The United States is suffering a crisis in the rule of law.
This is apparent on many levels. It’s evident in the weekly struggles of Trump’s new administration and its efforts to target Muslims and Mexicans (and others) and challenge the judicial establishment which has spent the better part of the country’s history developing jurisprudence designed to prevent lawless bigotry and fascist populism.
But even before Trump entered office, the US was struggling with an eroding rule of law, visible not just in the daily struggle of African-Americans and Mexicans and Muslims to survive in the face of militarized police and border patrols and Homeland ‘Security’ agents, but also in the reckless criminality of the country’s financial elite. This was a crime spree that took place not under the chest-thumping bigotry of a Trump administration — but on the watch of Obama’s Democrats. Indeed, perhaps it was the Obama administration’s weak-kneed response to corporate crime that emboldened the country’s corporate financial elites to grasp higher and dare farther.
The US financial crisis of 2007-08 saw dozens of companies and individuals commit a wide range of fraud and financial crimes, line their pockets with billions of dollars, wreak havoc on the global economy, and inflict tremendous pain on poor and middle-class communities. Most shocking of all, those responsible for the crimes walked away scot-free. Many of the corporations that committed fraud are still operating; many of the individuals who spearheaded criminal schemes took their ill-gotten gains with them and continue to work in the financial sector and reap personal reward despite the significant social and economic damage they caused.
Legal scholars Mary and Steven Ramirez argue that they should, instead, have paid the ultimate price: the ‘corporate death penalty’. American law has been honed over the past century and a half to ensure government has effective tools to fight financial crime and prevent lawlessness in the financial sector, with all the social and political chaos to which it inevitably leads. Governments can pursue criminal charges and imprison individuals responsible for corporate crime; governments can also bar them from ever working again in the financial sector. As for the corporations that commit crimes under human guidance, they can be broken up — put to death, figuratively speaking.
Yet inexplicably, the US government failed to do any of that against the megabanks and corporations responsible for the fraud and other crimes which sparked the 2008 financial crisis. Instead, it bailed out the corporations and allowed guilty CEO’s to walk away free.
The Ramirezes have unleashed a powerful condemnation of government’s weak-kneed response to corporate crime in their impressive new study The Case for the Corporate Death Penalty: Restoring Law and Order on Wall Street. They lay the blame for government’s failure to take effective action squarely on the shoulders of the Obama administration. Previous administrations, whether Democrat or Republican, they note, took at least some of the responsible actions necessary to prosecute financial crimes with the varied tool kit provided by law. Even the Bush administration, which preceded Obama, showed a stronger inclination to prosecute corporate financial crime than did its Democrat successor.
Why? The popular explanation — and the one encouraged by politicians — was that the actors in the financial crisis were ‘too big to fail’; in other words, if government didn’t bail them out and let them off the hook for their crimes, they were so powerful that their failure would have an even worse impact on the American economy.
Nonsense, respond the Ramirezes, and they make quick work disposing of government’s claim. Government and Department of Justice claims that enforcing the law against criminal corporations would damage the economy were made “with little supporting evidence and in defiance of common sense. President Obama claims that while much of the misconduct that occurred during and before the crisis of 2008 was reprehensible, it was not necessarily illegal. These claims are false and can be the product only of an effort to deceive or a grand delusion regarding the nature and costs of financial lawlessness.”
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The two legal scholars spend the bulk of their book presenting evidence revealing the scale of criminality engaged in by the banks and their corporate leadership. There’s no doubt that criminality occurred: the agreements reached between the corporations and US government often included outright admissions of fraud and other crimes. Much of the information presented in the book was collected by Department of Justice officials in the course of investigations; other information was provided by corporate whistleblowers (the courageous acts of several corporate employees who acted as whistleblowers to expose their corporations’ wrongdoings, even in the face of retaliation and reprisals, attests to the fact that not everyone in the corporate world is as corrupt as the leadership at the top would cause one to believe).
The authors examine several of the key illustrative cases: the toxic subprime loan schemes of Countrywide Financial; the mortgage-backed securities fraud of Wall Street megabanks like Citigroup, JPMorgan Chase, and Bank of America; the complicity of credit rating agencies like S&P and Moody’s that participated in the megabanks’ fraud; the securities fraud of the world’s fourth largest investment bank Lehman Brothers and the complicity of Ernst & Young’s (E&Y) auditing in their fraud; and the mortgage-related securities fraud of AIG and Goldman Sachs. They more briefly touch on other cases as well. What emerges is a clear image of the horrifying scale of lawlessness and criminality run rampant in the American financial sector.
Too Big to Fail? Or Too Big to Jail?
