Gretchen Morgenson and Louise Story have a must-read article in the New York Times on an important aspect of our two-tier justice system, in which only little people seem to be subject to the full force of the law. The article describes how, starting with the Bush Administration and continuing under Obama, the Department of Justice decided to exit the business of prosecuting suspected corporate criminals.
This section is stunning:
But by 2005, a debate was growing over aggressive prosecutions, as some business leaders had been criticizing the approach as perhaps too zealous.
That May, Justice Department officials met ahead of a session with a cross-agency group called the Corporate Fraud Task Force…
In the meeting, the deputy attorney general at the time, James B. Comey, posed questions that surprised some attendees, according to two people there who asked to remain anonymous because they were not supposed to discuss private meetings.
Was American business being hurt by the Justice Department’s investigations?, Mr. Comey asked, according to these two people, who said they thought the message had come from others. He cautioned colleagues to be responsible. “It was a total retrenchment,” one of the people said. “It was like we were going backwards.”
This is ass backwards. First, it is of absolutely no concern to a prosecutor what the impact of his work is on the quality of life of criminals. Would you ever hear a prosecutor say, “Gee, we better not bust that drug dealer. His mom would be distraught, and think what it would do to his kids”? Prosecutors are in the business of enforcing the law. If there is something wrong with the law, that’s a different question, and remedies should fall to the legislature (but we’ve been plagued with an awfully creative Supreme Court). A ttorneys general do not have social or economic engineering as part of their job description.
Second, American business is hurt by the failure to investigate corrupt and potentially criminal activities. The failure to go after bad actors puts the good guys at a competitive disadvantage. Want to give American corporations a lousy reputation? The best way is to enable crooks. Honest businessmen will be under pressure to match the growth and profits of the miscreants.
Subprime lending is the poster child of why this “enable bad businessmen” idea is a horrorshow. All the leaders in that business, Countrywide, New Century, Indymac, were criminal enterprises. They engaged in consumer and investor fraud, and not just one scam, but multiple scams. They left smoldering wreckage across the economy, imposting costs on individuals and enterprises that were innocent bystanders.
The history of economic development also shows corruption reduces economic competitiveness. We’ve mentioned repeatedly Amar Bhide’s 1994 Harvard Business Review article, “Efficient Markets, Deficient Governance,” in which he pointed out that one of the biggest reasons that the US had such liquid and deep capital markets was that foreign investors felt safe sending funds here due to the tough policing, specifically disclosure rules, prohibitions against insider trading, and rules against market manipulation (if you’ve ever done international deals, foreign investors are marks, so they have legitimate reasons to be worried about being taken for a ride).
Similarly, as the US is sliding into banana republic status, it needs to consider the insight of Lee Kwan Yew, who was the prime minister of Singapore for thirty years and is often described as its founding father. When the island nation gained its independence from Malaysia in 1965, it had nothing going for it: no natural resources, no technology, no world class manufacturers. His strategy was that Singapore could still compete by having a highly educated workforce and having clean government. Yew’s approach to policing citizens is admittedly heavy handed, but his policies designed to forestall official corruption are shrewd. For instance, top government bureaucrats are paid at the same level as private sector professionals (think partners of top law firms). That means no revolving door (staying in government is an attractive career path) and little incentive to cheat (you don’t have much to gain if you are well paid and have a lot of status and power already). He also put in place tough, independent internal audits.
By contrast, look at the effort to hamstring the watchdogs in the Executive Branch, the inspectors general. Morgenson and Story use Beazer Homes, which came under scrutiny in March 2007, as a case example:
Investigators found that Beazer had been offering a lower mortgage rate if buyers paid an extra fee, but then not giving them the lower rate. And it was enticing homeowners by offering down payment assistance, but not disclosing that it then raised the price of the house by the same amount.
Yet the further investigations were held at bay. No Beazer employees or customers were interviewed while Beazer and its law firm conducted their own “investigation”. I wonder how much coaching of executives and staff took place and how many records disappeared. If subpoenas have not been issued, I would assume some targeted file tidying up can’t be construed to be destroying evidence.
And the toughest internal watchdog, the inspector general, was leashed:
A year after the settlement, Kenneth M. Donohue, the inspector general of HUD at the time, raised questions about its handling. He said he was disturbed by the interference by the Justice Department and its calls to stop pursuing Beazer executives so the deferred prosecution deal could be completed. “As a law enforcement official for over 40 years,” Mr. Donohue wrote in a letter to Eric H. Holder Jr., the attorney general, “I have never witnessed a like action in any of my varied dealings.”
