Monday, April 27, 2015

Fines and Crimes, Part 2: How the government could prosecute the 'Banksters' (Commentary)


Eric Holder
Former Treasury Secretary Timothy Geithner, in his book "Stress Test,'' defended the government's strategy of concentrating on fixing the financial system rather than punishing those who caused it. The author argues that doing one does not prevent doing the other. ( Photo illustration by Peter Allen / Photo via AP)

By Special to 
on April 24, 2015 at 11:05 AM, updated April 24, 2015 at 11:07 AM

Jonathan Schonsheck, Ph.D., is Professor of Philosophy at Le Moyne College. He is appointed to the College of Arts & Sciences and the Madden School of Business, and is the inaugural Faculty Fellow of the Madden School's Center for Global Engagement and Impact. These pieces, and several previous op-eds and scholarly articles, are elements of an ongoing research program centering on the financial crisis and its aftermath, including the proposal of specific reforms. The working title of the research program is "Conscientious Capitalism." The work draws on Schonsheck's scholarship in finance and moral philosophy. The author can be contacted
By Jonathan Schonsheck
In a companion piece, I argued against the Department of Justice's strategy of negotiating fines, to be paid by the banks accused of wrongdoing. While the fines may at first seem "ginormous," they are in fact much smaller, in that they are tax-deductible, and but a small fraction of the banks' income. The executives, the "Banksters'' responsible for the crucial decisions, emerge unscathed. Furthermore, they are being conditioned by this strategy to consider these fines not as an expression of social condemnation, which should prompt disgrace and humiliation, but rather as merely a "fee." Thus, these executives are being conditioned to think of such transgressions, not as moral issues, but rather as something to be decided, just like any other "business" decision, on the basis of anticipated Return on Investment. And quite perversely, as more and more banks are fined under this strategy, the more comfortable Banksters become, since paying for violations is simply the new way of conducting business.
2015-04-15-schonsheck.JPGJonathan Schonsheck, Ph.D., is professor of philosophy at Le Moyne College. He also is on the faculty of the Madden School of Business. 