In response to claims that letting corporate criminals off the hook was necessary to save the economy, they counter that it’s not the death of criminal corporations, but the American government’s failure to enforce the law, which truly threatens the American economy. The problem is captured clearly and succinctly:
No economy can prosper without sturdy rule of law applicable to all economic actors, and granting indulgences to the most powerful in no way serves economic growth and stability. On the contrary, when a lawless class holds sway over massive resources, greater distortions will result as more capital flows into more financial crime… If financial crimes pay, then we should not expect our financial sector to allocate capital to those with new ideas of profitable business plans. Such legitimate capital projects will instead need to compete with the more profitable allure of financial fraud, money laundering, and other larcenous behavior.
Instead of prosecuting the guilty corporations properly, government instead accepted billions of dollars in fines. Not only did this allow the guilty parties to stay in business, but it meant that those who suffered were largely innocent shareholders, while corporate officers who masterminded the crimes got to walk away with the hundreds of millions of dollars they’d pocketed. Former Lehman’s CEO Richard Fuld, who claimed ignorance of his company’s fraudulent activities despite strong evidence to the contrary, certainly isn’t hurting for his role in the scandal, as the authors observe.
Whether one believes the whistleblower who claims that Fuld took in over $500 million in compensation between 2000 and 2007 or Fuld’s testimony before Congress claiming about $300 million, Fuld continues to enjoy a comfortable standard of living (Sterngold 2010). The Center for Public Integrity reported that former Lehman CEO Fuld now operates a financial consulting firm. Moreover, Fuld maintains an $8 million home in Greenwich, Connecticut, and a 40-acre ranch in Idaho. Fuld transferred a $10 million Florida property to his wife in 2008, and the Fulds reportedly sold their Park Avenue apartment for $25 million (Fitzgerald 2013).
Should people like this be in prison instead of enjoying multi-million dollar prosperity and prestige within the financial world? Should they be barred by law from participating in the financial sector? The Ramirezes emphasize that their research doesn’t substitute for a criminal trial, which is the only way of indisputably proving criminal guilt. But their point is that the public was deprived of the right to have such individuals tried in the criminal justice system because of deals struck by government agents which prevented (protected, arguably) such people from facing the rigours of justice and criminal trial.
What happens when you put a corporation to death? Nothing all too bad, note the Ramirezes. In fact, breaking up corporations has historically been shown to have an invigorating and positive effect on both the economy generally as well as shareholders’ interests.
[F]orcing spin-offs of regulated subsidiaries to the shareholders of the megabanks would give shareholders ownership in smaller, more competitive businesses. The businesses would also enjoy the benefit of superior, well-incentivized management that would follow the law instead of using shareholder money to buy off the government for managerial immunity. So the corporate death penalty in the financial sector harms only the managers of the criminal megabanks. Job losses for other than criminal managers are not necessary…
Even government’s thinly justified desire to keep megabanks intact doesn’t explain their refusal to prosecute bank managers and leadership for their crimes. Jailing criminal bankers doesn’t hurt the financial institutions they headed. An argument could be made that prosecuting the leadership of the country’s banking system could cause a loss of confidence in American financial institutions, but as the Ramirezes point out, allowing criminal bankers to get away with their crimes is likely to have a worse effect on investor and consumer confidence. If the world gets the impression that America allows its wealthy to break the law, confidence in American economic institutions will rapidly vanish.
Employment in the financial sector would not be affected, however — breaking up banks would not eliminate jobs since lower-level employees would remain employed by the spin-off companies thereby produced, and eliminating criminal bankers would open spaces for more honest and reliable employees to advance. There’s no benefit to preserving megabanks, argue the Ramirezes, especially when it means allowing them to flout the law.
The megabanks offer no offsetting economic benefit. Their operations are far-flung and complex, making them too big to manage. They also suffer from perverse incentives regarding risk because their government backing means they do not bear the full consequences of excessive risk. Without the massive government subsidy, only small, if any, operating efficiencies would remain… These distorted incentives also mean the megabanks are far more inclined toward criminality and other misbehavior. The increasing criminality associated with megabanks’ business model leads to ever higher legal expenses… In sum, the huge subsidy these megabanks enjoy is a total waste of taxpayer funds that serves only to entrench financial elites and encourage further criminality.
Crime Is Relative
While their argument is focused on crimes committed by megabanks and powerful financial institutions, the use of the ‘death penalty’ in breaking up those banks is more than simply a punishment. It also serves to improve the overall lawfulness of the industry. The Ramirezes observe that concentration of wealth coupled with broad-based inequality has often been associated with a rise in criminality, historically speaking. The entrenchment of a hyper-wealthy financial class, protected by government against prosecution for their crimes, risks incentivizing and spreading lawlessness on an even broader scale.