In a recent interview, Mr. Donohue, now a senior adviser at the Reznick Group, an accounting firm in Bethesda, Md., said of the Justice Department: “The most important point of this whole thing is the fact that they threatened the HUD office of the inspector general that we would not be allowed to go forward with our investigation of executives if we didn’t agree to their settlement.”
The problem is that while inspectors general have substantial law enforcement powers (for instance, most can execute search warrants and make arrests), they are not full fledged prosecutors; they can subpoena records, but not witnesses. So they are forced to work with the DoJ if a matter rises to a criminal level. So if you have a DoJ that is in “see not much evil” mode, you have a very effective Catch-22. Here is the bland bureaucratic formulation:
David A. Brown, acting United States attorney on the case, said: “What we do is work cooperatively as a team in conducting these investigations. We don’t tell agencies to stand down when they are working as part of the team.”
“Working at part of the team” means “not challenging our decision to do not all that much”.
That isn’t to say the DoJ is doing absolutely nothing. The new business-friendly approach is the “deferred prosecution agreement”, which became DoJ policy in mid 2008 and was used in Beazer. Again from the article:
Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.
Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.
The guidelines left open a possibility other than guilty or not guilty, giving leniency often if companies investigated and reported their own wrongdoing. In return, the government could enter into agreements to delay or cancel the prosecution if the companies promised to change their behavior.
While deferred prosecution agreements had been used before 2008, they had not been formally set forward as an options They were adopted last year by the SEC. The article argues, convincingly, that this change embodies an official posture of going easy on white collar crime.
Fundamentally, this is the same intellectually bankrupt reasoning that also gave us deregulation of financial markets. The push was for more efficiency and the hell with safety. But any real systems designer, be it a software designer, an architect, a civil engineer, will tell you safety is a first order design consideration and efficiency is second. It’s more important than the skyscraper not fall down than it be built for the lowest possible price. Yet what we are doing is the legal equivalent of gutting building codes and hoping for the best.
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Absolutely fascinating approach.
Too bad the DoJ doesn’t really care about the “significant negative consequences to innocent parties unable to prevent it” when those parties are mere voters, though.
Glad I live elsewhere, I guess.
Parenthetically, this attitude can also be found among judges in ‘smaller’ cases:
(One might note that the journalist writing this article had a field day quote-mining the defense lawyer, and probably disliked the verdict.) Furthermore, it is unclear to me why there was a need to keep him out of prison ‘in order to pay restitution’, given that he’s likely living off of his parent’s wealth.
While some judges show the deserving rich the understanding and deference that they are entitled to, some judges don’t get yet the new/old cultural climate:
http://storagemojo.com/2010/06/26/greg-reyes-sentenced/comment-page-1/
«When Reyes got his opportunity to address Breyer, he stood at the lectern silently for a few seconds, and then broke down sobbing. [His attorney] read his statement for him.
“I am a shell of the man I once was,” he read.
Breyer said he was quite moved by the 400 letters sent in on Reyes’ behalf, as well as the financial and emotional support he extends toward others. Yet a message must be sent to executives that deceiving the public markets is a serious crime, Breyer said.
The judge cited one more reason for a prison term.
“White-collar defendants, unlike most defendants I see in court every day, have choices,” Breyer said, adding that he had just sentenced a man to more time than Reyes because he illegally re-entered the United States to see his 5-year-old son.
In two weeks, Breyer will sentence another man whose drug addiction began when his father shot him up with heroin when he was 11.
“What choices did that young boy have?” Breyer said.»
However I still have seen no progress on the numerous convictions that should have came of the hundreds of millions of tax fraud due to backdating options to turn income into capital gains. But tax law is one of those things that are mean to be enforced mostly against the little people, not hero producers, even if sometimes one of them is thrown to the wolves.
On the street that I grew up on in Knoxville, there was a corner grocery store owned by a man named Raymond Holbert and my family were friends with him and even vacationed one year, with his family in Florida.
One day Raymond, walked into the local bar and shot a man dead in front of a dozen people, without saying a word.
He was charged with first degree murder.
He hired the best attorney in Knoxville a man named Ray Jenkins, who had argued cases before the Supreme court.
After a period of time he told the widow, that Raymond felt bad about what had happened, and that if he did not have to go to jail, that he had $25,000 that he would give her. But if he was convicted, that the money would have to be used to support his family.
When at the trial, she testified that he husband and Raymond had a blood fued, and that it was just a matter of time before one killed the other.
The jury returned a verdict of not guilty.
