to follow up on criminal referrals from the Financial Crisis Inquiry Commission regarding one of the Goldman Sachs mortgage deals, saying as it always does, that it stinks, but isn’t a crime.

The Platform admits that

For too long, we’ve had a financial system that stacked the deck against ordinary Americans. Banks on Wall Street played by different rules than businesses on Main Street and community banks. Without strong enough regulations, families were enticed, and sometimes tricked, into buying homes they couldn’t afford. Banks and investors were allowed to package and sell risky mortgages. Huge reckless bets were made with other people’s money on the line. That behavior not only nearly destroyed the financial system, it cost our economy millions of jobs, hurt middle class and poor families, and left taxpayers holding the bill.

Then we find out the solution offered by the party in power:

The path to restoring middle class security is through the basic values that made our country great. We are a nation that says anyone can make it if you try – no matter who you are, where you come from, or what you look like. We know that America is strongest when everybody has a seat at the table and when the same rules apply to everyone, from Main Street to Wall Street.

The only reason the banks were allowed to play by different rules is that the Obama administration mulishly refused to enforce the law against them. There is no doubt that the law was broken, over and over. But the candy-ass prosecutors at the Justice Department won’t act, and the craven time-servers at the SEC are so worried about their careers that they fall all over themselves in admiration of the thugs who stole all the money and kept it, while millions of Americans lost their life savings and their houses.

The platform ignores the reality that the bankers got away with theft, wire fraud, bank fraud, loan fraud, securities fraud, and commodities fraud. There are two causes for this, both the responsibility of the President and Democrats in the legislature. First, the President hired a bunch of known bank sympathizers and fellow travelers to head up every part of the financial sector. At the head of the list are Attorney General Holder and Treasury Secretary Geithner. Holder hired a slew of white collar defense lawyers from Covington and Burling, and he and they will all return to their civilian jobs with their hands unsoiled by something so ugly as criminal prosecutions of their former and future clients. Geithner is a product of the inbred financial sector, a man unable to conceptualize the possibility that any of his trainers was a common thief.

Second, the investigative arm of every financial regulator is full of time-servers. The first responsibility of every incoming administration is to get rid of the moles left from the prior administration, the wreckers, the foot-draggers, the bureaucratic sludge, the people waiting their turn at the revolving door. Obama failed to do that, and he failed to instruct the head of agencies to do it either.

The platform asserts that Dodd-Frank is a common sense solution to the problem, and will prevent future problems. Nonsense. The agencies have been so thoroughly captured by the financial sector that they can’t even get their regulations into effect. The biggest banks are much bigger than they were, and even more dangerous.

The platform says that Democrats are “… holding Wall Street accountable, bringing new transparency to financial markets, and ending taxpayer-funded bank bailouts and the era of “too big to fail” and by “… by requiring them to provide relief for homeowners still struggling to pay their mortgages and to change practices that took advantage of homeowners.

So holding people accountable means a) we told the banks not to do that again, and b) we asked banks to help some of the people damaged by the banks get a few bucks out of the stolen hundreds of billions.

That is not the rule of law applicable to all. That is just a load of garbage dumped on our heads as if to say: you people get what you deserve.

The Great Crash posed one question for this country: who would bear the losses? Would it be the banks that caused the problems? The officers, directors and shareholders of those banks? Their careless counterparties? The investors who bought the fraudulent real estate mortgage-backed securities and the complex spin-offs? The owners of capital who threw money into hedge funds and other exotic investments expecting a geyser of money in return?

No. That group doesn’t lose money. They used their control over the government and the Fed to make sure that the losses would be passed on to the rest of us, pushing millions into or near poverty. The savers were trashed by the Fed’s zero interest rate policies. The national debt run up by tax cuts and wars gave the rich an opportunity to end the safety net and focus all of the efforts of government on protecting them and their interests. The rich are safe. The rest of us are in deep trouble.

The government threw money at banks with abandon, leaving incompetent failed executives in place. When it turned out that banks lied about the quality of the notes and mortgages transferred to the RMBS Trusts, the SEC and the Department of Justice refused to investigate, let alone prosecute.

Banks didn’t complete the transfer of those worthless notes and mortgages into the Trusts, so the IRS announced it wouldn’t enforce the requirements for pass-through non-taxable status. The servicing arms of those banks cheated and lied to courts around the nation about ownership, and when they got caught, they talked the government into a sleazy settlement that gives nothing to the people damaged by the frauds and allows the banks to continue to lie and cheat, if at lower levels.

This list could be expanded indefinitely, with the same outcome: the Fed, Congress and the White House have only done those things that protected the money of the rich, whether or not the settlement was consistent with the law or not.

It didn’t have to be this way. From the outset, there were things that could have been done that would have placed the losses where they belonged: on Wall Street and its criminal denizens and its careless clients. The bailouts could have come with constraints and requirements, firings, lawsuits, and indictments. The entire rotten structure could have been pushed into a form that would not threaten the lives and incomes of the middle class, a group whose responsibility for the problems was minimal in contrast to that of crooked lenders and swindlers.

No. Not in this country. Not in a nation ruled by oligarchs and a government in thrall to economic theories years after those theories revealed themselves as nonsense, or to the rich who endow those irrational theories with sanctity of revealed truth, or both. There was never a day when the primary or even subsidiary consideration was the middle class, or the rule of law, or even the pretend values of the free market. The only consideration from the outset was the protection of the rich.