In my judgment, the only way to prevent an encore crisis is to prevent the Banksters from deciding whether to violate the law on the basis of Return on Investment. And the only way to re-orient their thinking is to pose the credible threat of criminal prosecution. So let us now turn to the questions: Why hasn't the Department of Justice undertaken criminal prosecutions, and how could it proceed?
Geithner's "defense"
Timothy F. Geithner, Secretary of the Treasury during the Crisis, defends the decision to not prosecute the Banksters in his book "Stress Test." Geithner explains that they were focused solely on preventing the total collapse of the global economy. He claims that ". . . the truly moral thing to do during a raging financial inferno is to put it out. The goal should be to protect the innocent . . ." I quite agree; surely it would be foolish – indeed, morally outrageous – for all the firefighters to descend from their ladders, stow their fire axes, shed their coats, pull off their boots, doff their helmets and chase the arsonists. The extreme silliness of Geithner's "defense" arises from the tense of the verb: "during" a genuinely systemic crisis, "during" a raging financial inferno. By all means, focus attention and energy on extinguishing the flames. But then? Once the financial fire has been brought under control, could we not then pursue the arsonists? It is fallacious to claim that, if battling the flames in the moment is the morally upright choice, then we are thereby debarred from ever seeking justice.
Furthermore, mere arsonists merely light fires. In sharp contrast, these "arsonist" Banksters ignited the financial markets in the course of wrongfully accumulating great wealth for themselves, having victimized a multitude of their fellow citizens. These transgressions cry out for justice.
Obstacles to criminal prosecution
To succeed, a criminal prosecution must overcome a number of obstacles. Broadly, the prosecutor must show that a crime has been committed and that the defendant committed it. "Crimes" are composed of a number of different "elements;" to be successful, the prosecution must prove each of these constitutive elements. It must then prove that the defendant did it – and prove it beyond a reasonable doubt. And the prosecution must prove all this to the satisfaction of each and every juror; if even one believes that there is reasonable doubt, the prosecution fails. And there are legitimate concerns about the typical jury pool. Many of those with higher education and critical reasoning skills are excused from service – one can safely bet against there being many lawyers or MBAs on any jury.
Every one of these obstacles to successful prosecution is vastly enlarged as regards the apparent crimes of the financial markets crisis. The financial instruments themselves are dizzyingly complex; the laws regulating the creation and exchange of these financial instruments – such as there were – were correspondingly complex. In consequence, it is most difficult for the prosecution to explain to a jury precisely what actions constitute a crime. Could a jury, composed of regular folks, be persuaded – unanimously, and beyond a reasonable doubt – that the law established these particular actions as criminal, and that the defendants did indeed choose those actions? In the parlance of the day: "Good luck with that!"
The Department of Justice did once try a trial, prosecuting two fund managers from Bear Stearns under securities laws. The proceedings lasted a month; the jury deliberated for just a day before finding them both "not guilty" on all counts. A plausible explanation: "jury befuddlement."
The Commodities Futures Modernization Act of 2000 debarred all federal agencies from regulating the "financial derivatives" markets. In consequence, it is even more difficult to prosecute wrongdoing as regards one of the more notorious financial instruments of the crisis, the Credit Default Swap (CDS), a device for increasing or decreasing one's exposure to the risk of losses. Stop! Let us not take even one more step into this financial quagmire.
Criminal prosecution as common law fraud
I want to offer a strategy not for surmounting these obstacles to prosecution, but for circumnavigating them. Of course he Banksters will have to be charged under securities laws. But the prosecution could immediately divert the jury's attention away from the esoteric minutiae of securities law, and focus instead upon its underlying foundation of "common law fraud," which centers on soliciting money in exchange for a promise that the promisor knows he cannot keep – or fails to ensure that he can keep.
Timothy Geithner, Ben Bernanke, William DudleyFederal Reserve Chairman Ben Bernanke, center, flanked by Treasury Secretary Timothy Geithner, left, and William Dudley, president and chief executive officer of the Federal Reserve Bank of New York, testifies on Capitol Hill in Washington, Tuesday, March 24, 2009, before a House Financial Services Committee hearing on AIG. 