This happened in the late 50s and the 25K would have bought five nice homes. Cars were under &2.000. Raymond did pay up, and the last time I saw him, he was living in a mobil home on a acre of farm land he had managed to keep.
The only reason I ever heard of for the event, was the man had supposedly said something about Raymond, but nobody knew what it was.
The reason I bring this up is, people have been buying their way out of trouble since lawyers were invented.
The difference is Raymond paid with everything he had and he never recovered.
Are the people “corporations” that the DOJ are protecting doing the painful restitution that Raymond did?
I THINK NOT.
The turning point was Enron and the collapse of Anderson.
I’m quite afraid this one won’t be over until some billionaires have bullets in their skulls.
A couple of years ago, I wrote that I didn’t know whether I was proud or ashamed that investment bankers weren’t dangling from the lampposts along Wall Street.
I’ve since decided I’m not proud.
Sometimes I feel as if I need to step away from news and information. I envy the blissfully ignorant. There is just so much that is wrong layered on top of so much else that is wrong, and I find the foundations of things I believed in to either be crumbling or perhaps illusory. It’s not an exaggeration to say that at times I find myself vacillating between dismay and anger to near tears. I think that’s because in the face of it all, I have come to believe that I am near powerless to do anything to set it all right. And if I can’t do anything to set it all right, then surely blissful ignorance is a better (or at least less stressful) choice.
Our politics and our system of laws seems utterly corrupt. And promises of change wind up delivering just more of the same. I no longer believe that these issues will be fixed through the ballot box. I believe that we are to the point that we will have no alternative but to tear it down and build again. The old structure is rotten to the core.
I hear you.
I find myself hoping something big will happen… hoping for some critial mass to say, “Enough! Smash the system!”
I watch the protests in Greece and think, I know how to make chloroform. I could make all those police take a nappy nap with one good throw. Save a few cracked heads.
«Sometimes I feel as if I need to step away from news and information. I envy the blissfully ignorant. There is just so much that is wrong layered on top of so much else that is wrong, and I find the foundations of things I believed in to either be crumbling or perhaps illusory. [ … ]
Our politics and our system of laws seems utterly corrupt.»
On my usual theme that it is voters who are corrupt, here is a very revealing quote from Newt Gingrich from some time ago, one of my favourite quotes:
http://classwebs.spea.indiana.edu/bakerr/v600/a_new_look_at_environmental_poli.htm
«In Germany on the Autobahn there is no speed limit. If tomorrow the Bundestag adopted a 100km, or 62-mph speed limit, virtually every German would obey it. Until, that is, the next election when they would wipe out the current politicians and they would elect the “No Speed-Limit” Party.
Now this is a significant insight that American reformers have neglected for 30 years, and is the great mistake of the Great Society and everything that followed it.
And I don’t want to offend anybody, but let me suggest to you that the American cultural response to the challenge of speed limits has been dramatically different than [sic] the German one. For most Americans speed limit is a benchmark of opportunity. This is not a light insight.
If you have a society where almost every middle class person routinely fudges the law, that’s telling us something. We have laws that matter-murder, rape, and we have laws that don’t matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work?»
I think that in this quote Newt Gingrich is being descriptive, more than approving, of Usian culture.
But clearly this is a worldview that is behind the “don’t make waves” approach of recent federal prosecutors.
I wonder also how many of your remember the case where the Bush administration removed several district attorneys, where many/all of them had a reputation for investigating crimes by politicians even near elections, instead of doing the decent thing and burying the cases.
“It’s the voters who are corrupt”
You’ve got to be fucking kidding me…
Bliss: “On my usual theme that it is voters who are corrupt”
Sorry, but I think Roman’s first paragraph is somewhat more accurate. It’s a favorite rationalization employed to avoid responsibility for actually trying to do something. At least, from my own personal experiences. So corrupt- no. Willfully ignorant- a more likely description.
There is only one solution to your near dispair besides withdrawing from the world. You said you felt “nearly powerless” to do anything. There is hope in that “nearly”. We are all “nearly powerless” but if enough people see, like we do, that the present system needs radical change we can work together with sites like Naked Capitalism to spread that idea and ideas about how to change the system and what to change it to. It’s bleak right now. But one way or another this system must and will change. My solution to a similar dispair, which tends to occur whenever I read Chris Hedges, is to continue to read Naked Capitalism and the comments and similar sources so I can effectively participate in the peaceful nonviolent revolution that will be necessary to create a better system. The first step in a revolution is to realize that we need one. The second step is to banish the idea that it can’t be done. You have already taken the first step.
“I believe that we are to the point that we will have no alternative but to tear it down and build again.”
