Has Corporate Malfeasance Signaled an End to Law and Order in America?
Has the US become a country where crime pays? Could the corporate death penalty help rein in America's criminal banks?
Crime Is Relative
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.”