Matt Stoller is a fellow at the Roosevelt Institute. You can follow him on twitter at http://www.twitter.com/matthewstoller
In a hearing last week titled “Examining the Settlement Practices of U.S. Financial Regulators”, various regulators tried to justify their practice of settling with financial firms and not requiring them to admit wrongdoing. In that hearing, Federal Reserve General Counsel Scott Alvarez, stated that only seven of the roughly one thousand enforcement actions taken in the last decade were resolved without consent.
The vast majority of the Federa Reserve’s formal enforcement actions are resolved upon consent, which is fully consistent with the goal of resolving supervisory concerns with bank management quickly and firmly. In crafting enforcement actions that are entered by consent, the Federal Reserve typically sets out summary recitations of the relevant facts in “Whereas” clause provisions; however, like our fellow banking regulators, it has not been our practice to require formal admissions to the misconduct addressed in our enforcement orders given the remedial nature of our enforcement program. Requiring admission of fact and legal conclusions as a condition of entering into a consent action is likely to have a deleterious effect on our supervisory efforts by causing more institutions and individuals to challenge the requested relief in contested administrative proceedings, which typically takes years to reach final resolution, and which could delay implemenattion of necessary corrective action.
In other words, the Federal Reserve will only punish banks who break the rules if those banks consent to punishment. This attitude is pervasive among all regulators. Here’s the Office of the Comptroller of the Currency, which regulates among other banks JP Morgan Chase.
Obtaining an institution’s consent to an immediately effective order helps ensure that its problems are addressed at a stage when rehabilitation is still possible, thus helping the bank avoid failure…
The longstanding practice of permitting the bank or individual to neither admit nor deny wrongdoing allows the OCC to get an enforceable order in place at an early stage of the proceeding, and encourages compliance with the enforcement action and immediate correction of any deficiencies that need to be addressed. Because consent orders are made available to the public, requiring an admission of wrongdoing would prolong settlement negotiations and increase the number of respondents who choose to litigate the merits of the action.
Of all the regulators testifying, the Securities and Exchange Commission’s enforcement chief, Robert Khuzami, was the most embarrassing, announcing the SEC would be making a change to its practice of not forcing corporate actors to admit wrongdoing.
In light in the special situation where an SEC civil action may also involve a parallel criminal action, senior officials in the Division of Enforcement recently undertook a review of the “neither-admit-nor-deny” settlement policy. While reaffirming the policy more generally, as a result of this review, the Division, after consulting with the Commission, modified its policy to eliminate “neither-admit-nor-deny” language that could be construed as inconsistent with admissions or findings made in a parallel criminal proceeding. In other words, it seemed unwarranted for there to be a “neither-admit-nor-deny” provision in those cases where a defendant had already admitted to, or been criminally convicted of, conduct that formed the basis of a parallel civil enforcement proceeding.
In other words, if the company has already admitted guilt in a criminal proceeding, where the evidence required is usually much heavier, then the SEC will ask the company to admit guilt in a civil proceeding. Khuzami spent most of the hearing talking about how the SEC was getting most of what it wanted out of these settlements, anyway, without an admission of guilt. This is, of course, nonsense. I pinged Bill Black about why it’s important to make companies admit wrongdoing, and here’s what he said.
(1) It demonstrates that what has occurred was a fraud (otherwise they deny it after the fact and insist they were simply being extorted), (2) the plea of guilty (as opposed to nolo contender) can be used by civil plaintiffs (and in administrative enforcement actions) to invoke “collateral estoppel.”” The defendant is estopped from denying their guilt in the civil action. This makes it immensely easier for victims to recover, (3) offenders, particularly multiple offenders, are treated differently under the laws and rules. The pleas can be used under RICO to establish a pattern of racketeering, under the sentencing guidelines to secure a tougher prison sentence, and to argue in favor of punitive damages and asset freeze orders.
The hearing was about District Court Judge Jed Rakoff’s refusal to sustain the Citigroup settlement with the SEC. What was interesting about it, from a political standpoint, is that all three witnesses, including the witness brought in by the Democrats, opposed Rakoff’s move and supported the SEC’s position. And one of the top Democrats on the committee, Carolyn Maloney, gave a long-winded opening statement in which she basically took the position that forcing an admission of wrongdoing was just too hard. In other words, many high-level Democratic politicians, for all their gnashing of teeth about the need for regulation, aren’t being truthful. They don’t want regulation, they want to be seen as wanting regulation. And the Republicans, while they want to be seen as the party against regulation, are actually quite happy having regulators they can work with, regulators who protect the banks from state or local level action.
The argument over regulation or deregulation, in some sense, misses the point. We need regulation, obviously. But we also need strongly principled regulators. And neither Barack Obama nor Mitt Romney has any appetite for that.
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Yes.
And last I checked, the approval rates of Congress were spiraling down around 17%.
Really? Congress’s approval rating is that high?
And Oh Goody! We can expenct 7/10 new faces after this election cycly!
(of those standing)
Right?
… And the Republicans …
Puh…lease already; there is no R, there is no D, there is only Global Financial Terrorists
Love
Matt, you said;
“The argument over regulation or deregulation, in some sense, misses the point. We need regulation, obviously. But we also need strongly principled regulators.”
