A Tsunami of Cover-ups and Lies

By J.M. Hamilton (12-4-11)

“As Ferdinand Pecora, the Depression-era prosecutor, is supposed to have said of the events leading to the Wall Street crash of 1929: Pitch darkness was among the bankers’ stoutest allies.”  - Gretchen Morgenson – NY TIMES


In a land where back room dealing, and double dealing, in government, banking, and many other facets of our lives, has become the norm, Judge Rakoff's position on the Citigroup/SEC deal was a breath of fresh air.

The Judge’s position, unfortunately, would appear to be - by current standards - anachronistic.  Mr. Rakoff appears to be standing against the tide of history, more akin to a tsunami of cover-ups and lies, and yelling "Stop - a little honesty and integrity, please!"


Please recall Judge Rakoff, a Federal Judge, was supposed to rubber-stamp a deal  between the Securities and Exchange Commission and Citigroup, a bank that has been bailed out by the U.S. taxpayer, ad nauseum.   In fact last I checked the U.S. government still holds a substantive stake in Citigroup, as a result of the bank's failure in 2008.  The "deal" was Citigroup would cough up just north of a quarter billion dollars, and its role in selling, possibly, fraudulent security products, like derivatives and CDO's during the height of the financial crisis, would vanish w/out any admission of responsibility or wrong doing.

How convenient.   And yet this is the norm in our two tiered justice system, where the public deals with one set of courts, and banks get fast track justice with no trial, relatively light fines, and where the fines, themselves, are considered a cost of doing business.   Americans, of course, have become numb to Wall Street’s recidivist activities.  And so for Judge Rakoff to say "no more," was truly exceptional.

And we can see why the Judge's behavior was novel, almost rebellious: the Wall Street cartel has co-opted our government, regulators, our judicial system, rating agencies, and our laws and law making.  Our opaque accounting system is laughable, when we consider how derivatives and swap are not accounted for in financial statements (often only receiving a footnote); and Repos - an accounting maneuver/derivative product that helped bring down MF Global (not to mention Lehman), and with it possibly a billion plus in vanishing client money - are an all too common practice.  

Opaque accounting is why every central bank in the world, including the Fed, rushed to Europe last week to provide liquidity to seized up credit markets.  Simply put the banks don't trust each others financial statements, and have stopped inter-bank lending, and in many cases lending, altogether.

Granted Judge Rakoff's decision could possibly mean more trials and the SEC  spending more time proving its case against the major banks - at a time when, as recently noted by Arthur Levitt on Bloomberg Radio (Hosted by Tom Keene and Ken Prewitt), Republican's are starving the organization of money and funds.   Mr. Levitt is the SEC's former chairmen.  The Republicans, lap dog of Wall Street, and advocate and stander bearer for the one percent, quite possibly may believe they are doing "god's work," by supporting a monopolistic cartel and restraining government agencies, like the SEC.  However, the SEC is the first, and often only, line of defense against the predatory Wall Street oligopoly, in the protection of ordinary Americans, investors, business - both big and small, and of course, the government, itself.

But can you hardly blame the Republicans?  With all that money coming their way from Wall Street, and presidential candidate Romney meeting with Jamie Dimon,  (Mr. Romney, himself making his bones on Wall Street with private equity's Bain Capital), why not perpetuate crony capitalism and crony democracy?   After all, and gee-whiz, Wall Street paid back its TARP loans with interest....isn't it time to get off the cartel's back?

And therein lies the problem, because as much as Republicans would like to wish away the financial crisis of 2008, and assure us that the banks' have paid back the U.S. taxpayer in full, quite the opposite has in fact happened.   The Banks, who have received 7.0 plus trillion in handouts and government benefits, as reported by Bloomberg last week (that's half of U.S. GDP), have not paid for the damage they have caused to the real estate market (the cornerstone of life savings and equity for many Americans), the economy, nor for their share of the fiscal mess our government is in.  

Not by a fraction.  

Republicans are often portrayed as being unfeeling, uncaring, and against the welfare state... that paradigm does not hold up, however, when the welfare is gifted to the Republican Party’s core constituency, the one percent.

So for Judge Rakoff to shine a bright light of truth on an unacceptable practice, tantamount to a banking whitewash and cover-up, was both brave and the kind of iconoclastic practice Americans need to see more of, in both business and government.

Some might call Judge Rakoff a bully.  I call the Judge a hero.

In the land where who you know and one’s connections, as often as not trumps the truth, Judge Rakoff's act was a singularly courageous event.   Kudos and accolades to Judge Rakoff!