The NYT Implies that Not Prosecuting JPMorgan Proves DOJ’s Vigor
By William Black. This article was first published on New Economic Perspectives.
No one expects Andrew Ross Sorkin’s slavish “Deal Book” lackeys to demand that the elite Wall Street bankers whose frauds drove the financial crisis be imprisoned, but the slavishness to the banks revealed when major news stories emerge continues to irritate if not surprise. A recent embarrassment can be found here.
The “Deal Book” Spinmeisters
The context of the NYT article was the expected settlement between DOJ, various states, and JPMorgan. The spin comes fast and hard, which would be great in cricket (or quarks) but, sadly, exemplifies the national paper of record’s “Deal Book” devotional pages. The “Deal Book” shows that cricket masters can impart very different spins. The first substantive paragraph’s spin is to minimize JPMorgan’s fraud.
“The civil settlement, which materialized after months of wrangling, resolves an array of state and federal investigations into JPMorgan’s sale of troubled mortgage securities to pension funds and other investors from 2005 through 2008. The government accused the bank of not fully disclosing the risks of buying such securities, which imploded in 2008 and helped plunge the economy to its lowest depths since the Depression.”
“Deal Book’s” first spin takes the fraud completely out of fraud. In its place we have something designed to sound trivial, ethics-free, and non-criminal – “not fully disclosing the risks of buying such securities.” The goal is to make the reader yawn.
We don’t need no stinkin’ ethics!
Step back from the details of the story and recall that the Wall Street Journal notes that DOJ and various states were pursuing nine fraud investigations of JPMorgan – and that is not counting the fraud cases that were settled with JPMorgan concerning massive numbers of felonies through false affidavits that produced unlawful foreclosures and the “London whale” accounting and securities fraud (and the non-investigation of JPMorgan’s conduct of the world’s largest proprietary trading operation in contravention of Dodd-Frank). JPMorgan is one of the largest banks in the world and it is a cesspool of diversified fraud schemes. It allegedly participated in the largest cartel in world history (by four orders of magnitude – LIBOR) and the three most destructive control fraud epidemics in history that drove the financial crisis. These were the twin epidemics of mortgage origination fraud (appraisal fraud and liar’s loans) and the resultant epidemic of fraudulent sales of the fraudulent mortgages to the secondary market. DOJ, for reasons that pass all understanding, is not even investigating the twin mortgage origination frauds – so we really have 13 diversified fraud schemes discovered to date, each of which occurred primarily or exclusively while Jamie Dimon was CEO.
In any other facet of life JPMorgan and Jamie Dimon would be anathema and would have been prosecuted and put out of business. Because JPMorgan is a massive bank, however, the “Deal Book” writes a story about what increasingly is being revealed as the most fraudulent business in the world in which the word “ethics” never appears and the word “fraud” appears only once in a tangential quotation the authors treat as unworthy of discussion. This is significantly crazy. Indeed, the ethics-free reaction of the (limitless shades of ) “Grey Lady” exemplifies why these fraud epidemics can occur and cost American households $11 trillion in lost wealth and ten million lost jobs while making the officers who lead the frauds obscenely wealthy. The “Deal Book” treats it like an expensive parking ticket. What would it take for “Deal Book” to take these fraud epidemics, the Great Recession, the rise of crony capitalism, and the resultant “cheater-take-all” plutocracy (masquerading as Tyler Cowen’s “hyper-meritocracy”) seriously? Do prospective “Deal Book” authors have to take Myer-Briggs tests demonstrating that they are utterly amoral – and proud of it? They have demonstrated that they are incapable of outrage in a context where outrage is essential to honest, competent reporting.
The hidden story is that even DOJ now agrees that there was an epidemic of control fraud
In reality, a host of government investigators have concluded that JPMorgan’s officers lied to buyers to induce them to purchase securities that JPMorgan’s (or WaMU’s or Bear’s) officers knew (1) were fraudulently originated by JPMorgan (or WaMu or Bear) and (2) sold to others through fraudulent “reps and warranties.” But if “Deal Book” wrote a declarative sentence stating those facts the story would no longer be a yawn.