I’d add that we need a justice system that treats the banker who steals millions much harsher than the man who steals a loaf of bread. Instead its exactly reversed. When was the last time a petty criminal was taken to court and not required to plead guilty or be overwhelmed with legal fees and a court battle? Lets start with becoming a nation of law again, equal law for everyone, and fraud, corruption, and the rest of what the 1% indulge in would take care of itself.
I would argue that we need a responsive to the will of the people electoral process, and that until you have it your ass is wasting time sucking useless remedial Santa Clause fantasies.
Dear Santa,
We need fox regulation, obviously.
But we also need strongly principled fox regulators.
Please tell the foxes to stop eating us poor chickens.
Thank you Santa,
Remedial Retardo
Deception is the strongest political force on the planet.
IOTBPatriot? Is that you?
The squid is on the ball today!
Deception is the strongest political force on the planet.
If you remember, that’s what Les Miserables and all of Dickens were all about. The more things change…
Actually, the letter would be from the fox, asking Santa to regulate them, oh, and here’s the regulations we wrote for you, and here’s a fox who volunteered, kthxbye!
Regulations bestow competitive advanatge.
Criminal Laws, however, are much more interesting as a tool to moderate behavior.
“In other words, if the company has already admitted guilt in a criminal proceeding, where the evidence required is usually much heavier”
And if all the resources were put into criminal investigations, with appropriate revisions to the criminal code for what were formerly civil offenses and incorporation of strict liability, you might moderate behavior much more.
Want a dedicated regulator? The criminal court system would be much more effective at ensuring financial fraudsters get the perpwalk and jailtime.
The concept of civil actions are becoming more and more irrelevant in the age of corpo-fascism.
These three axioms are the basis for any/all Law
– Do no harm to others, nor their property
– Do not breach the peace
– Do not use FRAUD in your contracts
Can we all atleast agree to these 3 simple axioms?
Love
It’s a good starting point. I’d want to make sure the contract attorneys could not wiggle around them.
I guess i was just continuing my thoughts/diatribe from another recent thread here ;-) (in response to something you wrote)
http://www.nakedcapitalism.com/2012/05/recovery-begins-when-addiction-ends-an-open-letter-to-jamie-dimon.html#comment-718833
Love
“Lets start with becoming a nation of law again, equal law for everyone, and fraud, corruption, and the rest of what the 1% indulge in would take care of itself.”
Mr. Hoff, we have never been a nation of equal law for everyone, and if you think we have, then you don’t know our history.
It is too late for regulation. And how will an utterly corrupt political system permit the rule of law to any degree, let alone “equal law for everyone”?
We need systemic change, at every level. To begin with, we will have to seize the money power from the international bankers who intend serfdom for the 99% and are close to bringing it to fruition.
Lets not forget the SEC policy/practice of destroying investigative files.
Although I read that the practice was illegal, it has apparently been swept under the rug because I haven’t heard anything about it since it came out many months ago.
“SEC policy/practice of destroying investigative files. ”
An enforcement arm gone mad.
Tasked with smoothing over public reaction once the story hits the papers.
Quintessentially an Insider Trading arm of the federal govt.
I’m not sure “principled” is the word I’d use. It would be nice if they simply had the skills required for the spectrum of remedies. What do you think the job/appointment interviews for these positions are like?
The skills to implement remedies are not so difficult. Litigation is time consuming and expensive, but not exactly rocket science. Regulatory enforcement is more about will and appetite for risk than aptitude.
In our very distinct class system, most Democrats, Republicans and top regulators belong to a social 1% club. Solidarity among all the above groups rules. For regulators or legislators punishing criminal activities of one of their own is unacceptable unless the case is the equivalent of serial killings.
This might be an extreme variation of what you said.
HARSH LANGUAGE!!
http://shoqvalue.com/george-carlin-on-the-american-dream-with-transcript
Oh dear, the f word. Fuck, fuck, fuck, fuck the Federal Reserve, there fixed it for ya.
“That’s funny. I don’tcare who you are.”
It’s a fine transcript, but a scan of the headlines on the site makes the partisan identification pretty clear.
Chris Hedges won one for our team recently. Let’s hope the work being done by the circle of friends here has a favorable outcome.
Rakoff was exactly right in what he did, and mandamus was a slap to the people, not him.
With these fine-only, no-contest arrangements, there’s no
factual record of wrong-doing: merely allegations.
There are commonly two ways to establish a factual
record of wrong-doing:
(a) A freely given, non-coerced admission of guilt,
(b) a guilty verdict following a trial.
These light-touch regulators live with a “strange”
world-view, in my opinion.
J.M.H. has a point right on the mark. I would add another, make and uphold the law, that when ever the bank[s] engage in the crimes that are being foisted upon the citizens -the taxpayers – rgwn, like the “crack dealer” who got sentenced to 10 times what the plain coke dealer got, with I might also add, a clause, full restitution from the culprit, right down to his/her socks.
While one in three black men has a record, mostly for petty drug use. F this shitstem for a lark.
