WHAT KEEPS WALL STREET MISCREANTS OUT OF JAIL?

TROUBLE IS, GREED AND STUPIDITY AREN'T ILLEGAL


 

Why isn't Wall Street in jail? Thirty-two months after the ceiling caved in on the global financial industry, triggering the worst economic crisis since the Great Depression, criminal charges have not been brought against a single financier or institution culpable in capitalism's biggest failure since the 1930s.

Martha Stewart went to jail for obstruction of justice connected with a $45,673 (U.s.) stock sale.


Newspaper magnate Conrad Black was incarcerated for looting his firm of $6 million.


Lindsay Lohan was imprisoned for violating parole on a DUI con¬viction.


Yet not one of the Wall Street perps in the most severe economic crisis in the memory of most people alive today has been led away in an orange jumpsuit


The avarice and disregard for risk that knew no bounds among Wall Street's top managers will cause the U.S. banking system to lose a forecast $744 billion before the crisis ends.' Taxpayers were forced to spend $700 billion to inject capital into failing banks to prevent a total collapse of the system, and the onset of a second Great Depression, with unemployment of 25 per cent to 30 per cent compared with the current, painful enough 91 per cent million Americans and 400,000 Canadians lost their jobs in the Great Recession. An estimated 50 million American homeowners have been foreclosed upon or are cllnging to houses that continue to plummet in price, far below their mortgage value.


The US. national debt has swollen by $3 trillion to stabilize the US. economy.


Shouldn't someone go to jail for that?


After all, the last wave of white collar crime ended with prison sentences for the highest-ranking executives at Enron Corp., World¬Com Inc., Tyco International Inc" and Adelphia Communications Inc., and other miscreants.

To argue, as a few brave experts have done recently, that the rampant greed and ineptitude that caused a record US. housing bubble was not criminal behaviour is to invite retorts like this one from Barry Ritholtz, the leading US. independent economics blogger:


"By that logic, O.J. didn't kill Nicole Simpson and Ronald Goldman" Ritholtz says.


But those brave souls deserve a hearing. Their argument is persua¬sive. The crisis, financial author Roger Lowenstein wrote recently in a controversial Bloomberg Businessweek story, was caused "by a speculative bubble in mortgages, in which bankers, (mortgage) applicants, investors, and regulators were all blind to risk"

And weak regulation, to my mind the leading culprit, was "a product of the discredited but entrenched thesis that markets are efficient and self-policing."

Ifs true that in periods of irrational exuberance, financiers always have become dangerously sanguine about risk, and intensified their search for regulatory loopholes to exploit. None of which is illegal.

"One of the most galling aspects of the financial crisis is that so much of the behaviour that precipitated it was explicitly legal:' writes Salon financial analyst Andrew Leonard (Leonard's emphasis.) "The crooks rigged the system so that they weren't, technically speaking, crooks!'


As to regulations and the public guardians entrusted with enforcing them, "For decades, both Republican and Democratic administrations steered financial sector policy in a deregulatory direction that all but guaranteed an eventual crash!'

In Canada's most recent real estate bubble, which burst in the early1990s, Ottawa told Canadian lenders to rein in their lending before a growing problem with loan losses could escalate into a crisis requiring a government bailout of Bay Street.


Conversely, a US. regulatory apparatus in thrall to the "discredited" thesis that markets self-correct did not act until a crisis was underway. The US. Federal Reserve Board, the US. Securities and Exchange Commission and other supposed watchdogs read too little into warning signs of an unsustainable housing boom that were evident as early as the mid-2000s.

Armchair prosecutors who've lost jobs and homes or know friends and family members in dire straits are outraged at the absence of criminal charges and the banks' use of bailout funds to pay exec¬utive bonuses and dividends while refusing to lend to job-creating enterprises.

But it must be said that putting Bernie Ebbers and Jeff Skilling behind bars didn't prevent a far more devastating outbreak of corporate malfeasance that began in the early 2000s, just as the last bunch of corporate malefactors was being sentenced So much for the deterrent value of jail time.

What's required, as in the aftemath of the Crash of1929, are sweeping reforms.

• The dangerous US. banking debt -to-capital ratio of 30 to 1 needs be brought in line with Canada's 18 to 1 ratio, providing a sufficient cushion for loan losses.

• America needs to scrap mortgage-interest tax deductibility, a $100-billion annual middle-class tax break that spurs US. overco sumption of housing. That alon would cut the US. deficit by 7 cent a year.

• The divorce of traditional commercial banking from riskier in" vestment banking imposed by FDR in response to the Crash 1929 was followed by generati, of financial-markets stability. 1999 revocation of that law soon followed by the unp ed US. housing bubble, in which the new Wall Street "megabanks" packaged subprime, or junk. mortgages into "securitized" then sold for fat upfront fees to other banks, pension funds and university endowments worldwide.


That separation needs to be reimposed, with investment bank clients deprived of the safety net of federal deposit insurance.

• Lavish Wall Street pay should be tied to prudent capital ratios to discourage high-risk behaviour. And outlandish compensation should be clawed back if profits plunge within five years of it being paid, as an incentive for careful long-term stewardship over fast¬buck speculation.

• Finally, US. prosecutors need to redouble their efforts. US. prosecutions of corporate, securities and bank fraud actually fell last year to 39 per cent below the 2003 level.

David Olive
Toronto Star
06 11 2011