By William K. Black

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.

The last three administrations have found the bouquet of the financial industry’s political contributions so delectable that they have allowed elite financial firms and their senior officers to commit fraud with near impunity.  Prosecutions, even serious investigations employing grand juries, of the elite bankers who became wealthy by causing the ongoing crisis have become so rare that Breuer is firing “blancs” at the most elite frauds.  The results of Breuer blanc have been catastrophic.   The Clinton, Bush, and Obama administrations (and Congress) catered to elite bankers so unctuously that they created the most criminogenic environment for financial fraud in history.  The fin de siècle feast that the Clinton and Bush administration served up to produce the crisis exemplified the elite degeneracy that the French have always ascribed to the end of an era.  The element of hope, however, that the French also ascribe to the new era was quickly betrayed by the Obama administration.  The audacity of hope soon curdled into a spoiled and broken Breuer blanc slathered over the rot of the elite banksters to cover up their frauds.

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Breuer is the very model of the modern chef de cover up so he has deconstructed the criminal justice system to the point that it no longer applies to the banksters who caused the crisis.  Breuer and Attorney General Holder specialize in serving the American people tripe and confit de canard.  Breuer blanc has been slathered on so many of Holder’s hors d’œuvre that the Justice Department has been rendered hors de combat when it comes to the banksters.

It was a travesty and a national tragedy that 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.  On September 13, 2012, Breuer spoke to an audience of New York City attorneys who function primarily to maximize the wealth and political power of corporate CEOs – even when they do so at the corporation’s expense.  See Looting: the Economic Underworld of Bankruptcy for Profit (George Akerlof and Paul Romer, 1993).  The CEO, not the “corporation,” hires and fires big law firms and the CEO’s interests are frequently hostile to the interests of the corporation’s shareholders and creditors.  Breuer was at his most obsequious in front of his NYC peers.

Holder and Breuer became wealthy by doing the bidding of the world’s wealthiest and most powerful CEOs when they were at Covington & Burling.  The CEOs deploy them as apex predators – and they are famously vicious or charming, whatever is required, in their role as counsel representing the CEO’s interests.  Holder and Breuer will soon return formally to that status.  It is an odd role, for the lawyer must be reliably tame in serving the CEO’s interests and willing to be reliably vicious if necessary when attacking anyone that stands between the CEO and wealth, ego, and power maximization.  It is an extremely lucrative role and such lawyers are considered to be the profession’s elite by their peers.

I started my professional career in the typical large law firm.  It was pure luck that I began representing the Federal Home Loan Bank Board (one of the larger clients of our Washington, D.C. office) and was asked by the agency to join them as their Litigation Director.  This, indirectly, led to me eventual working for a very fine chief agency counsel, Harris Weinstein – who came from and returned to Covington & Burling.  It is not inevitable that lawyers from large firms who often served as defense counsel for CEOs will be weak in enforcing the law.  OTS Director Tim Ryan chose Weinstein as his chief agency counsel because he knew that Weinstein was tough and competent.  Unfortunately, Holder and Breuer have proved to be nothing like Weinstein.

Breuer was likely more candid than usual in his speech given his specialization in canards because he was delivering such a safe message to such safe audience of lawyers so much like him.  He decided to serve them as a lagniappe an amuse-bouche perfectly crafted to his audience’s taste.  He explained to them how to give him an excuse to refuse to bring meritorious prosecutions of their clients’ elite corporate crimes. 

First, however, he served more canards and tripe.

“Since 2009, my team and I have changed the [Criminal] Division in significant ways – bringing in new, energetic leadership in virtually all of our sections, and prosecuting the highest-impact cases in the country.

In particular, and relevant to the subject of my remarks tonight, we have dramatically ramped up our white collar criminal enforcement efforts – an aspect of our work that I care deeply about, and that is now more important than ever.”

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.

The best that Breuer could come up with was Lee Farkas, the “mastermind” of a crude fraud discovered by Fannie Mae a decade ago shortly after it began.  Farkas was not prosecuted for the frauds he committed that contributed to the crisis, but for unsuccessfully trying to rip off TARP.  The prosecution occurred because SIGTARP discovered the fraud and made the criminal referral.  Breuer knows that criminal referrals have virtually ceased from the banking regulatory agencies because their leadership was selected to lead a competition in regulatory laxity.  Breuer knows that mortgage fraud, led by our most elite financial institutions, drove the crisis.  Breuer has done nothing to reestablish the banking regulators’ criminal referral process as a national priority.  Breuer did not even put the banking regulatory agencies on the task force he created and appointed Mr. Schneiderman to lead – a task force that has leaked its intention not to prosecute.

