William Black on the deregulated race to financial ruin

On Saturday [Oct 6^th] William K Black, Associate Professor of Law and Economics at the University of Missouri-Kansas City and a former bank regulator, spoke again with Max Keiser on the second half of his tri-weekly Russia Today programme, Keiser Report.

The discussion ranged from how major financial criminals are protected by Deferred Prosecution Agreements under the disastrous tenure of Lanny Breuer as Assistant Attorney General for the Criminal Division of the US Department of Justice, to how, more generally, the City of London became such an important player in the international deregulatory race to the bottom:

Let’s begin with what Black had to say about the UK Financial Services Authority (FSA) and their part in the London Interbank Offered Rate or Libor Scandal [19:30 min into the show]:

Max Keiser: We recently saw the rigging of global interest rate markets Libor. The FSA says they will in the future prosecute bankers involved in rigging Libor. The overwhelming evidence, including all of the emails, suggests this was a prosecutable racket. Why can’t they prosecute the crime that has happened in real time, right now?

William Black: You used the word ‘can’. It has nothing to do with ‘can’. ‘Can’ refers to ability. This is a problem of ‘will’… You can’t create a competition in laxity, which is exactly what the FSA deliberately did. It competed with the Securities and Exchange Commission in the United States [SEC] and the CFTC, the Commodity Futures Trading Commission, and of course Congress, to who can have the absolute weakest regulation.

If you do that, you’re never going to have regulatory leaders with backbone. And you’re never going to have staffers who often have backbone, because why would you go to work for an entity that exists to serve the banks as opposed to serving the people. Good people will leave in those circumstances. And so what you’re seeing is the FSA – and by the way the Bank of England – continue to be the land of the invertebrates. Where if you have any backbone, you’re not allowed.

MK: [referring to the party political conferences] None of the [party] leaders on the local television address the fact that London is a cesspool of regulation – that it won the competition to have the least biting regulatory framework and that’s why the global economy and financial markets are in such disarray…. How are we going to rectify this, what do you suggest?

WB: Well, first let’s think out that if you have a competition in laxity, everybody loses. Everybody ends up with crappy regulation, and that’s exactly what happened throughout the Eurozone and in the United States. The only way to win a competition in laxity is not to engage in the competition.

Let me give you two specific examples, from a conference I was at just last week in Baltimore. Brooksley Born, one of the heroes who issued the famous warning about Credit Default Swaps, and got swashed by that bi-partisan coalition of the Clinton administration and Alan Greenspan, and Phil Gramm said that as soon as the FSA got created, then leaders – senior leadership of the FSA – began coming to the United States to industry conferences, and saying you should leave America and do your deals and relocate in the City of London, because we will give you weaker regulation.

And then a guy who had been with the Securities and Exchange Commission for many, many years said that’s exactly what happened on Initial Public Offerings, IPOs. That the City of London officials began coming to the United States, to the trade meetings, and saying do your IPOs in the City of London instead of Wall Street because we will look the other way while you do this.

And so I’d only make one minor thing about your point. Of course the Labour Party on finance issues is not a party that is remotely of the left. It is a party of what would be, in US terms, ‘the extreme right’. The Lib-Dems were every bit as bad, and the Conservatives, if anything, are worse. And so there has been no choice in the United Kingdom for over a decade, if you actually wanted to vote for someone who’s really going to regulate. So that’s what you have to change. And one of the British parties has to be changed into a party that represents the people… instead of representing the huge financial institutions.

Because you’ve just seen what happens to a nation that wins a competition in laxity; it loses its moral soul and it has repeated financial crises, because what it will attract is the worst pond scum throughout the world, and it will have regulatory leaders who will stand by while the pond scum destroy the nation.

In the first half of the same interview, Keiser asks Black to talk more specifically about Lanny Breuer, the head of the Criminal Division of the US Department of Justice, “caught boasting of his love for Deferred Prosecution Agreements”.

In fact, William Black had already written an extended article tackling the same subject back on September 17^th. Entitled “Fiat Justitia? Breuer fires blanks on elite financial frauds”, Black’s piece entertainingly summed up Breuer’s recipe for disaster as follows:

Beurre blanc is the classic white butter sauce of France. Americans who hate the French claim that they became adept at saucing to cover up the rot in their meat in earlier times. A beurre blanc does not remove the rot. It masks the bad taste and the bad color of bad meat. Indeed, the sauce makes the dish even less healthy. If the rotten meat doesn’t get you, the sauce’s cholesterol will.

“Breuer blanc” is the classic white butter sauce served by the increasingly oxymoronic Justice Department to cover up the rot in elite American banksters. Lanny Breuer runs the Criminal Division during the continuing cover up of the greatest and most destructive epidemic of elite white-collar crime in our history. The ingredients of “Breuer blanc” consist of a generous portion of inaction and a large dollop of hypocrisy all emulsified with esters of excuse.