Every member of the jury will be familiar with the idea of a fire insurance policy on one's house. Fearful of a catastrophic loss in the event of a fire, the prudent homeowner purchases a policy. The homeowner pays a periodic premium to the insurer; in exchange, the insurer assumes the risk of loss due to a fire, promising to reimburse the homeowner if the house burns. The homeowner's payment of the premium is a certainty; the insurer's payment of a claim is not. If the house never catches fire, the insurer never pays a claim – but does keep all the premiums paid by the homeowner.
A CDS is most clearly thought of as an insurance policy – in practice, though not in securities law. It is a policy not on a house, but on an investment. The investor pays a premium to the issuer, e.g., AIG; in exchange, the issuer promises to reimburse the investor in the event of a "financial fire," i.e., the investment loses value. The investor's payment of the premium is a certainty; the issuer's payment of a claim is not. If the investment never loses value, the issuer never pays a claim – but does get to keep all the premiums paid by the investor.
By law, fire insurance companies are required to maintain "reserves," cash on hand to pay claims. By law, CDS issuers were not required to maintain reserves. And AIG didn't; it paid out the premiums as salaries and bonuses, quite literally betting that the insured investments would not decline in value, and thus it would never have to pay a claim.
AIG lost that bet – and without any reserves, had to be bailed out by U.S. taxpayers.
This is a wonderfully straightforward example of common-law fraud. AIG took money from investors, in exchange for the promise of reimbursement in the event of the investment's decline in value. The investors relied upon the promise. But AIG made that promise without insuring that it could keep it. When investors sought reimbursement, AIG could not keep its promise. That's it; all of the elements of common law fraud have been proved.
Think now of the profound effects that this argument strategy would have on the dynamics of the courtroom. Since the prosecution will have already established that the Banksters took money in exchange for a promise that they could not keep, it is the defense that is put on the defensive. It is the defense that will be citing esoteric provisions of securities law, attempting to persuade the jury that it was not technically against the law for them to take money from investors, in exchange for a promise to protect them from financial loss, and then break that promise. Every juror will understand that they are trying to hide behind "legal technicalities," legislation written by their lobbyists, trying to evade what has already been proved. So now "jury befuddlement" works against the Banksters. For what remains unobscured, despite all the dust raised by the defense, is the common law fraud.
Executives can testify that they violated no securities statutes in failing to maintain adequate reserves. But that is wholly irrelevant; the executives will have just conceded that they did not have reserves sufficient to keep their promises. Bang the gavel – guilty of fraud. Salespeople can testify that they did not know what CDSs had been sold, and on which instruments, by other salespeople – and so did not know the total exposure of AIG. Bang the gavel; they have testified that they did not know whether they could keep their promises to investors. Guilty of fraud. Executives can testify that no one predicted the housing market crash, and the consequent bond market crash.Bang the gavel – they took money from investors in exchange for promises they took no adequate measures to insure that they could keep. Guilty of fraud.
Suppose the Department of Justice were to adopt this strategy. The Banksters will be contemplating the very real threat of criminal prosecution, the prospect of incarceration, the terrifying knowledge of what can happen after the steel doors slam. The allure of Return on Investment from violations of common law fraud will lose its luster – the thinking of the Banksters will indeed have been "re-oriented."
And now note how dramatically different a business environment this would create. When Bank #1 is fined but the Banksters emerge unscathed, and then so with Bank #2, and then so with Bank #3, and Bank #4, and Bank #5 – banks are not deterred from bad actions, but incentivized to elect them. And then an encore Crisis will ensue. But when Bankster #1 is sent to prison, and then Bankster #2 is imprisoned, and then Bankster #3, and Banksters #4 and #5 . . . well, it's reasonable to believe that all the rest of the Banksters will indeed be deterred from bad acts – and an encore crisis thereby averted.