Eric Holder, Lanny Breuer (when he posed as head of the Criminal Division), and President Obama also refuse to make that declarative sentence. That would be an official statement by the government of the United States and several state governments that their investigations had determined that three of Wall Street’s largest and most elite banks were among the largest originators and sellers of fraudulent mortgages. Issuing that statement would declare that we face a crisis demanding as a national priority that the regulators, criminal investigators, and prosecutors immediately conduct far more intense investigations of the controlling officers of the largest, most elite banks to confirm whether other government investigators were correct in finding that they too engaged in endemically fraudulent loan origination and sales. No one is foolish enough to hold their breath waiting for Holder and Obama to make a simple declarative sentence that their investigations have confirmed that the three fraud mortgage fraud epidemics that drove the crisis were led by the world’s most elite bankers’ banks. The Bush and Obama administrations’ refusal to speak truth to power makes it all the more essential that “Deal Book” – the purported repository of the Nation’s preeminent paper of record’s financial expertise – take the lead in conducting the analytics that show that when one reads the now scores of government complaints against the world’s most elite banks that the government is charging that their controlling officers led massive fraud schemes. The Wall Street Journal’s news staff (which used to start conversations with people like me by emphasizing that they had nothing to do with the know-nothings on the opinion side of their paper) would once have been strong allies in making such an analytical case, but those journalists have long since been Murdoched.
The DOJ as Rambo meme (if Rambo were a pacifist)
The spin on the next several paragraphs of the story is about how manly the Department of Justice (DOJ) has become. Yes, it started out as the 99-pound weakling that the banksters tormented by kicking sand in his eyes, but DOJ has transformed itself into an action hero that is the big banks’ greatest nightmare.
“JPMorgan’s settlement strikes at the core of the accusations, requiring the bank to pay fines to prosecutors and provide relief to struggling homeowners as well as compensation for harmed investors. JPMorgan initially planned to pay about $3 billion, a position it abandoned midway through negotiations.
The final $13 billion deal eclipses other major Wall Street settlements. In fact, it is the largest sum that a single company has ever paid to the government.
The magnitude of the payout reflects a broader strategy shift within the Justice Department to hit Wall Street where it hurts most: the bottom line. Once content to extract multi-million dollar fines that critics dismissed as little more than a slap on the wrist, prosecutors have signaled to the nation’s biggest banks that the billion- dollar mark is a floor rather than a ceiling.”
At best, ignoring JPMorgan’s possible claims against the FDIC and the IRS for refunds, it’s really a $9 billion deal. The other $4 billion represents loan workouts that JPMorgan would do anyway with distressed homeowners in order to minimize JPM’s defaults and losses and new loans it would make anyway for profit. The NYT is implicitly conceding that “critics” of DOJ’s prior fines were correct – they did represent “little more than a [misdirected] slap on the wrist.” Now that DOJ pushes, even a little, it gets massively larger fines without even having to go to trial. (Recall that a $1 billion fine would equal about .004 of JPMorgan’s assets (less than one-half of one percent).
The “Deal Book” thinks banks have pain receptors and their CEOs feel their pain
But “Deal Book’s” industry sycophants have missed the essential analytical points about JPMorgan’s controlling officers and one key analytical point about DOJ’s leadership that are inherent in these three paragraphs. The key analytical points arise from the central fact of preeminent importance that “Deal Book” ignores: when the controlling officers of a bank cause it to commit control fraud they control the bank and they run the bank to further their interests rather than the bank’s interests. It matters enormously what the officers received, and the injury they caused to others, through the crimes that draw only “a [misdirected] slap on the wrist” even in (the rare) cases where DOJ pushes civil liability against the corporation. The settlement supposedly exemplifies DOJ’s new “strategy” “to hit Wall Street where it hurts most.” Authors sometimes personify specific animals and ascribe to them human emotions, but “Wall Street” has no senses, including pain receptors. They have no wrists to “slap.” Take a power shovel to Wall Street’s most famous intersections and the Street will never weep or feel shame or pain.
The officers who control Wall Street firms are humans. No one doubts what “hurts most” for an elite banker – conviction for a felony that produced material imprisonment, the duty to repay all fraud proceeds plus punitive damages, and being removed and prohibited from the financial industry. Note that these penalties are in declining order of what “hurts most” and that the penalties are not mutually exclusive. Senior officers who have leadership roles in these frauds should suffer each of these three responses.