“I have said before that the strongest deterrent against corporate crime is the prospect of prison time for individual employees – and we do not hesitate to seek long sentences when circumstances warrant. Lee Bentley Farkas, the former chairman of Taylor Bean & Whitaker, which was one of the largest private mortgage lending companies in the country, is serving a 30-year prison sentence for having masterminded a nearly $3 billion bank and securities fraud.”

We can agree that prosecuting the CEOs who grew wealthy by leading the accounting control frauds that drove the crisis would be “the strongest deterrent” and that the last three administrations have failed to prosecute the CEOs leading our financial accounting control frauds.  It was the lenders and their agents who overwhelmingly put the lies in liar’s loans.  No honest lender would make liar’s loans.  By his own standard, Breuer (and his predecessors) failed utterly to employ “the strongest deterrent” against the largest and most destructive fraud in history.

Private counsel for homeowners, at very small firms, produced the admissions under oath, demonstrating that several of the largest mortgage servicers routinely filed false affidavits – roughly one hundred thousand times annually.  The Obama administration led the effort to give the banks effective immunity from prosecution for these felonies – all without admissions of guilt in the settlements.

The Criminal Division has never been confronted with so many and so destructive elite white collar frauds.  The Division has never failed so utterly to prosecute such elite frauds.  It is true that Bush’s Department of Justice was also a disaster, but that is no defense of Breuer blanc.

Breuer’s next served up the canard that was the focus of his speech.

“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.

Prosecutors faced a stark choice when they encountered a corporation that had engaged in misconduct – either indict, or walk away.  [O]ver the last decade, DPAs have become a mainstay of white collar criminal law enforcement.

The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts.”

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.

Studies by the Big 4 audit firms and Transparency International have documented increased corporate illegality and corruption in the U.S. during this century.

Breuer’s claim that “DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe” may have been conclusively proven.  As he admits, DPAs have been the Justice Department’s “mainstay” response to elite corporate crime for over a decade.  During that period, we have suffered repeated, intensifying control fraud epidemics by our most elite corporations, as have many nations.   There has been a “transformati[on] … [in] corporate culture” – for the worse.  I do not believe that DPAs are the primary cause of that transformation, but by greatly reducing the risk of real prosecutions they have made the world more criminogenic and encouraged the continuing degradation of corporate culture.

The scary aspect of this quotation is that Breuer may believe it.  He may actually believe that over the course of this new century there has been a positive “transformati[on] … [in] corporate culture” and that not prosecuting elite U.S. corporations that commit felonies caused the transformation that produced this Golden era of corporate integrity we now enjoy.  If he believes that the global corporate culture has improved dramatically over the course of this century Breuer is delusional and his delusions make it impossible for him to avoid abject failure as head of the Criminal Division.

Solely in the interest of reducing length I will not explain why Breuer’s claim that non-prosecution through a DPA is really equivalent to prosecution is a tasteless canard and move instead to Breuer’s amuse-bouche.  Breuer served up a roadmap for defense counsel to follow in order to excuse corporate felons from prosecutions that Breuer knows to be meritorious.

“To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets [is] a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”

I’ll limit my response to four points.  First, the head of the Criminal Division feels the need to “stress” that he will not “always” refuse to prosecute corporations that commit felonies.  He is giving defense counsel a roadmap on how to shape their arguments to allow corporate felons to escape indictment.  Breuer and Holder need to resign forthwith and be replaced by prosecutors.

Second, Breuer has “heard … predictions that a … bank might fail if we indict.”  Since he has failed to indict banks this means that he failed to prosecute banks that committed felonies because the defense predicted the bank “might fail if we indict.”  We put thousands of banks and S&Ls through receiverships in the 1980s and early 1990s and made the industry far healthier.  If the bank is insolvent or cannot raise the minimum required capital it should be put into receivership because it is in an unsafe and unsound condition.  Very few receiverships result in liquidation.  We typically sell, with federal financial assistance, the failed bank to an acquirer.  Banks have deposit insurance.  They virtually never fail due to runs, particularly irrational runs on healthy banks.  So the “sober” “prediction” that the bank would (1) fail if indicted and (2) that the bank is actually healthy and should not be placed in receivership would be rejected by any competent financial regulator.  Breuer fell for the “prediction” – hook, line, sinker, rod, reel, and the boat he rowed in on.

Third, “innocent” employees are a red herring.  There are often collateral effects of criminal prosecutions, including blue collar crimes.  The blue collar felon’s family is typically innocent and the consequences of prosecuting the felon are often severe for the family.  Prosecutors routinely indict blue collar felons in such circumstances.