Fines and Crimes, Part 1: Why Wall Street 'Banksters' aren't deterred by fines (Commentary)


Eric Holder
Attorney General Eric Holder has pursued a strategy of extracting fines from the banks and Wall Street firms that precipitated the financial crisis. The writer argues this has not deterred -- and in fact may encourage -- bad corporate behavior. (Photo illustration by Peter Allen / Photo via AP)

By Special to 
on April 17, 2015 at 4:21 PM, updated April 17, 2015 at 4:33 PM

Jonathan Schonsheck, Ph.D., is Professor of Philosophy at Le Moyne College. He is appointed to the College of Arts & Sciences and the Madden School of Business, and is the inaugural Faculty Fellow of the Madden School's Center for Global Engagement and Impact. These pieces, and several previous op-eds and scholarly articles, are elements of an ongoing research program centering on the financial crisis and its aftermath, including the proposal of specific reforms. The working title of the research program is "Conscientious Capitalism." The work draws on Schonsheck's scholarship in finance and moral philosophy. The author can be contacted
By Jonathan Schonsheck
The crisis in the financial markets that began in 2007, and the ensuing Great Recession, have begun to fade from public consciousness. In the context of all that has happened since then -- from various elections in the United States, to the continuing terrorist threats posed by al-Qaida and ISIL -- this is perfectly understandable. Nonetheless, the fact that memories are fading is both deeply troubling, and exceedingly dangerous. This fading is creating the ideal conditions for an encore crisis.
2015-04-15-schonsheck.JPGJonathan Schonsheck, Ph.D., is professor of philosophy at Le Moyne College. He also is on the faculty of the Madden School of Business. 