My sentiments exactly.
Jim
As Yves eloquently put it, this article depicts the continued slide of the United States into banana republic status. The key question becomes the tipping point when Americans in large numbers say enough is enough and begin to organize. But indeed the power structure in this country is and has been corrupt, and I suspect the DoJ policy change had everything to do with finance cartel influence or pressure not to prosecute Wall Street. But as the rich get richer (and the poor get poorer), the banana republic identification becomes more valid with the passage of time. People get outraged about injustice with Casey Anthony yet they are not bright enough to identify or act on injustice with the largest perpetrators of injustice today, the global finance cartel and the power brokers in NY and DC.
«the continued slide of the United States into banana republic status.»
Another type of plantation republic: Dixiefication is the name of the game. A lot of “Southern” values have gone national.
«The key question becomes the tipping point when Americans in large numbers say enough is enough and begin to organize. But indeed the power structure in this country is and has been corrupt,»
The power structure in the USA has been corrupt for hundreds of years. As a major investor once said in an interview, in the 19th the USA did not have the rule of law.
The development has been that voters, which are now almost all propertied and landlords, think that they have joined the rentier upper class and have become accordingly corrupt.
It is more likely that the USA will devolve towards a mass-kleptocracy political culture more like Argentina or Greece (or even Lebanon) than a truly banana republic style one.
Its been a depressing week of blogs. This, and the NYT Rich article about Obama just makes you think there is no democratic alternative. You need a third way, but the system doesn’t really allow for a third party. And even then, you wonder if that would be some sort of Donald Trump tea partier. Where’s the next Huey Long..?!
Alan Grayson’s role model was Huey Long, and since Huey Long wound up dead, when I first heard that, I figured Grayson had a self destructive streak. Although Grayson did a rather spectacular job of shooting himself in the foot with his “Taliban Dan” ad, he was probably going to lose because he was targeted by out of state Republicans (tons of big dollar donations to his opponent) and Grayson had a manner that rubbed a lot of women voters the wrong way (he always polled badly with them).
He is a genuinely irate fellow, sincerely motivated to take up torch and pitchfork. The bulk of his assets are claims on a fraudulent fund.
Actually, he’s self made, and his money came mainly from a business venture. Was a Fried Frank attorney in government contracting (normally a backwater) and made a ton of money starting up a phone card business.
See this from Vanity Fair:
http://www.vanityfair.com/politics/features/2007/11/halliburton200711
He did, IDT was a bonanza, but (I can’t seem to get at it now)
http://www.opensecrets.org/pfds/CIDsummary.php?CID=N00028418&year=2009
I seem to recall 20+M in claims on Derivium in his asset disclosure.
Business insider says it’s 34M, more than half his upper asset bound.
http://www.businessinsider.com/rep-alan-grayson-ponzi-scheme-victim-2009-7
Whether it was actually a Ponzi scheme I don’t know, or whether that affects his prior withdrawals. But if it was me I would not have the patience to nobly sublimate my displeasure as a legislator, there would be blood on the moon.
How about doing away with all that voting stuff, and going back to what democracy really meant for Athenians? That is, switching to sortition instead of elections?
The argument that politicians are “professionals” who would be better than a semi-random man-on-the-street is pretty weak, I believe (at least, the larger sample of potential voters you have). Keep civil service to implement things, but otherwise…
Or, alternatively, if you don’t like the randomness, go for something like Venetian’s had for their Doge elections – including electing president (instead of Doge) for a very long time, and preventing anyone connected to him to be the next one.
There are many, many thick volumes of codes and caselaw covering securities regulation and fiduciary duties of corporations and corporate officers. Yet the laws sit unused and useless and there have been almost no prosecutions in the midst of the greatest financial fraud in history. Why?
I have two explanations for this sorry state of affairs: 1) the idea that prosecuting corporate crime is bad for the stock market, and thus the economy and 2) the rise of the Republicans and the politicization of the enforcement agencies.