Blue collar defendants never hire economists and elite lawyers, Breuer never personally listens to their pleas not to indict, and their pleas not to indict do not “literally keep [Breuer] up at night.”  The statue symbolizing the Justice Department wears a blindfold to indicate that justice is given to all regardless of class, but surely no one expects Holder and Breuer to take that symbol seriously, particularly in Breuer’s sleep-deprived state.  Breuer’s solicitude for elite corporate felons “literally keep[s] [him] up at night.”  (Besides, Ashcroft hid the Justice Department statue behind a screen because he was offended that by the Lady Justice’s exposed breast.)

Breuer’s argument allows large corporations that commit felonies to escape indictment by holding their innocent employees hostage.  Note that his argument greatly favors the largest corporations, making them too big to indict.  A similar argument is made against corporate income taxes.  We dare not tax corporations lest they move elsewhere, which would harm the innocent poor who wash dishes in the Manhattan restaurants frequented by the wealthy.

Fourth, note that Breuer says that he may refuse to bring prosecutions he knows to be meritorious because he fears the impact on “the health of an industry or the markets.”  This is grotesquely improper, particularly since Breuer admits that he relies on “economists’” (and Geithner’s?) claims about such alleged impacts.  One of the most common reasons that an industry becomes “[un]health[y]” is because control fraud triggered a Gresham’s dynamic in which bad ethics drove good ethics out of industries and professions.  The control frauds deliberately created Gresham’s dynamics in order to produce “echo” fraud epidemics in other industries and professions (such as mortgage brokers and appraisers).

Vigorous prosecution is essential to break a Gresham’s dynamic, but when an industry suffers catastrophic losses due to an epidemic of accounting control fraud the widespread industry losses produce precisely the circumstances that Breuer has been convinced should not lead to indictments of elite corporate felons lest we harm the industry.  It is even more bizarre that the economists that Breuer listens to about fraud often believe in a bizarre dogma that purports that markets automatically self-correct, making serious fraud impossible.

Neo-classical and Austrian economists are the professionals who have shown that they are the most ignorant of corporate fraud.  Economists have consistently advanced the most criminogenic policies and displayed the greatest inability to identify fraud or understand how much damage it causes.  Breuer has chosen to rely on the worst possible “experts.”  Economists have no models or expertise as to the impact of indictments on industries.  Breuer’s notion that we can protect the “health” of an industry by not prosecuting corporate felons is the opposite of the truth.  It is essential that we prosecute the felons to break the Gresham’s dynamic and restore the industry’s health.

Breuer’s invitation to defense counsel to give him an excuse not to indict based on concerns about the impact on “the markets” is equally dangerous and shameful.  Again, this excuse for committing fraud with impunity applies only to the largest corporations.  (Even the most dishonest economist would have difficulty claiming with a straight face that indicting any but a handful of the largest firms would cause some devastating crisis for the stock markets.)  The economists making these absurd arguments to Breuer are all strong believers in Schumpeter’s theory that the dynamic that makes capitalism great is “creative destruction.”  In every other context, they would agree that committing felonies was an excellent reason for the markets destroying a corporation and that the destruction was essential to strengthen the U.S. economy.  It is the markets’ reaction to learning of the corporation’s felonies that leads the markets to put the firm out of business.  The fines the Criminal Division imposes in DPAs have never been more than a minor “cost of doing [fraudulent] business” for the largest U.S. corporate felons.  But there is no one in these “sober” meetings who points out the hypocrisy of the economists arguing against bringing meritorious prosecutions of elite corporate felons.  I doubt that Breuer has ever consulted a white-collar criminologist not working for the admitted felons in deciding whether to indict a major corporation.

Economists do not know whether it is a good thing or a bad thing if the stock price of a corporate felon falls.  They do not know whether such a fall would cause a serious drop in overall stock market prices.  They do not know whether such a fall in overall stock market prices would be a good thing or a bad thing.  But it is obvious that Breuer thinks that economists know these things and that Breuer has drunk the Kool-Aid and believes that indictments are likely to reduce stock prices and that such a reduction is a bad thing.

Under the efficient market hypothesis, the indictment would convey new information to investors demonstrating that the corporation’s stock was a much riskier investment.  The markets would react by reducing the corporation’s stock price – which would make the markets more efficient.  That would be a good thing.  I’m not a big believer in the efficient market hypothesis, but the economists employed by corporate felons to bolster their sober sob stories to Breuer overwhelmingly believe in the hypothesis – except when it is inconvenient to their fees.  Again, it is clear that no one has ever pointed out this contradiction to Breuer.

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.