Corporate leaders getting free legal pass on cleaning up financial crisis

From today’s New York Times Editorial Observer by Teresa Tritch:

In recent years, it has become increasingly clear that no prominent banker would be prosecuted for fraud in the run-up to the financial crisis. In the current issue of The New York Review of Books, Judge Jed Rakoff of the Federal District Court in Manhattan asks why.

The comforting answer — that no fraud was committed — is possible, but implausible. “While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies,” he wrote, “I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities.”

So why no high-level prosecutions? According to Judge Rakoff, evidence of fraud without prosecution of fraud indicates prosecutorial weaknesses.

This is not the first time Judge Rakoff has weighed in on the prosecutorial response to the financial crisis. In 2011, he rejected a settlement between Citigroup and the Securities and Exchange Commission because it did not require the bank to admit wrongdoing.

His insights on financial-crisis cases also apply to cases that have emerged since then, like JPMorgan Chase’s settlement with the government this week over the bank’s role in Bernard Madoff’s Ponzi scheme.

Under the deal, JPMorgan Chase, which served as Mr. Madoff’s primary bank for more than two decades, must pay a $1.7 billion penalty, essentially for turning a blind eye to Mr. Madoff’s fraud. It must also take steps to improve its anti-money-laundering controls. And it had to acknowledge, among other facts, that shortly before the fraud was revealed, the bank withdrew nearly $300 million of its money from Madoff-related funds.

By adhering to the settlement terms, the bank will avoid criminal indictment on two felony violations of the Bank Secrecy Act. No individuals were named or charged.

And that is the problem. Until relatively recently, it was rare for corporations to face criminal charges without the simultaneous prosecution of managers or executives. That changed over the past three decades, as prosecutors shifted their focus away from individuals and toward corporations, as if fault resides not in executives, but in corporate culture.

Read the entire article here.

Citibank to eliminate 11,000 workers

In a shake up last month Citi’s executive board ousted its former CEO Vikram Pandit, paving the way for today’s announcement that the country’s second largest bank would cut 11,000 jobs in exchange for a $1 billion charge. The bank has been slow to bounce back from the recession despite cutting its workforce by 33 percent since 2007.

Moody’s downgrades world’s banks

In 2011, a Congressional Report was released exposing those financial institutions responsible for the recession. The finger was pointed squarely at large investment banks as well as credit rating agencies for colluding to undermine the checks and balances that are supposed to keep the latter impartial, so that investor’s can be confident their evaluations of the former are accurate.

The report found that both Moody’s and Standard and Poor’s were both complicit in rigging scores for those banks, as well as the toxic financial products they were selling to investors. Both agencies knew that banks were off-loading toxic assets in investment bundles that were bogus, but gave those same products high scores in order to attract investors to them. As a result, hundreds of billions of dollars of other people’s money was lost, banks made out big by betting against these toxic assets in the derivatives market, and credit rating agencies made large bonuses from those banks for their part in perpetuating lies to the public

What a difference a year makes. Yesterday, Moody’s announced it was downgrading 15 of the world’s largest financial institutions, including several major U.S. banks such as Citigroup and Bank of America. Once cozy in their collusion with these agencies, banks reacted swiftly and disingenuously to the news. Citigroup accused Moody’s of doing poor research and advised its investors to search for other agencies with credit ratings more favorable to it (and therefore probably false). The bank released a statement to the effect that Moody’s “fails to recognize Citi’s transformation over the past several years…Citi strongly disagrees with Moody’s analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted.”

Along with Citigroup and Bank of America, Moody’s evaluated 13 other banks:  Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Crédit Agricole, Société Générale, Royal Bank of Canada, and Royal Bank of Scotland.

Analysis was based on firms’ capital ratios and whether they would be able to survive so-called “stress tests” modeling another severe recession. Many of the largest U.S. banks failed those tests, or were close to failing, prompting the downgrade in their credit ratings.

For consumers, homeowners, small business owners and retirees the downgrade is too little, too late. In election year politics relief for these stakeholders has also been slim to none. Democrats and Republicans alike play the blame game on one another, pandering for emotionally-charged votes, while members from both parties take significant amounts of cash from the financial industry, which has one of the largest armies of lobbyists in Washington to ensure very little is done to regulate it.

The move by Moody’s is good, and reflects a long-overdue divorce between two industries that should not be in bed together. Whether the long-term effects of this downgrade will mean more accurate information and better oversight remains doubtful without aggressive political action to curtail the greed Wall Street has substituted for the public agenda.