There were maybe a thousand convictions during the S&L scandal during the early ’90s, with lots of convictions of bank officers for fraud, for the exact sort of activities that we have seen in the 2004-2008 period, such as knowingly making bad loans to pad short-term profits. And in the 2000s, up until about late 2001, there were numerous civil class actions and criminal prosecutions against a variety of companies, not just Enron and Worldcom but a whole range of tech and biotech companies. Almost every day there were announcements of class actions for crashed stocks and pending charges of insider trading. Then in about 2002 and 2003 the actions almost completely disappeared. Why? One explanation was that the stock market was going up again so there was no financial losses anymore. Another explanation is that insiders wised up and stopped overt insider trading and instead took their money in the form of huge paychecks. But at the time, in 2001-2002, there was a widespread perception in the financial news outlets that it was actually the lawsuits that were responsible for making the markets tank, and not the illegal activities themselves. Somebody, such as the banks, big brokers or the White House, must have applied pressure on the lawyers and the SEC to knock it off, so that the stock market could proceed without these pesky scandals. Lerach, the leader of the class actions, was quietly disbarred and put out of action. The SEC did virtually nothing after Martha Stewart, Enron and Worldcom. (Those who follow the 911 issue will remember that most of the evidence for criminal prosections were stored in Building 7 of the WTC, which mysteriously collapsed that day despite not getting hit by any airplane.) And what do you know, with nothing but good news in the papers, the stock market just happened to take off and kept rising until 2007.
And it is also no coincidence that the rise of the Bushes and their penchant for politicizing government agencies and de-fanging regulatory agencies also greatly contributed to the lack of enforcement by the SEC and DOJ. Some commentators argue that there is a mismatch in resources between the two sides, with the government agencies being outgunned due to low government salaries. But this was not true in the S&L crisis, or even during the prosecutions in the early 2000s. If the state really wants to get someone they can and did. There are thousands of able and willing lawyers who would work for government pay of $80k per year, and if you hire enough of them you can get convictions if you wanted to. All you have to is recycle some of the S&L lawsuits and substitute one set of facts for another. What has instead happened is that a decision has been made at the top not to do any prosecutions. Regulatory captured has occurred at the SEC and DOJ, who are now mere obedient lapdogs of the White House and the big banks.
The “hands off policy” did not start in 2008, it started soon after Bush took over, in 2002 and 2003.
“The Revolution Will Not Be Televised”
Gil Scott-Heron R.I.P.
Responsbile bloggers tell the truth. Depressing as all hell it may be, people are on to the big picture now before us.
«But at the time, in 2001-2002, there was a widespread perception in the financial news outlets that it was actually the lawsuits that were responsible for making the markets tank, and not the illegal activities themselves. Somebody, such as the banks, big brokers or the White House, must have applied pressure on the lawyers and the SEC to knock it off, so that the stock market could proceed without these pesky scandals.»
That’s basically the industrial policy of the USA in the past 30 years: pump asset prices up via an expansion of the financial sector, to enrich the few and create make-believe jobs, to avoid massive unemployment.
In addition this policy has been enthusiastically endorsed by most voters who have been bribed with modest assets in real estate and in shares.
This was planned, here is a “smoking gun” quote by Grover Norquist:
http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=11699
«The 1930s rhetoric was bash business — only a handful of bankers thought that meant them. Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”. And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.»
Every middle class “F*ck you! I am fully vested” voter wants to be rich and retire in luxury to a McMansion. Jerks who want to undermine that dream by enforcing stupid laws are not welcome.
The voters are as corrupt or more corrupt than the elites…
My Dear Blissex;
I would counter with the observation that the ‘Commons’ have been indoctrinated over the years to want to be elites themselves. This society wide Stockholm Syndrome has had the “intended” effect of neutralizing popular reform tendencies. Note the ‘pandering to the base instincts’ policys of the Mainstream Media. Charles Foster Kane is alive and well. To paraphrase the original: “You send me the charts, I’ll supply the policy.”
«have been indoctrinated over the years to want to be elites themselves.»
Ahhh that has been part of the story, the other part has been that the irish/italian/jewish working classes that supported the New Deal politics abandoned them when after the black revolts of the 60s-70s and becoming property owners they started to see themselves as fully vested.
But your word “indoctrinated” has a terrible connotation: that voters somehow cannot be trusted to think with their own head, and are easy prey of manipulation, which is a common position among progressives.
Sure that can happen, but in a republic/democracy either the voter remember that the price of liberty is eternal vigilance, or else they get what they deserve.
Many people think that republican democracies have as goal or consequence to ensure good government, but that’s false: their signal goal and consequence is to ensure that voters suffer the consequences of their political choices. This may lead to better government, but it might not if the voters are corrupt themselves.
Good government cannot be achieved by any institutional arrangement; the alternative, seemingly beloved by Brad DeLong, of government by centrist technocrats, is just a rebranding of government by philosopher-kings of Plato, and has not much plausibility.
Again, the only hope is for the majority of voters to be eternally vigilant, including resisting indoctrination, and to look carefully after their long term interests, without being corrupted by short term temptations.
