Justice System

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16
May 10

Surfing the Financial Crisis

I’ve been watching the financial crisis since it began in 2007.  Every so often it is good to step back and consider some of the anomalies. Thus, some disconnected thoughts:

-          The time between crises gets shorter.  It was seven years from the dot.com to the sub-prime crash.  It has taken us only one year from TARP and other alphabet soup US-based federal bailout programs to the European Commission trillion dollar bailout.  With the Euro plunging after the bailout, how long will it be to the next crisis?

-          If everything is really improving why have short-term US interest rates not risen? I am amazed that for over 2-years of regular Treasury auctions, 3 month bill rates have ranged between .1 – .2%.  Why does the Federal Reserve keep stating in its guidance that it intends to keep rates at zero for an extended period of time?

-          Why would anyone invest in the US equity markets?  The most active stocks each day are severely troubled, probably insolvent companies:  Citicorp, Fannie Mae, AIG, and Bank of America. More than sixty percent of every day’s volume is non-human, computerized, automated trading.  And what is worse, computers doing this trading are shaving cents off each transaction to the detriment of institutions and retail investors.   No one believes in long term investment value any more. Respected analysts believe the market is severely overvalued and should probably trade at the 850 S&P level.

-          How do Goldman Sachs and JP Morgan have perfect trading performance, that is, making money every day of the first quarter?  Karl Denninger has calculated the odds of achieving this feat at one in many trillions.  Have the SEC and other government regulators taken an extended holiday during the financial crisis? It sure seems that way.

-           The 1987 version of the SEC portrayed in the movie Wall Street was able to detect illegal activity in the fictional Blue Star Airlines and arrest the hapless Bud Fox.  Mary Schapiro and the current SEC staff can’t seem to find water with two hands if they fell out of a rowboat in the middle of the Atlantic.

-          Why do things keep getting more complicated and less clear? Yes, we live in a complex world.  But I have a deep suspicion that complexity is being used as a subterfuge to mask true intent.  Why do we need multi-thousand page financial and health reform legislation, customized credit default swap instruments and impenetrable corporate proxy statements? The answer: complexity is designed to disguise the essence of each issue.

-           Why is the Federal Reserve afraid of a full-fledged audit?   As taxpayers, we are the ultimate financiers for the various government bailout programs. What happened to sunshine as the best disinfectant in public matters?  This is an economic, not a national security matter. Or in the minds of the government, has everything become a national security matter, even the Fed’s purchase of the Red Roof Inn?

-          Why is Senator Chris Dodd, himself compromised with a Countrywide below market loan, allowed to lead financial reform?

-          With a Justice Department of 100,000 employees, why haven’t we indicted a major financial institution?

We live in dangerous times.  Perhaps some of our leaders should be thinking about some of these questions and issues.

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29
Apr 10

Some Random Thoughts on Goldman

Tuesday’s Senate hearings on Goldman raised as many issues as they answered.  Today’s thoughts on the status of Goldman Sachs’ current folly and the US financial industry:

-          Goldman executives have no idea how angry the average American is at Wall Street in general and Goldman in particular.

-          Nobody likes Ivy-league trained, arrogant, wise-cracking executives, least of all those who wear great suits and have great haircuts.

-          In a work-related email, lack of discretion and caution can really return to haunt the writer.  Thus, characterizing a deal as “shitty,” calling the securities “monstrosities,” doubting the sale of your product to “widows and orphans,” and not understanding the complexities of these products guarantees later problems to both writer and firm.

-          When pressed on the use of the word “shitty” in the email, the correct response is not that it was an unfortunate use of words.  Rather, explain whether or not it was a good or bad deal for the investors.

-          To the average American, trying to justify a $9 million cash compensation package as “modest” will never work.

-          If indeed the customer comes first at Goldman, it is impossible to duck questions on fiduciary duty to your customer.

-           “I did nothing legally wrong” will only antagonize the SEC and other prosecutors.  The court will decide what is lawful.

-          As a corollary point, isn’t Goldman smart enough to stop its ongoing public relations releases attacking the SEC and proclaiming innocence?  Nobody believes them.

I have made much of Wall Street’s casino atmosphere.   The Senate should now focus on the following:

  • Why are these types of securities even  legal?
  • What societal or economic good do they promote?
  • How did Goldman and other firms prosper through the short-selling of their competitors’ securities (e.g. AIG, Bear Stearns, Lehman)
  • Even if a security is marginally legal, is it ethical to sell it to customers without detailed and comprehensive disclosures?
  • Since Goldman does not write mortgages, commercial loans or engage in other aspects of retail banking, why should it have a national bank charter?
  • Since it is really a disguised hedge fund, why should it be able to borrow at the Federal Reserve’s discount window at zero percent interest?
  • What is Goldman’s current level of leverage compared to leverage employed just prior to the financial crisis?
  • How could overuse of leverage cause a second more serious financial crisis?
  • Does Goldman (or any other firm) expect to be bailed out again if the crisis reappears?
  • What has Goldman done or approved to assure the public of no more tainted securities and no second bailout?   Personnel changes, managements controls, ethical standards, external oversight?