No officer controlling an elite bank has suffered either of the first two sanctions and the only prominent controlling officer who was removed and prohibited was retired and had no plans to return to management. The DOJ is batting .000 against the most elite and most damaging fraud leaders in terms of the three forms of accountability that “hurt” the “most” and provide deterrence and justice. The DOJ has chosen not to “hit” the people who actually led the frauds that caused the crisis, became wealthy from leading the fraud epidemics, and became – and remain – powerful within their firms and politically because they led the frauds. Their resultant wealth and high social position and resultant charitable and political contributions also boost their reputations rather than harming their reputations.
It is remarkable that the “Deal Book” does not stress the points I have just made since they are central to how DOJ and JPMorgan’s CEO, Jamie Dimon, structured the deal and to the questions of whether the deal will punish those who led the frauds and remove their wealth gained by leading the frauds, deter future fraud, and do justice. The article’s only recognition of the existence of officers shows no recognition of the key differences between humans and corporate fictions. It mentions only that Dimon was involved in the deal negotiations and that Dimon’s board (chosen by Dimon) supports Dimon and views the deal as a “victory for the bank.”
Holder ignores the bank officers who lead the frauds and grow wealthy through them
Attorney General Eric Holder’s boast also ignores the officers who committed the frauds: “No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.” Holder knows that the disgraceful “too big to prosecute” Holder/Breuer doctrine has nothing to do with a firm’s high profits. (Lanny Breuer, who posed for years as Holder’s head of the Criminal Division, was a co-creator of the “too big to prosecute” doctrine.) The “passage of time” is a “shield from accountability.” Holder and Breuer and their predecessors under the Bush administration allowed the normal statute of limitations for fraud to run without prosecuting a single elite bank or controlling officer of an elite bank for leading the fraud epidemics that made them wealthy and drove the financial crisis and the Great Recession. The FIRREA statute of limitations – which we got passed during the savings and loan debacle in order to assist in the prosecution of many hundreds of cases that were in the pipeline as a result of our (Office of Thrift Supervision’s (OTS)) over 30,000 criminal referrals – is the only reason DOJ can still prosecute and it can only prosecute cases involving federally insured depositories, which means that “the passage of time” under Holder and his ilk have “shielded” most of the senior perpetrators from all “accountability.” For present purposes, however, the point is that Holder’s boast ignored the humans who control the “banks” and cause them to commit frauds – and the “Deal Book” was so clueless that it ignored Holder’s critical failure.
The Deal Completed Jamie Dimon’s “Triple Whammy” v. the Shareholders
The DOJ settlement was designed, by DOJ and Jamie Dimon, to “hit” JPMorgan’s shareholders – the victims of two prior “hits” by its controlling officers. The controlling officers caused JPMorgan, Washington Mutual (WaMu), and Bear Stearns (Bear) to take actions that produced fictional short-term income and real longer-term losses that the shareholders bore (the first “whammy”) and the controlling officers were made wealthy by that fraud strategy through immense bonuses (paid by the shareholders, the second “whammy”) based on the fraudulently-reported surge in short-term income. (JPMorgan acquired WaMu and Bear.) When the officers leading the frauds are not prosecuted the alternative civil actions against the firm in the form of large fines add the third “hit” of the “triple whammy” to the shareholders while leading the controlling officers who led the frauds wealthy. This encourages future elite fraud epidemics.
The Controlling Officers of the Entity Sued for Fraud have a Conflict of Interest
The officers controlling the corporation that has committed fraud have strong personal and financial incentives to use the firm’s assets to buy “indulgences” for the officers from DOJ. I have explained the three sanctions that officers fear the most and the order in which they fear those sanctions (which are not mutually exclusive). When the DOJ cares about publicity and large fines, the officers controlling the firm are able to trade off larger fines paid for by the firm for immunity for the officers. The officers have done this for decades as DOJ’s senior leaders have increasingly resisted prosecuting the officers that control our most elite banks.