There are other consequences to the coupling of financial lawlessness with growing inequality. The sale of toxic subprime mortgages led to ‘race-based lending’ on the part of companies like Countrywide Financial. Countrywide’s minority “borrowers were charged more because of their race or national origin, not because of their creditworthiness or other factors related to default risk. Furthermore, Countrywide discriminated by steering thousands of African American and Hispanic borrowers into subprime mortgages while white borrowers with similar credit profiles received prime loans. This undisclosed discrimination occurred coast to coast in over 180 markets and 41 states.”
Race-based lending compounded pre-existing forms of discrimination. Minority borrowers in the US have historically been denied credit due to outright discrimination.
Thus, minority communities and families did not have the same level of sophistication and experience regarding mortgage transactions, all else being equal. After being denied credit for generations, minorities proved too eager to take on too much debt and too trusting that legal protections would operate to save them from lender abuse. Countrywide particularly abused Latino borrowers, who constituted two-thirds of their victims. If English was not a borrower’s primary language, Countrywide could pounce. Essentially Countrywide preyed upon the most vulnerable citizens in order to make predatory loans to maximize profitability.
The social implications of the financial crisis must not be forgotten, the authors remind us.
[F]raud drove every element of the Great Financial Crisis. And the cost staggers the imagination. The government puts the cost of the crisis at $20 trillion and counting. Even this figure is misleading, as it fails to account for the huge number of foreclosures that followed in its wake or the families forced out of their homes and the children who had to transfer schools. How does one reduce the increased suicides associated with foreclosures to a monetary figure? A similar accounting difficulty arises from the fact that huge profits flowed into the pockets of the richest and most powerful while the most disempowered suffered the greatest losses. A massive transfer of wealth occurred from the middle class and the disempowered to the most powerful. Much wealth was destroyed along the way as dead weight losses accompanied the transfers.
The transfer reallocated wealth from the most needy to the least needy. The crisis pushed childhood poverty in minority communities to nearly 40 percent and wiped out much of the previously meager household wealth in minority communities. The damage from this fiasco to American families and their highest hopes and dreams — from college education to a comfortable retirement — cannot be quantified. Few Americans escaped the losses from the financial crisis that disempowered these families from reaching their full economic potential and will thereby continue to impose losses for years to come.
Why Did the US Government Allow the Crooks to Get Away?
The Ramirezes advance a number of theories to explain the growing lawlessness in the American financial sector. When bankers and other financial agents see their colleagues get away with crime and prosper financially, a clear message that ‘crime pays’ leads to incentivizing further criminality on the part of other firms. That explains the rapid growth of financial crime but doesn’t explain why government shrugged its shoulders in the face of it.
Politics plays a pivotal role, suggest the authors. The extreme costs of running political campaigns make candidates increasingly reliant on donations from corporations and the hyper-wealthy persons running them, and this has led to undue influence on the part of bankers over politicians. Moreover, there’s a dangerous revolving door, which sees many government officials reliant on the very corporations they’re supposed to monitor and investigate, for jobs after they finish their tenure in government. Indeed, many of those who allowed criminal megabanks and their leaderships off the hook under the Obama administration have gone on to receive plum jobs with those very banks.
There are of course other plausible explanations. The concentration of resources on fighting ‘terror’ has meant a reduction in resources and personnel to enforce law and investigate crime in the financial sector. The fact that mortgage fraud is considered a low-ranking criminal threat belies the massive damage it imposes on the American and global economy.
More significant, though, is the role that megabanks and hyper-wealthy individuals have come to play in financial support for political parties. The megabanks sponsor speaking engagements that pay politicians massive amounts (fees in the hundreds of thousands of dollars); chief bankers write personal donation cheques to the tune of tens of thousands of dollars. “According to the Center for Responsive Politics the financial sector outpaced all others (by far) during the 2013-2014 election cycle, giving over $498 million in campaign contributions. The financial sector also spent a mind-boggling $6.4 billion in lobbying our representatives between 1998 and 2014 (Center for Responsive Politics 2015b & 2015c). More recently, Reuters reported that certain megabanks threatened to withhold funding from the entire Democratic caucus of the US Senate due to the antibank rhetoric of Senators Elizabeth Warren and Sherrod Brown (Flitter 2015).” The list of damning statistics goes on.