Unfortunately, this is the lesser of two problems. The greater problem is that the strategy chosen by the Department of Justice -- levying fines against the banks, rather than undertaking criminal prosecutions of the Banksters -- cannot succeed in preventing an encore crisis. And it's not just that the policy will fail -- it's that the policy itself is actually facilitating the next crisis.
In the first of two companion op-ed pieces, "Why Fines are Not Fine," I show how the policy of merely fining banks leaves their senior executives, the Banksters, unscathed - and thus, undeterred. In the second, "The Criminal Prosecution of Banksters," I reject the two main arguments against criminal prosecutions: former Secretary of the Treasury Timothy F. Geithner's position that the importance of saving the world's financial system eclipsed the importance of prosecutions, and the widely accepted position that the extreme complexity of these issues precludes conviction by a jury.
The two pieces are synergistic. So long as one believes that the strategy of fining banks is viable, one will not look for creative ways to undertake prosecutions. And what motivates the search for creativity in prosecution is the realization that the strategy of levying fines is deeply, and quite inescapably, counterproductive: destined to bring about precisely that which we so fervently wish to avoid.

Part 1: Why fines are not fine

When Charles Ferguson accepted the Academy Award for "Inside Job,'' he eloquently evinced his outrage that no one had gone to prison for having had a role in the crisis. That was February 2011; in the intervening four years, the count remains essentially zero. And Ferguson's is but one voice in a loud chorus singing for Sing Sing. To be sure, fines have been levied against many of the financial institutions. The intent, of course, has been to punish the perpetrators, functioning as a deterrent, to prevent future bad behavior. But have they had that effect? I think not. Indeed, and quite perversely, this policy has had precisely the opposite effect. The Department of Justice, in opting for negotiated settlements rather than criminal prosecutions, has established a business environment which has the effect of incentivizing, rather than deterring, the kinds of decision-making that will precipitate the next crisis in financial markets.
Putting fines into context
The strategy of the Department of Justice has been to negotiate with the offending banks. Often heard in defense of this way of proceeding is the claim, "We're hitting them right where it hurts - in the wallet." And we have witnessed an amazing escalation in the amount of these fines. The investment bank Goldman Sachs settled with the Securities and Exchange Commission for a (then) record-setting $550 million. Citigroup agreed to $7 billion; JPMorgan $13 billion. And more recently, Bank of America agreed to a structured set of fines totaling $16 billion.
Lloyd Blankfein, James Dimon, John Mack, Brian MoynihanIn this Wednesday, Jan. 13, 2010 file photo, from left, Goldman Sachs Group, Inc. Chairman and Chief Executive Officer Lloyd Blankfein; JPMorgan Chase & Company Chairman and Chief Executive Officer Jamie Dimon; Morgan Stanley Chairman John Mack and Bank of America Corporation Chief Executive Officer and President Brian Moynihan, testify on Capitol Hill in Washington before the Financial Crisis Inquiry Commission. Many Wall Street firms paid big fines -- in the billions of dollars -- an expense borne by the shareholders, not the people who made bad decisions. 
To the ordinary citizen, with no context for assessing these amounts other than one's own salary and savings, terms like "massive" and "ginormous" seem perfectly apt. But the ordinary person's own "wealth" is absolutely the wrong "frame" for understanding these amounts. Consider: All of these banks, after the fines, remained profitable. Additionally, these fines are tax-deductible. The loss to the Treasury is made up by ordinary taxpayers. Furthermore, it is paid by the bank, i.e., its stockholders, and not the senior executives who made the fateful decisions -- i.e., the individual Banksters. The upshot of all this: When put into proper context, these fines are not as large as they initially seem, and the "hurt" is suffered by stockholders and taxpayers, not the Banksters. As individuals, they are not "getting hurt right in the wallet."
In announcing the Citigroup settlement, outgoing Attorney General Eric Holder claimed that "the size and scope of this resolution goes beyond what could be considered the mere cost of doing business" -- apparently to silence critics of Justice's strategy of merely imposing fines. I believe Holder is quite mistaken.
Decision-making in business
Every business, as a going concern, has a balance sheet -- an accounting of income and expenses, of debits and credits. Decision-making in a business focuses on the anticipated impact of the various options it is considering on that balance sheet: what expenses will be incurred, what income will be realized. The relevant technical term here: "Return on Investment," or "RoI." In essence, the executives of a business seek to maximize RoI, to gain the greatest amount of revenues from the least in expenditures.
Let us imagine a manufacturer, shipping products. On the expense side of the balance sheet will be fees of various sorts: tolls for trucks on limited access highways, and over bridges and through tunnels; lock and dock fees for barges; gate and landing fees for air freight, etc. The payment of such fees is just one amongst innumerable other expenses of doing business. Of course in a well-run business, the various shipping options will be carefully researched. And it is certainly possible to make a bad decision - to air-freight iron ore, to send (initially) fresh seafood by barge. These are indeed bad decisions - but bad business decisions, not morally bad decisions.
From the perspective of various agencies of the state, the collection of fees is a very good thing. Typically these fees will be used for the maintenance and improvement of the relevant structures -- roads, bridges, canals, runways. From the authority's perspective, the more the better: the greater the usage, the greater the aggregate amount of fees collected. It's good business, and it's good for business. Indeed, the authority may even adopt various stratagems to increase usage, and thus increase the collection of fees. Most importantly, the collection of fees is certainly not intended to discourage the use of the facility.
The crucial differences between fees and fines
There are profound differences between fees and fines. Of course there are superficial similarities: Resources are transferred from a business, and to an authority. However, the transaction does not originate in the business's use of some facility. The transaction originates in an authoritative judgment that the business has done wrong, has made a morally bad decision. The imposition of a fine is part of the expression of that negative judgment. Furthermore, the raison d'etre of imposing a fine is to eliminate, or at least discourage, that conduct: by the business fined, and also by other businesses that might be tempted to elect that conduct. To impose a fine is not an effort to raise revenue, like a fee dedicated to the maintenance of some facility. Rather, it is to "reify," to make real, the authority's judgment that a wrong has been committed. And while authorities are delighted to collect more fees, they would be correspondingly delighted to collect no fines -- for having eliminated violations.
A business's paying a fee is a business doing business. A business's paying a fine, in sharp contrast, is a business that should suffer embarrassment, humiliation, disgrace.
A social cancer: When fines metastasize into fees
Grave problems arise if a business begins to consider the imposition of a "fine" - which is an expression of society's moral condemnation of its actions, and ought to result in disgrace -- as merely the payment of a "fee," which is not a moral matter at all. For if the "financial transaction" has been stripped of moral condemnation, the business regards that transgression as merely one of the indefinitely many business decisions that executives must make. And of course the basis for that decision is Return on Investment. So instead of being deterred by the prospect of humiliation, the Bankster decides whether to engage in prohibited conduct solely on the basis of anticipated profits. The crucial decisions have become of this sort: Can we maximize RoI by expanding capacity, or by engaging in "creative accounting?" By implementing a promising but unproven technology, or by engaging in a scheme that is likely unlawful, but that's nearly certain to be profitable? They reason: "If we get caught doing these things, we will still make money, despite our paying the fine, which we now think of as merely paying a fee."
Eric HolderAttorney General Eric Holder announces at the Justice Department in Washington Monday, July 14, 2014, that Citigroup will pay $7 billion to settle an investigation into risky subprime mortgages, the type that helped fuel the financial crisis. 