Even two years later, the government showed no interest in raising taxes on the richest Americans. Both parties explained that they couldn’t raise taxes even on the rich in a recession, and that the only solution was cutting out unemployment benefits, lowering the minimum wage, slashing Social Security and Medicare, and removing people from Medicare and the shredded remnants of help for the worst off.

The current lousy economy is a result of deliberately chosen policies. The government could have chosen policies that would have protected the middle class at the expense of rich criminals and their clients and their hedge funds and their off-shore trusts and their tax-avoidance schemes, the people and entities that wrecked the economy. It didn’t.

It’s not that we don’t know what to do to make the economy work for the middle class. We do. The government and the elites and the rich won’t allow it. They go house to house, from Bangor to Bakersfield, saying to the inhabitants, What part of this sentence don’t you understand? You think we’re going to eat our losses? You think we don’t care about our money? Well. Suck. On. This.

Most of the time, you can ignore that foot on your neck. You can pretend that electoral politics work and that we are a nation of law, not of rich people. You can revel when your tribe puts someone in office, and pretend that the person you voted for is working in your interests.

Not today. Today it is confirmed: there will be no prosecutions, there will be no accountability for the rich financiers and their clients who caused the Great Crash of 2008, profited mightily, fought off regulation, and escaped with their personal fortunes and their reputations intact, all as part of the great muddle-through plan of the Obama administration.

Gretchen Morgenson and Louise Story report in the New York Times that in mid-October, 2008, in the middle of the collapse, Timothy Geithner met with Andrew Cuomo:

According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

At the time, Geithner was President of the Federal Reserve Bank of New York, and Cuomo was the Attorney General of New York. Cuomo ran noisy investigations but did not prosecute anyone. Now Geithner is Treasury Secretary and Cuomo is Governor of New York. Both of them have been rewarded for their attention to the needs and concerns of the financial markets.

Morgenson and Story report that the efforts of the FBI to ramp up to investigate the fraud and abuse were crushed by the Department of Justice, then headed by Michael Mukasey, shades of Alberto Gonzalez, can’t remember requests to beef up that operation. They report an unpublished policy of the SEC adopted in 2009 calling for caution in issuing hefty fines against banks that had gotten huge bailouts. I wonder how grateful the banks and their rich shareholders are for that thoughtfulness?

Could someone ask what kind of instructions Geithner and his current boss, President Obama, gave to the US Attorneys in the Southern District of New York, Los Angeles, Seattle and other big cities. They have done nothing at all, except, of course, for Preet Bharara’s silly and irrelevant insider trading cases.There is nothing to suggest that Jenny Durkan, the US Attorney in Seattle, (home of Washington Mutual), André Birotte, the US Attorney in Los Angeles (home of Countrywide, Long Beach Mortgage and New Century) and the rest of the Department of Justice even bothered with subpoenas.

Morgenson and Story are careful to add the usual banker explanation that these are complex cases. These cases are not complicated at all, and the information necessary to prove them has been gathered by the Financial Crisis Inquiry Commission and by Senators Levin and Coburn from the Senate Permanent Subcommittee on Investigations with further information.

That foot on your neck is banksters rubbing your face in their immunity from the rule of law.

On March 16, the FDIC filed suit against three top officials of Washington Mutual, alleging that they were grossly negligent in their management of the mortgage business of the failed banking giant. The suit also names the wives of the officials. The FDIC took over as receiver of the bank in September 2008, and as a result, it had possession of all of the records of WaMu, including e-mails and board minutes. That makes for a detailed complaint [.pdf], which explains the failure of WaMu clearly.

Beginning in 2004, the defendant Kerry Killinger, CEO of WaMu, COO Stephen Rotella, and Home Loans President David Schneider launched a plan called the Higher Risk Lending Strategy. The plan began with the recognition that there was a bubble in the residential real estate market, and that they could make a lot of money with higher risk loans. Certain kinds of loans are risky, Option ARMs, Home Equity Lines of Credit (HELOCs), and subprime mortgages. The complaint alleges that on top of already risky forms of loans, the defendants layered risks, with techniques such as

1. High debt to income ratios, so minor financial setbacks to borrowers were more likely to cause defaults;

2. Loans to non-occupier buyers such as speculators and second home purchasers, who lacked reason to pay if things got bad;

3. Interest only loans;

4. ARM loans with very low teaser rates, so that when the loans reset, the borrowers lacked income to pay, which the complaint calls by “borrower shock”;

5. Cash-out re-financings, which leave little equity to protect the lender; and

6. Loans originated by others where WaMu had little ability to control quality.

7. Stated income loans, made to anyone who didn’t want to fill out forms, allowing both borrowers and originators to make up the numbers.

8. Geographic concentration, with 50% of its loans in California and 33% in just four urban areas. Another 20-30% of the loans were in Florida, New York, Washington, Texas and Illinois.

The complaint says that the entire structure of WaMu was set up to enforce this plan. Loan underwriting was weak and undisciplined. Loan officers were paid based on loans originated and they were encouraged to make as many loans as possible. Loan underwriting employees were also compensated based on volume. Compensation for senior executives was based on earnings per share and revenue, increasing incentives to pursue short-term profits. Even the risk manager for home loans was compensated in part on volume and growth of the home loans generated.
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