The press has given much coverage to these hearings.  It is now time for some thoughtful reflection on  Wall Street’s behavior: Is there excessive leverage? Favoring of certain financial institutions? Are we investing or gambling?  Have we learned any lessons? Where are the regulators?

For a public with a short attention span and a Senate looking for quick financial reform, it is handy to target Goldman.   Unfortunately, flogging their executives is merely peeling back one layer of the very large, smelly onion that Wall Street has become.

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9
Apr 10

Above the Law: Too Big to Jail

By and large compliance with the law is voluntary.  Every crime cannot be prosecuted.  In an ethical business culture companies and individuals believe compliance is the right thing to do.  For those who lack a moral compass, the fear factor of imprisonment, fines and social obloquy do the trick.  But now companies display a disturbing cynicism toward legal compliance.

The notion of “Too Big to Fail” is no longer new.  Unfortunately, we are creating a new concept: “Too Big to Jail.”

Pfizer

  • CNN reports in Feds Find Pfizer too Big to Nail that Pfizer illegally marketed Bextra, a painkiller. The FBI conducted a criminal investigation and with much fanfare announced the appropriateness of a Pfizer indictment; i.e., fully prosecuting Pfizer would send a clear directive for tough law enforcement.  But the government did not try Pfizer, and instead settled.  The company agreed to pay a large fine, $1.2 billion dollars, and entered into a special reporting and compliance program.  The government did not seek the ultimate penalty of prohibiting (debarring) Pfizer from participating in Medicare and Medicaid programs.  Prosecutors reasoned:

that excluding Pfizer would most likely lead to Pfizer’s collapse, with collateral consequences: disrupting the flow of Pfizer products to Medicare and Medicaid recipients, causing the loss of jobs including those of Pfizer employees who were not involved in the fraud, and causing significant losses for Pfizer shareholders.

Thus, to avoid debarment, an agreement was reached between a shell subsidiary of Pfizer, which was created for the sole purpose of paying fines and the government.  One federal prosecutor questioned whether even a $1.2b penalty was enough to punish Pfizer.

JP Morgan Chase

To finance a sewer upgrade project Jefferson County (Birmingham), Alabama, entered into a series of financial transactions with a division of JP Morgan Chase.  JP Morgan advised the county to move from a fixed rate mortgage to a variable rate mortgage. JPMC then created complex synthetic derivative rate swaps to match cash flows between payments to bondholders and payments it was to receive from the bank for the interest rate swaps.  In 2008, these deals blew up. The county was then required to pay a major part of the project in 4 years instead of 40 years, and a $647m one time penalty fee. The county’s annual payments jumped from $53m to $636m.

In addition to the poor financial advice which has nearly bankrupted the county, federal bribery convictions were obtained against twenty officials and businessmen.  However, so far, JP Morgan Chase has not been indicted. Rather, it has faced an SEC action and been required to forgo collecting the $647m one time penalty. See Mike Taibbi’s excellent article and chronology Looting Main Street.

As with Pfizer, JPMC avoided indictment for reasons that are clearly expedient rather than ethical.  Karl Denninger on Market Ticker explains:

JP Morgan is the firm that handles the Federal Government’s food stamp program – by creating debit accounts so that there is no “stigma” associated with public assistance.  They issue what look like generic debit cards and of course collect a fee when they’re used, as well as a maintenance charge….

JP Morgan would have a hell of a time justifying the retention of their lucrative food stamp business were they to be charged and convicted of criminal fraud in the Jefferson County case.  See Greenspan’s Delusions Deepen

Reeling in the Small Fish

The government seems to be allergic to indicting and fully prosecuting the worst perpetrators of financial fraud.  For over two years Angelo Mozilo of Countrywide, the ground zero of shoddy mortgage practices, has been investigated without an indictment.

Instead we have been treated to insider trading cases involving Martha Stewart and Samuel Waksal in the Imclone insider trading case and Robert Moffat, an ex-IBM executive who fed inside information to the Galleon Group hedge fund.  Bernie Madoff was convicted only because he confessed to the crimes.  The SEC ignored evidence of his criminal fraud and indeed has been embarrassed by the revelations brought to light in the case.

The Unbalanced Criminal Justice System

A standard not written into the law is the preservation of a corporation deemed systemically important to the society as a whole.  As a result, the criminal justice system has treated the large corporate offender with kid gloves.  However, we now know that fraud was part and parcel of the current financial crisis.  And as Karl Denninger has opined, the system will not recover until we clear it of corporate corruption.  So, how to approach this ethical Catch 22 that may keep us in crisis for the foreseeable future?