Now others have noted that executives have come to consider fines as "just another business expense." But what has been missed so far is the deeper dynamic: that decisions about transgressions are being made on the basis of Return on Investment. So when Holder claims that the "size" of the settlement "goes beyond what could be considered the mere cost of doing business," he is precisely wrong. It's not a matter of "size." As regards fines, size doesn't matter. Despite record-setting fines, it is still business. Executives are still deciding whether to violate the law based upon Return on Investment.
The Department of Justice's strategy of negotiating fines on banks, while Banksters emerge unscathed and unchastised, is creating a toxic business environment. After Bank #1 negotiates a fine, but the Banksters admit no guilt, and lose neither their jobs nor their personal wealth, and then Bank #2 negotiates a fine, but its Banksters emerge unscathed, and then Bank #3 does the same: Well, so with Bank #4, and Bank #5 . . .. Indeed, the more "successful" that Justice is in this strategy, the more likely the Banksters are to consider their bad acts as "merely business." So quite perversely, this "success" transforms what was intended as a deterrent, into an incentive. It encourages precisely the executive decision-making that we sought to prevent.
How can we clean up this business environment? How can we "re-orient" the thinking of the Banksters, so that the decision whether to break the law is no longer based upon anticipated Return on Investment? Only by the credible threat of criminal prosecution of the Banksters -- as I argue in the companion piece next week.

Thursday, April 23, 2015

The Financial Crisis for DUMMIES

from youtube

Author Michael Hudson on Young Turks  

An easy to understand overview of the financial meltdown 

Thursday, April 9, 2015

Papantonio: Bankers Warn Dems To Shut Elizabeth Warren Down


— March 29, 2015

Since taking office in January of 2013, Senator Elizabeth Warren (D-MA) has made a name for herself with her fiery takedowns of big banks and the regulators who failed to keep those big banks in check. For example, back in 2013 she asked a panel of bank regulators whether or not ‘too big to fail’ has become ‘too big for trial.’ Comments like that have made many Wall Street enemies for the senator, but that is certainly a sign that she’s on the right track.
As it turns out, some banksters are actually thinking of boycotting the Democratic party because of her. All of this comes as progressives attempt to line up a liberal alternative to Hillary Clinton in the 2016 presidential elections.
What kind of impact will Wall Street’s boycott have on the 2016 race, and what should it tell us about politics in a post Citizens United world? America’s Lawyer, Mike Papantonio, discusses this withRichard Eskow, senior fellow at the Campaign for America’s Future and host of The Zero Hour.
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Thursday, April 2, 2015

Here’s Why Ocwen Financial Corp Stock Is Trading Down Today


Here’s Why Ocwen Financial Corp Stock Is Trading Down Today

Here’s Why Ocwen Financial Corp Stock Is Trading Down Today

In a press release after the market closed on Monday, Ocwen Financial Corp (NYSE:OCN) announced that the New York Stock Exchange (NYSE) Regulation, Inc. sent a letter to the company on Wednesday. It clearly stated that the company was not in compliance with the standards required for continued listing in NYSE as it failed to file Annual Report on Form 10-K for the year ended December 31, 2014. The stock is trading down by 3.07% at $8.53 as of 8:57AM EDT.
Ocwen, being not able to meet its obligation, remains unclear about when it will be able to file the 10-K. The company said that it was unable to make disclosures on time because it focused on the analysis of Home Loan Servicing Solutions Ltd’s (NASDAQ:HLSS) ability to continue providing funds for new servicing advances.
HLSS is Ocwen’s affiliate that provides finance for the purchase of its mortgage-servicing rights. Ocwen believes the review and focus on HLSS was crucial, as it notified that the company might face substantial negative impacts on it financial position, if HLSS fails to finance new servicing advances.
The company stated: “The Company requires additional time to prepare information related to its ability to operate as a going concern.” Normally, the process of delisting a company by NYSE takes about six months or even more. This time-frame might prove to be an opportunity for Ocwen to clear all the queries in the auditors' minds and disclose its financial statements.
Ocwen's disclosure of receiving the deficiency letter clearly made significant impact on the trading price of its stock, as it went down about 5.11% in pre-market session. Since the start of the year, the stock has experienced 42.26% decline at average daily volume of 7 million shares.
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