That’s a pretty ambitious set of requirements, and the problem in the USA is that voters seem to think that in the new plantation economy most of them are going to be masters or at least trusties, and vote accordingly. Too bad for them and for those that are on the same boat.
Two major pieces of evidence: USA voters have massively endorsed the PATRIOT act, the invasion of IRAQ, the TARP and other facilities by re-electing those who passed those laws. All of those are on their heads.
IMHO part of the problem is the false equivlance that business = current management. Because when you fall into that mistake, the idea that fleecing stockholders, bond purchasers indeed anybody who a company has business dealings with is just a short jump away. The problem isn’t the very idea of prosecutorial discression. After all, prosecutors make decisions based on the chance of success, the resources involved in taking a case to trial, the deterrent value of a conviction vs the cost of a trial and incarceration all the time. The problem is that financial crime are regarded as somehow if not “victimless” than as “they had it comming.” They all signed the contract, after all. As if all the parties agreed to material misrepresentation and insider trading. As if government bailouts when the counterparties are connected somehow make the victimization disappear, instead of making us all victims.
“The voters are as corrupt or more corrupt than the elites…”
So, there are as many Good Americans in the contemporary US as there were Good Germans in, say, 1940?
Sounds right.
«The problem is that financial crime are regarded as somehow if not “victimless” than as “they had it comming.”»
In part it is because financial fraud is a wholly American value, where most voters think that it is immoral to leave suckers their money (even if those suckers are themselves, so many Usians are self-hating losers).
In part though it is that in every stage of social organization the actions that are most difficult to prosecute are those performed by the dominant elites, and those that are easiest to prosecute are those of which the elites are afraid.
In the current climate it is surprising that securities fraud is still considered a crime, instead of being merely unenforced.
In more “advanced” countries like Italy activities performed by the prime minister such as accounting fraud, bribery of officials and tax evasion have been largely decriminalized outright. To some extent that’s more honest than having unenforced laws.
“. Would you ever hear a prosecutor say, “Gee, we better not bust that drug dealer. His mom would be distraught, and think what it would do to his kids”?”
http://www.comedycentral.com/videos/index.jhtml?title=tron-carter-s-law—order&videoId=219426
YS:
This is an old story. It goes back to 1986 with the creation of the federal sentencing guidelines. Where has Morgenstern been for 25 years?
Perhaps prosecutorial forbearance is merely a form of blackmail being enacted by the executive branch (one could make the same argument about regulatory forbearance as well), either for the personal gain of people within the administration, or as a general power grab by the executive.
With a recalcitrant congress and a fickle public, it might be tempting to employ the threat of future prosecution to strongarm key players in an industry to “voluntarily” implement a preferred policy that congress is unlikely to enact into law.
I’m not sure which is worse — that public officials are completely under the thumb of business; that public officials are doing the “people’s business” through strong-arm tactics rather than rule of law; or that public officials are solely self-interested actors that violate public trust, rule of law, and ethics to promote their own interests.
Someone’s next spouse, Cotillion conversationalist, golf partner, employer, neighbor, kid’s date, etc come from families of banksters. It’s no real surprise that federal prosecutors don’t really want to put anyone in jail. They’d hear about it the next time they were scarfing a cocktail hot dog at a rooftop party in the HighLine. Embarrassing. Just like the law someone in NY wants passed preventing perp walk photos. Since more … um … non-minorities (yeah, that works) are banksters, those photos would be rather unwelcome beside the kiss-up photos in society pages.
Meanwhile the prosecutors make hay and headlines charging the likes of Barry Bonds, Marion Jones, and Roger Clements with lying about taking drugs. Now I don’t condone lying and some of our celebrities are as entitled as their Wall Street counter parts. But when the corporate types are responsible for the financial ruin of millions of people by fraudulent behavior the DoJ looks the other way and Obama slips them a few billion to help them on their way.
One rule for the people, an entirely different one for the bosses.
When money talks, the perps walk.
Yves,
You are one of the most cynical bloggers out there. (Justifiably so, in my opinion.) But even you are not cynical enough when you write this:
“American business is hurt by the failure to investigate corrupt and potentially criminal activities. The failure to go after bad actors puts the good guys at a competitive disadvantage.”
This is not primarily about the economic efficiency of the entire business sector. It is about stress reduction of managers. Knowing that the Feds will be understanding of any peccadillos means not having to worry about being second-guessed by outside authority as you try to maximize profits for your shareholders. This, not concern with the welfare of the entire sector, is why it is preferred by individuals running businesses. Autonomy.
Given the logic of free enterprise competitive capitalism I’m not sure that this is not a rational calculation.
