Three Financial Crimes that Show How the DOJ “Went Easy” on Wall Street
Public Banking Institute’s Ellen Brown breaks down Senator Warren’s report which highlights how the DOJ and regulators give corporate criminals slaps on the wrists and free rein to operate outside the law
JESSICA DESVARIEUX, TRNN: Welcome to the Real News Network. I’m Jessica Desvarieux in Baltimore.
Massachusetts Democratic Senator Elizabeth Warren has just released a report slamming federal regulators and the Department of Justice. It’s titled Rigged Justice 2016: How Weak Enforcement Lets Corporate Offenders Off Easy. The title says it all. Senator Warren goes after how the government fails to adequately punish corporations when they break the law. She says, quote, when government regulators and prosecutors fail to pursue big corporations or their executives who violate the law, corporate criminals have free rein to operate outside the law.
Here to discuss the top three financial crimes in this report is our guest, Ellen Brown. Ellen is an attorney and founder of Public Banking Institute. Thank you so much for joining us, Ellen.
ELLEN BROWN: Thank you, Jessica.
DESVARIEUX: So, Ellen, one of the top cases that is brought up in this report is the Standard & Poor settlement back in 2015, where the ratings agency agreed to pay about $1.4 billion in a civil settlement to the DOJ, 19 states, and DC. Just give our viewers a refresher. Why did S&P have to pay that fine, and why does Senator Warren argue that the fine does not go far enough?
BROWN: Well, it was the S&P that gave their AAA stamp of approval to these mortgage-backed securities and credit default swaps that investors bought into around the world based on this AAA rating, including pension funds and large savers’ money. It’s little peoples’ money, bought into these funds.
And in the end they weren’t AAA, of course. They were filled with subprime mortgages, and when it was discovered that what supposedly made them AAA was that they were protected with derivatives, where they sold off the risk–like they had risky things in them, but they sold off the risk to other investors, well, who were the other investors? There was [inaud.]. This was in the shadow banking system so nobody knew who was on the other side of these bets. And it turned out that the parties on the other side of the bets didn’t necessarily have the money. And we saw that in 2007 when two Bear Sterns hedge funds went bankrupt, and that freaked out the whole, the whole market when people realized that they AAA things weren’t necessarily AAA after all. And then, and there were some, a couple of rating agencies that also lost their [inaud.]. Well, anyway, that was another thing.
So people lost trillions of dollars on these bad investments. So even though a $1.375 billion or whatever that settlement was sounds like a lot of money, it was a drop in the bucket compared to what people lost. And nobody goes to jail. It doesn’t change their ability to continue to be rating agencies. So it’s really a slap on the wrist that makes it look like the Department of Justice is doing something. Nobody can say that they’re, you know, totally ignoring their duties. But in fact, it’s not effective. It’s not solving the problem and it’s not compensating the victims.
DESVARIEUX: Yeah. There was another case brought up in this report, the LIBOR scandal. Give our viewers just a refresher, what is LIBOR again? And I know none of the bankers who were a part of this operation ever faced criminal charges. So talk about why they didn’t face criminal charges.
BROWN: LIBOR is the London Inter-Bank Offering Rate, which is, it’s a privately-set interest rate, but it’s set by a group of banks which has been labeled [the cartel], which made me laugh, because when I first started writing on this subject I used to call them a cartel, and people called me a conspiracy theorist. A cartel is a, you know, it’s a legal term, and conspiracy is a legal term, and they qualified. And so it’s actually, well, there’s the interest rate swaps that–the interest rate that was being manipulated, and the exchange rates were being manipulated. I guess technically the cartel was the group manipulating the exchange rate. And then also UBS, and Deutsche Bank were independently found guilty of manipulating interest rates.
Which is–the interest rates were the basis for the interest rate swaps, which are the largest component of the derivatives market. So it’s something like 82 percent of the derivatives market is composed of interest rate swaps, which, it’s something like $380 trillion in interest rate swaps.
DESVARIEUX: And this affects people’s mortgage rates, I mean, this wasn’t just affecting those who are playing in the casino of the derivatives market. This is affecting everyday people, too.