Black then goes on to explain how all of the last three US administrations, each having been bought off by huge political contributions, have been equally irresponsible in allowing “elite financial firms and their senior officers to commit fraud with near impunity”:

It was a travesty and a national tragedy that [Attorney General, Eric] Holder and Breuer (and their predecessors) have failed to do their duty to hold the banksters accountable. It is beyond comprehension that Breuer is bragging about his failure to prosecute elite corporate frauds. […]

The reality is that prosecutions of financial fraud fell dramatically under Bush and declined further under Obama. Breuer has not indicted a single elite Wall Street bankster whose frauds drove the crisis. I have been unable to find evidence that he has even conducted grand jury investigations of the elite banksters who drove the crisis. (Grand juries are secret, but they generally become public because the witnesses can disclose their existence.) Even if a few grand jury investigations of the Wall Street banksters have occurred, there cannot have been more than a handful of investigations worthy of the name. I know of none, and that includes Countrywide, WaMu, IndyMac, Lehman, Merrill Lynch, Goldman, the huge mortgage banks, and Citicorp.

And when it comes to the use of Deferred Prosecution Agreements [DFAs], Black begins by quoting what Breuer himself described as “the focus” of a speech he made on September 13^th to an audience of New York attorneys, before then adding his own response:

“Tonight, I want to focus on one aspect of our white collar criminal enforcement in particular: the use of deferred prosecution agreements, or DPAs. Over the past three-and-a-half years, the Department of Justice has entered into dozens of DPAs, and non-prosecution agreements, or NPAs. I’ve heard people criticize them and I’ve heard people praise them. What I’m here to tell you, is that, along with the other tools we have, DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.”

You will find the statement at 7:37 min into this youtube clip of Breuer’s speech:

Click here to read a very tidy official transcript of Lanny Breuer’s speech posted on the US Department of Justice website.

William Black’s response:

Breuer’s claim is preposterous. Here are key facts that show he is serving us tripe. First, he is correct that we have just run an experiment for over a decade – we no longer typically prosecute elite U.S. corporations that commit felonies. We have dramatically reduced financial fraud prosecutions and in the cases where the Criminal Division still troubles a felonious corporation it typically negotiates a DPA, or more pathetic still, a NPA. A DPA rarely leads to a prosecution of the corporation, so it too is really an agreement not to prosecute. DPAs and NPAs are primarily used for non-elite corporations, so when Breuer claims “dozens of DPAs” one should not assume that his Criminal Division is taking on vigorously fraudulent elite corporations, particularly elite U.S. corporations that commit felonies.

Far from proving that DPAs caused a “sea change in corporate compliance,” a December 2009 GAO study found that the Justice Department did not collect data on DPAs until 2009, had no performance measures for “corporate compliance,” and had no reliable information on purported improvements in corporate compliance.

William Black concludes the article as follows:

Breuer is a lawyer, not an economist. A lawyer should know better. We have known for millennia that the way to provide justice is to follow the maxim: Fiat Justitia; Ruat Caelum (let justice be done, though the heavens fall). The maxim may sound impractical, but long experience has demonstrated that the best way to prevent the heavens from falling is to always provide justice and ignore the claims that the elites should be given special favors lest the heavens fall. Breuer, Holder, and Obama are all lawyers who were taught that the temptation to create a special, favorable set of rules for the elites is not simply unjust but also the surest means of destroying a democracy, an economy, and a society. Politics, of course, teaches the opposite lesson and Breuer, Holder, and Obama became politicians a long time ago. Politics is raw, serving up crudités variées. Breuer’s speech coaching defense counsel on how to provide him with the excuse to avoid prosecuting elite corporate felons was crude and unworthy of any representative of the Department of Justice.

Click here to read William Black’s complete article.

And here’s what William Black said to Max Keiser [13:40 min]:

I was appalled. I, you know, used to help the prosecutions during the savings and loan [crisis] days. And I was a Justice Department lawyer, as was my wife. And Lanny Breuer set out a roadmap on how people could avoid getting prosecuted their elite white-collar criminal banks that caused the financial crisis. And the way he said to do it is hire yourself an economist and be really ‘too big to fail’ and claim that a lot of innocent workers are going to lose their jobs if you take any prosecution against my criminal bank. You know, in other words you hold the workers hostage. […]

Well, the deferred prosecution means non-prosecution, and everybody knows it means non-prosecution. And the one exception proved the rule. Arthur Andersen was offered a third Deferred Prosecution Agreement and refused it, and went to trial and lost… and so you know there’s no more Arthur Andersen. But the lesson the justice Department learned from all of that is: Oh my God, we can’t actually prosecute anybody large, and so they essentially don’t prosecute large organisations anymore. […]

This is all about removing the deterrents. This is all about allowing people to commit the crimes with absolute impunity. And this was more than a wink-wink, nod-nod… This is how you give me the excuse not to prosecute. And it was wonderful! Breuer said: Now I want to warn you, this approach won’t always work…

Not always – just all of the time…!