Complex societies fail. They instigate prosecutorial loop holes. Tax loop holes. Everyone is greedy and dishonest. Everyone hallucinates. The need for honesty and good faith is removed because all the laws and, yes, regulations, undermine just this underpinning to a functioning society, which underpinning is: we have a fair social contract which we agree to. But we don’t agree when the contract has been so consumed by mold that it crumbles. So we don’t agree on anything these days. It is a monster of a mess. And everyone and their dog can find some legal out. It is very depressing. Here’s what we all have to remember – we need each other. When the shit hits the fan, all we will have left is what we started with – each other.
«Here’s what we all have to remember – we need each other. When the shit hits the fan, all we will have left is what we started with – each other.»
This is just on its own ridiculously delusionary.
But a shared sense of civil society does help. I think that the post-WWII USA and other countries had it because both rich and poor served for years during that war, and got to know each other across class and regional lines, and they found each other to be neither vile nor saintly, but mostly decent people with their own issues and qualities. All the same before machine gun fire.
Then there was another great equalizer: the threat of a rain of missiles killing dozens of millions of people, rich and poor alike.
But I think that the overall mood in the USA and other countries is more “f*ck you, I am fully vested”. The rich think of the poor as usable cattle (if exploitable) or parasitic vermin (if not exploitable). There are superior winners and there are inferior losers, and woe be the losers, because their inferiority damns them.
Many winners are smug as to their superiority and spiteful of the loser’s inferiority, and just want to cut them loose .
The goal is a plantation economy or Rio/Calcutta, where there are small islands of stunning comfort and beauty for the winners, and streets in which losers display their inferiority dying in the gutters.
‘All those hired during the Bush Cabal, still work for the justice dept, except Gonzales. ‘ Banks Good! Jesus Good!
Work Sets you Free!
Great post. Vigilance is key. If you don’t have checks and balances and you don’t have motivated overseers (in a web that works to check the overseers), the system will devolve into corruption. It is difficult to investigate the history of human societies and come to another conclusion, I think.
My personal favorite quote from the article was, “Alisa Finelli, a spokeswoman, said deferred prosecution agreements require that corporations pay penalties and restitution, correct criminal conduct and ‘achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.'”
That innocent victims have ALREADY lost jobs, pensions, and faced “significant negative consequences” seems to beyond comprehension here. I wish I could say it’s incredible how obvious their obliviousness is, but this is standard operating procedure.
Yes, why put white collar criminals in white collar jails and suffer the indignities of the electric vibrator chair, caviar past its “best consumed by” date and commoner high end busted escorts (ones that don’t even have a fake european accent).
They will just associate with other white collar criminals and learn to be better white collar criminals and develop a network of white collar criminals once they are released back to society in 90 days.
Better to let them cope with society as they see fit like the rest of us.
Egads. I am starting to sound like such a libby.
We should also consider that being interred for 90 days does give them ample time to sign the next Q report once they are released back to their jobs, but not to read it.
So we are now dependant on corporate control fraud culture to have adequate inertia to survive an entire quarter, with out the big guy at the helm.
That gives me cause for concern.
Almost forgot. Confining someone like Mozilo to a tiny suntan booth for hours on end is unhealthy, could be considered torture – sort of like water boarding without the beach, and there was a proposal to tax sun booth usage in one of our “balance the budget” plans. If one’s tax accountant fails to find a loophole here, that could certainly drive one into insanity.
That the Anti-trust Division at Justice became moribund under Bush was well known at the time. As far as I can tell, it still is.
Comey’s role is interesting. He was portrayed as a kind of hero for refusing to re-authorize Bush’s illegal wiretapping episode. He was the acting AG during the famous attempt by Gonzales by White House Chief of Staff Andy Card and White House counsel Alberto Gonzales to get Ashcroft to sign off on the program while he was in the hospital with gallstone pancreatitis. But as some of us pointed out later, Comey otherwise endorsed most of what Bush was doing at the DOJ. This is another example of it.
It is also another example of what I call the Mukasey principle, which now also applies to the Obama Administration, and that is no one would with a shred of integrity would work for either Administration.
There are various levels of inspectors general. Even those with greater independence tend not to be very aggressive. Those that are generally don’t hold their jobs for very long. So when an inspector general criticizes anybody or anything, a good rule of thumb is to multiply the severity of the problem by 10.
See no evil, hear no evil, speak no evil and…well…this. ;o) Sorry, couldn’t resist.
I get it. Ihey are trying to make monkeys out of us!