Fines against Banks are useless if the goal is deterrence or justice
Officers lead accounting control frauds. They typically profess great affection for “their” banks, but they are skilled liars and manipulators. They do care about themselves and wealth, power, and status. As George Akerlof and Paul Romer observed in their 1993 article about accounting control fraud (“Looting: The Economic Underworld of Bankruptcy for Profit”), leading such a fraud produces three “sure things” – the bank will report record (albeit fictional) income in the early years, the officers will promptly be made wealthy, and the bank will suffer severe losses because the means of maximizing fictional income is to grow exceptionally rapidly by making bad loans at a premium yield. The idea that such a CEO would be deterred by a fine against the bank is fatuous.
What this says About DOJ’s “Too Big to Prosecute” Bank Strategy from 2000-2012
This difference between the “bank” and the humans who control the bank is essential to justice and effective deterrence and should have central to DOJ’s choice of what the “Deal Book” purports is its new strategy. We can infer a great deal by examining these purported old and new strategies. (I assume solely for purposes of analysis that the Deal Book’s description of the old and new strategies is accurate.) Recall that the “Deal Book” authors admit that JPMorgan’s view the current settlement, which the authors describe as dramatically tougher than the old strategy, as a “victory for the bank.” That means that the DOJ’s earlier strategy represented a series of recurrent routs by the elite banks and bankers.
Pause to consider what the Deal Book’s claim, if true, indicates was DOJ’s “strategy” for the last 12 years when it comes to not prosecuting elite bankers and banks and what it reveals about DOJ and its political leaders that they would deliberately adopt a strategy of (a) never prosecuting elite banks and bankers and (b) substituting a few civil suits solely against the banks (not the bankers) that are inevitably settled such that they produce no useful precedents, do not provide for collateral estoppel by other plaintiffs, and impose only “a slap on the wrist” even on the world’s largest banks in the rare civil cases. There are three possibilities. None of them are mutually exclusive, but they all reflect badly on DOJ, its leaders, and three Presidents of the United States. DOJ’s leadership could have been incompetent, cowardly, or ideologically allied with the officers leading the most elite bank frauds. Whatever combination explains the strategy it had to fail and DOJ knew it failed catastrophically yet for four years (2008-2012) the failure caused no change in the strategy of deliberately not enforcing the laws or holding the senior officers who led the epidemics of accounting control fraud that drove the crisis accountable.
If the “Deal Book” is right about DOJ’s strategy until late in 2012, then “failure [was] an option” for the DOJ. Indeed, a known, continued failed strategy was the only option DOJ seriously considered. Given that we know how to prosecute successfully enormous numbers of elite fraudulent bankers and their allies, DOJ’s refusal to employ methods it knew had received strong praise for their exceptional, proven effectiveness in prosecuting the elite bankers who led the fraud epidemics that drove prior financial crises (the second-phase of the S&L debacle and the Enron-era scandals) has strong implications for inferring why DOJ’s leaders and President Clinton, Bush, and Obama chose and maintained a strategy they knew must fail and had failed. (Clinton and his Attorney General did not know the strategy had failed, but they should have known that it was certain to fail.) No one seriously thinks DOJ attorneys are this incompetent or congenital cowards in the courtroom, so ideological capture by systemically dangerous institutions (SDIs) and the Mortgage Bankers Association (MBA) and the economists and political contributions and lobbyists that the SDIs and MBA wield is the only credible explanation of why DOJ adopted a “strategy” of not deterring or punishing elite bank fraud for over a decade – and continued the strategy when they knew it had failed spectacularly by helping to create the criminogenic environment that created the three massive fraud epidemics that drove the current financial crisis.
We tried an experiment of seeing what would have happen if elite bankers could become wealthy through the “sure thing” of leading accounting control frauds with immunity from effective sanction by regulators, the loss of their massive fraud proceeds through “claw backs” or civil suits, or criminal prosecution. The result was the three epidemics of accounting control fraud – each of which would have independently been the most destructive financial fraud epidemic in world history – and the resultant financial crisis and the Great Recession. We keep promoting the architects of the failures and then entities like “Deal Book” praise their failures. If we are ever to hold the Dimons of the world accountable we will have to start by holding the Holders/Obamas and Mukaseys/Bushes of the world accountable for allowing the CEOs to loot with impunity.