BROWN: Right. And the state and local governments, like your city, your school districts. They were all required to buy these derivatives, interest rate swaps, in order to get loans. And the banks set up the swaps. So they are the house, and the house was rigging the game. And that’s been proved. And yet nobody goes to jail. There are no–the fines are basically a cost of doing business. And they get to carry on their merry way, doing what they were doing. So it’s a very, it’s ineffective regulation that’s making a show of regulation without actually, actually doing the job.
DESVARIEUX: Okay. Let’s talk about case number three. In August 2013, two Citigroup affiliates agreed to pay nearly $180 million to the SEC to settle allegations that they defrauded investors in the leadup to the 2008 financial crisis. Did Citibank have to even admit to wrongdoing, Ellen? Any criminal charges? What were the consequences?
BROWN: No, there were no criminal consequences. It’s just they–it’s like a black mark on the record, and that’s about it. Again, it’s just a slap on the wrist, and they go on doing what they were doing, or doing something similar. They may move [inaud.] the mortgage-backed, or the collateralized debt obligations market is not what it was for mortgages, but now they’re moving into car loans and student loans. I mean, they just move over into doing something else.
So regulation really, this form of regulation, hasn’t worked. And Elizabeth Warren’s point is that even though these regulatory agencies have the power to enforce pretty strict penalties, they’re not doing it.
DESVARIEUX: Yes, so then the question becomes what is the solution, if regulations on the books, that we have the law to prosecute these people, and some people would argue they’re very stringent regulations, but people aren’t using the full capacity of the law. Some would argue they’re under-prosecuting these wrongdoers on Wall Street.
So coming up with more laws, is it really going to necessarily get us to a point where we’re actually prosecuting wrongdoers? What is, what should be the solution, then? What do we do?
BROWN: Elizabeth Warren’s point would be that no matter who gets elected, you have to get the right people into these regulatory agencies. But it seems to me that we’ve tried it for seven years now, since 2008, and it hasn’t worked. Regulation has not worked. We’re in a, as you can tell from the movie The Big Short, we’re in a worse position than we were before in some ways. I mean, the derivatives market is bigger, and people, the gap between rich and poor is getting wider and wider.
So my solution, proposed solution would be that the next time we have some insolvent, too big to fail banks, instead of bailing them out or bailing them in, which means taking the money and the creditors, including the depositors, we should nationalize them. Which–that was actually in the law. The FDIC rule before 2008 said that a bank that was too big to liquidate and to sell off when it was insolvent, should be nationalized. And that, that was done, for example, with Continental Illinois in 1994, where the government took over the bank and ran it for ten years as a public utility. And that’s what I think that they should keep it as, a public utility.
DESVARIEUX: What does nationalizing actually do in terms of preventing this sort of corruption and criminality?
BROWN: Well, the way–there’s two ways to interpret the word ‘nationalize’. What some people call nationalization is basically that we the public bear the losses, and we get it back into shape, and then we turn it back over to the private market, to private investors. But that’s sort of a bastardization of the term. What it should mean, and what we should do with it, it seems to me, is turn it into a public utility where it actually has a mandate to serve the public. It has certain–you know, it makes loans to small or medium-sized businesses. All those things that we expect banks to do, and we expect government to do, you know, it should be a public utility just like water and power, I think should be, and railroads and things like that.
You know, things that are–money is a flow. It’s a flow of the national currency. And in order to keep this flow going, it seems to me it should be a public utility just like electricity is a flow, and water is a flow. Things that we all share, and in order to make that–.
DESVARIEUX: So if it’s a public utility, too, they’d have to be more transparent to the public. Is that also a point?
BROWN: Exactly. Totally transparent. They should be–well, the model would be the Bank of North Dakota, which has a charter mandate to serve the public interest, and that’s what it does. And you know, it can do, take the long-term view, and support projects that are, you know, that we’ll support community in the long-term, not just the short-term or shareholders’ profits, which what banks now are geared towards, or executive profits, more likely.
DESVARIEUX: All right. Ellen Brown joining us from Los Angeles, thank you so much for being with us.
BROWN: Thank you, Jessica.
DESVARIEUX: And thank you for joining us on the Real News Network.
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