This non-admission of guilt isn’t just an issue with banksters and their so-called regulators. It is also standard practice for the SEC with non-financial companies who pay paltry fines for criminal activity but “neither admit or deny guilt”. It makes financial sense for companies to disregard the law; on the slim chance they ever caught the worst that will happen is a fine that’s typically much less than what they made through the criminal behavior.
I don’t think you will ever be able to regulate any institutions that are so large, and/or that take market positions that are so large, that they can turn themselves
into weapons of mass financial destruction.
Such institutions will always be in a position to put you at a disadvantage and leave you open to the iniquities of whatever moral caliber of politician (or regulator) you happen to have in office. (I’m not optimistic).
What that means is that there is a kind of “to regulate or not to regulate” issue here in the sense that you can attempt to merely re-regulate the behemoths (and fail), or you can break up the behemoths first and then re-regulate smaller institutions that it is actually possible to regulate.
I think the liberal Big Government bias is generating a kind of hubris with regard to the regulatory capabilities of the government that the evidence has not borne out.
Being defensive about it really does not strike me as being productive.
The first object of a new generation of regulation ought to be taking account of regulatory limitations with the aim of ending entirely the era of Big Bank as big gambling casino.
“The pleas can be used under RICO to establish a pattern of racketeering, under the sentencing guidelines to secure a tougher prison sentence, and to argue in favor of punitive damages and asset freeze orders.”
Ha Ha Ha! I laughed so hard reading this that I nearly fell off my chair! Tell me again… When was the last prison sentence imposed, tough or otherwise, except for low-hanging fruits? I didn’t hear anything about it! Did they forget to tell us?
Laws are for the little fish, just like prisons. Why oh why do protest too much.
I don’t know what everyone is complaining about. This all seems fair to me.
After all, if I were to break into my neighbor’s house and steal $1,000, I’m sure that if I were caught the police, prosecutor, and judge would all be perfectly happy to have me py a fine of $100 and neither admit nor deny my guilt. At least that way they wouldn’t have to shoulder the expense, time, and trouble of going to trial, proving my guilt in front of a jury, and then putting me in prison.
And best of all, I could go back home and steal $1,000 from another neighbor.
Even better, you can steal $1000 from your neighbor, lend it to them, steal the rest of their money, and then take their house when they can’t pay back the loan.
Well it works for me guys!
“The vast majority of the Federa Reserve’s formal enforcement actions are resolved upon consent, which is fully consistent with the goal of resolving supervisory concerns with bank management quickly and firmly.”
While providing absolutely ZERO deterence to the same actions being committed again and again by the same firm because it is far more profitable to do so and simply pay the piddling fine with no other repercussions.
HUGE FINES and JAIL TIME!
[…] The longstanding practice of permitting the bank or individual to neither admit nor deny wrongdoing…
Apologies, but i can’t seem to read beyond this … my brain is turning to mush when i try.
Love
What did you expect? Here is answer.
CONGRESS AND WHITE HOUSE ARE OWNED BY $$$$$$$$$$$$$$$$$.
GET $$$$$ OUR OF OUR GOVERNMENT
IT IS A SHAME THAT OUR SENATOR WAS A FRESHMAN AND HAD 1.3M IN HIS CAMPAIGN PIGGY BANK ONLY A FEW MONTHS AFTER BEING ELECTED
Max Baucus—Chair Senate Finance Comm—70% poll for Public option–
Bill hit his comm— first act—removed public option for debate
shocked me—I trusted him. Zap. Report=he had $1,900,00 in his campaign kitty from health care industry..
The millions spent by thousands of Lobbyists expect favors. Buy them.
We need a Washington revolution and kick all out
Obama lost me with Gay Marriage. Totally disgusted. I am in a position I trust no one in Washington. I know few are very good but $$$$$$$$$$$$$$$$$$ BUYS ANYONE
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ OUT OF GOVERNMENT—— QUICK
NYT had superb article on Wall Street employees going into many many many government jobs in Congress and White House
They left for a much lower paying job.
Conclusion—Wall Street biggies are placing them in positions to make decisions for Wall Street.
Pay under table or? Many have done this. Worked in Wash for few years then back to Wall street into a higher paying job
This is sad sad. RULES MUST CHANGE
NO $$$$$$$$$$$$$$$$$$$$$$$$ IN WASHINGTON
NYT had article on Interconnectivity between Board Of Directors in WSA firms
You vote for my pay+pension I vote for yours
sickening
5 big banks own 50% of deposits in 7000 banks and 10 own 80%
Restate Glass Steagall—separate Casinos from local banks
County Banking Systems—local wealth kept local to create more local wealth and jobs
WASHINGTON SOLUTIONS (Congress + White House)
1. fed fund election—6 mos-3 primary 3 general—free equal tv time—debate a week=12=adequate to evaluate candidates NO $$ =O
2. Since they will not need campaign funds Ban them from receiving anything of a financial value this closes K St.
3. Progressive Flat Tax by group—We have the income to pay our way-do it
We rank #2 as lowest taxed in OECD nations. We have an income of $14,00 billion yet tax 2400 and borrow 1300. Dumb?
clarence swinney Lifeaholics of America Political Historian for 21 years