Equally significant is the ‘revolving door’ relationship between megabanks and the country’s political institutions. Securities and Exchange Commission (SEC, one of the agencies responsible for regulating and investigating the financial sector) enforcement chief Robert Khuzami “left and ended up in a $5-million-per-year job at corporate law firm Kirkland & Ellis, which represents Wall Street behemoths such as Morgan Stanley, UBS, American Express, and Bank of America… Lanny Breuer, the head of the Criminal Division of the Department of Justice, left the DOJ to return to his old firm Covington & Burling, where he now makes $4 million a year as the firm’s vice chair. Covington also represents many of the Wall Street firms Breuer failed to prosecute… Former SEC Chair Mary Schapiro now sits on the board of industrial and financial giant General Electric, a firm that had been subject to SEC inquiry during her tenure. Virtually every Obama administration senior economic advisor or financial regulator has landed a lucrative Wall Street position, serving the interests of the very firms they supposedly regulated as public servants (Chittum 2013). Of course, the revolving door is not by any means a new problem. But high inequality and consolidation in the financial sector have heightened these influences.”
Some of those politicians who are now benefiting from Wall Street jobs did more than just fail to prosecute: they actively facilitated legislation sought by the very banks they now work for.
Former Treasury Secretary Robert Rubin, while part of the Clinton administration, successfully repealed legislation to separate investment banking from commercial banking, which had been a key principle of the financial sector since the Great Depression. “After leaving government he joined Citigroup as chair of the Executive Committee, with no operational responsibilities. Citigroup in particular needed the act’s repeal to allow it to maintain its otherwise unlawful acquisition of another financial conglomerate that included an investment bank. Rubin also played a key role in championing derivatives deregulation. Ultimately, Rubin became chairman of the board of Citigroup. Over a period of 10 years he raked in $126 million from Citigroup. Meanwhile Citigroup shareholders suffered massive losses in derivaties speculation and beyond, and the government expended billions in bailouts as a result of its bid to be the biggest megabank (Schwartz & Dash 2008).”
Again, like-minded examples roll off the pages; the Ramirezes have done their research and what they reveal is a damning litany of greed, criminality, and lawlessness in the American financial sector.
What Can Be Done?
The Ramirezes offer some suggestions. The establishment of a well-resourced corporate fraud division as an independent division of the Department of Justice is one suggestion. Another is eliminating the ability of government to strike shady deals with corporations instead of prosecuting them — eliminate the ‘deferred prosecution agreements’ (DPAs) and ‘nonprosecution agreements’ (NPAs) on which these corporations have come to rely and even expect as alternatives to facing justice. Government ought to also strengthen, and use more prolifically, its ability to break up the megabanks which are responsible for much of the criminality and lawlessness in the US financial sector — expand the ‘corporate death penalty’, in other words.
Their final suggestion is one that invites greater skepticism in light of the 2016 election, and which underscores the broader problem of lawlessness that has come to grip the United States. Restore the rule of law through electoral engagement, they argue that the ultimate solution “lies in the determination of the voting public to prioritize the reimposition of the rule of law upon even the wealthiest and most powerful among us. This means setting aside other issues that create partisan divides among voters to vindicate the rule of law, which enjoys almost universal support. Virtually no voter would vote for candidates espousing lawlessness in the financial sector.”
Really? While the Ramirezes, among others, undoubtedly hoped the 2016 US Presidential election would offer an opportunity for voters to demand accountability from government, a very different phenomenon emerged as voters elected a president who demonstrated callous disregard and contempt for the rule of law. Clearly “the rule of law” does not enjoy “almost universal support” in America; at least not so long as populists and hate-mongers take advantage of the public’s volatile fears to undermine civil rights and the rule of law. Indeed, the wink-and-shrug bailout approach of Obama’s smiling Democrats seems almost benign by comparison with what the US now faces.
Yet if anything, the Ramirezes’ thorough and erudite dissection of financial lawlessness suggests (to me) that Trump’s strong-man populism is part of a broader spectrum of lawlessness that preceded the 2016 election cycle. By letting America’s banks and financial institutions get away with rampant criminality, the Obama administration sent a signal to the country’s elites that wealth, power, and influence can trump law; that armed with wealth, power and influence the elites can get away with things that others can’t. One could plausibly argue that this set the stage for Trump’s ascendance: both by generating widespread anger and frustration at a vaguely articulated ‘establishment’ that allowed corporate crime to pay (and inflict suffering on the poor and middle classes), but also by increasing the general disregard for law in the US. What do laws matter if they are not enforced? Especially if they are not enforced upon the powerful?
The Case for the Corporate Death Penalty went to print shortly before Trump took office, so the authors don’t address Trump or the political implications of his election on the need for tackling lawlessness in the financial sector. Yet their book helps us not only understand the scale of criminality among America’s financial elites, but also the dynamics which propel elites like Trump into office. The Trump administration’s early calls for deregulating America’s economy do not bode well for hopes that America’s criminal bankers will get their just due. If action is not taken to rein in the lawlessness which the Ramirezes so thoroughly reveal, the economic and social implications for America are terrifying.
‘In the end, it is up to the voters in the United States to reimpose the rule of law upon financial elites…The American people will ultimately get the rule of law they demand.”