That was the most infuriating article I’ve read in quite some time. How can people be so stupid to think that criminals will angelically police themselves? What is their reasoning – do they actually think that should a CEO or top-executive commit a crime that would lock him behind bars for 30 years, he’d then freely turn himself in at the earliest possible convenience? I guess they actually think he would be otherwise so guilt ridden that he wouldn’t be able to enjoy his millions in false profit bonuses? What delusional fantasy land are they living in? UGH.
YS “…American business is hurt by the failure to investigate corrupt and potentially criminal activities. The failure to go after bad actors puts the good guys at a competitive disadvantage. Want to give American corporations a lousy reputation? The best way is to enable crooks. Honest businessmen will be under pressure to match the growth and profits of the miscreants.”
Law Of The Jungle 101.
How the frontline DOJ people cannot see the logic of this is beyond me. (The upper echelon apparently already bought and paid for). In my profession, the tax arena, this is precisely how things are playing out. Sometimes we have to turn down potential clients because of their ridiculous expectations about what is or isn’t appropriate. Having to do that more frequently these days.
Don’t get me wrong, we work as hard as anyone to understand tax law, so we can help clients take advantage of every opportunity. But we strive to have substance and form on our side when we take a position, unless there’s no precedent and the law is grey , in which case we make sure to at least have substance on our side.
Unfortunately, IRS has been forced over the years by Congress, from both a rhetorical and budgetary perspective, to ease up on enforcement. From our experiences and those of some of my colleagues, the consequences of that negative Congressional influence have become glaringly obvious. Quite frankly, taking outrageous positions and playing the audit lottery seems to becoming a national pastime.
The proof in the pudding regarding Yves’ comment above, is in the sales tax arena. In the old days(more than 15 years ago), our clients would periodically be contacted by a sales tax auditor. We’d schedule a day for them to come out to our office. And if nothing significant was uncovered they would wrap up the audit and that would be the end of it.
Then… along came the internet …and everything changed. States became aware that they were losing a ton of sales tax revenue via online purchases. But there was no effective way to police those transactions at the time.
So the states’ responses were logical-increased enforcement. I still recall the first call I received somewhere during the mid 1990’s from an sales tax auditor. As usual, I asked what day would he would like us set aside for use of our conference room. His response was “I need at least a week”. He then requested a copy of our client’s transaction registers. So I said “OK, let me know the sample of transactions you’d like to test and we’ll get you the supporting invoices for those.” His response – “I want to see them all”. We had to have stacks of boxed records from the client shipped to our location. Under that scenario, it became obvious thatthe auditor was going to find something – and he did.
The client missed paying tax on a number of purchases (due to a combination of carelessness and willfulness). The tally was significant. Towards the end of the audit he asked if he could extrapolate the results of the particular auidt year over the other 5 audit years on which the SOL was still open? Or would we prefer that he audit those years also? Talk about being caught between a rock and a hard place! While we were able to negotiate away a large portion of the I & P, the bill was still quite large. Needless to say, the client management team learned its lesson and from then on had much greater interest understanding and following the rules. Multiply this scenario by the tens of thousands of businesses across our state.
Our experience now is that most businesses almost always pay the appropriate sales tax. Most are quite familiar with the rules and comply dutifully. Even many of the worst income tax offenders seem to understand sales tax exposure and pay what is required. The side benefit has become that many of them have become proactive enough in staying abreast of the rule changes and paying the tax, that they no longer need representation during the audits. This confidence allows them to handle the audits themselves. And our job has shifted to being more of advisor in keeping them up to speed. (Which is actually a good thing for us too because sales tax audits generally don’t provide the same opportunity to utilize higher level skill sets as does representation for business income tax audits.)
So I’ll ask again. How is it that the frontline DOJ folks don’t get the importance of actual enforcement?
Thank you Yves for this extremely important article, and all the comments to it. It paints a bleak picture and something will have to be done about it, however good or bad. Lack of respect for law has permeated society. A country armed with 200-300 million guns and no legal or moral code should be an interesting place shortly, sort of a version of “last man/woman standing.”
You should also review the memo from Sullivan and Cromwell, which is cited in the Gretchen Morgenson and Louise story.
“If [President Obama] isn’t going to use his
[Justice Department] I’d like to borrow it
for a time.”
Couldn’t find a better place to post this comment. It’s about the whole site, not just this post.
I subscribe to Naked Capitalism in Google Reader. It’s one of my daily reads.
But the ads at the bottom of the page, that overlay the content, are getting so annoying that I am starting to avoid clicking into the NC posts and either click on internal links in the article, or search for some other source for the content.
They are self-defeating.