President Obama is an attorney who is well aware of the disproportionate sentences meted out to accused and convicted minorities.  He was also a constitutional law professor who understood the need for equality under the law.  Yet more than two years into the financial crisis we have yet to indict, try and convict any “too big to jail” institutions.  Continuing this inequity will only convince Americans that there are two sets of laws, one for favored institutions and individuals and another for the rest of us.

No one should be above the law.

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10
Mar 10

Can We Afford Our Criminal Justice System?

Based on 2007 data, the United States has 7.3 million (up from 2.4 million in 1982) in jail or prison, paroled or on probation. That is, 1 in 31 adults, compared to an earlier 1 in 77.  With the ongoing financial crisis, desperate state and local politicians are looking for any means to reduce these costs, including early release.  A recent New York Times article, Safety is Issue as Budget Cuts Free Prisoners, highlights the dilemma:

In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result — more convicted felons on the streets, not behind bars — has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public’s sense of safety.

One result: many of the newly released prisoners commit crimes!  How do we keep society safe against the growing cost of incarcerating the bad guys?

The State and Local Financial Crisis

In Where Are We Now? we discussed the budget deficits in 48 of 50 states, while all states but Vermont require them to be balanced.  The situation has deteriorated.  Michael Shedlock (“Mish”) has chronicled these massive budget problems and some state and local responses:

- Illinois – “The state is in utter crisis,” said Representative Suzie Bassi. “We are next to bankruptcy. We have a $13bn hole in a $28bn budget.”The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. “It’s a catastrophe”, said the Schools Superintendent. See Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget

-   New Jersey – Newly elected Governor Chris Christie found that: In the time we got here, of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money.

When I went into the treasurer’s off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them. See Governor Christie: “Time to Hold Hands and Jump Off the Cliff” – Chris Christie For President?

-   California – Last year the state assured markets that it had solved its budget problem.  To meet deficits and cash shortages, the state treasurer is contemplating creditors in state IOUs, delaying payments to school programs and demanding that 80% of state tax be paid before it is earned. See California Delays Payments, Ponders IOUs Again, Demands 80% of Income Tax Paid Before It’s Even Earned

The Prison Industrial Complex

In his 1961 farewell address, President Eisenhower warned Americans against the military industrial complex.  We have created a “prison industrial complex,” with its expensive, unmanageable system of incarceration and monitoring.  One Connecticut study showed an average annual cost of $44k per prisoner.  Public sector unions with high salaries, generous overtime, defined benefit pension plans and retiree health care benefits are hugely expensive, and prison staffs are heavily unionized.

A Way Out

We have suggested in the past that government needs radical reengineering.  See Why Not Reengineer Government? Overhauling the criminal justice system should be a part of that effort. And there are possible solutions:

  • Privatize prisons.
  • Decriminalize certain offenses such as illegal drugs and gambling.
  • Non-violent criminals should pay financial penalties, be confined to their homes, placed in half-way houses or paroled immediately.
  • Community service programs should be re-thought to make best use of talents and skills of otherwise imprisoned citizens.
  • Shorten prison sentences for all but the most violent felons.

Our criminal justice system has mushroomed with little regard to the financial costs to taxpayers. We have over-criminalized non-violent behaviors to all our detriment.  A reform in that system can pay both societal dividends, fewer citizens locked up and a financial dividend, lower taxes.  Perhaps this is one silver lining from the financial crisis.

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1
Mar 10

Labor and Employment Laws: The Hidden Job Killer

When we ignore government sleight of hand, the real number of unemployed Americans is a staggering 26.9 million.  In For 15 Million Unemployed any Job is a Good Job; Questions for Pollyannas; Wishes Aren’t Fishes, Michael Shedlock (“Mish”) continues his excellent analysis of the unemployment situation.  Contrary to Bernanke and Obama Administration rosy projections, Mish predicts that official unemployment will remain greater than 9 % through 2015.  In a quote from Allen Sinai, chief global economist for Decision Economics, Mish describes corporate hiring behavior:

American business is about maximizing shareholder value…You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.

Workers are expensive. Federal, state and local employment laws make them more so.

New Deal Labor Legislation

In the late 19th and early 20th century, rapid industrialization resulted in powerful owner/capitalists, virtually powerless workers, and deplorable working conditions.   Upton Sinclair’s The Jungle dramatized the deplorable state of affairs in the meatpacking industry.  In reaction, in 1935, Congress passed the Wagner Act to permit union organizing. Then it enacted the Fair Labor Standards Act to establish minimum pay, limitations on hours and pay for overtime work.  Perhaps labor legislation should have stopped at that point.

Nothing Succeeds Like Excess

New Deal labor legislation was just a springboard for greater federal control over the workplace.   Since 1964, there has been a flood of labor and employment legislation and Executive Orders.

  • The Civil Rights Act prohibits race, color, religion, sex or national origin and pregnancy discrimination.
  • The Age Discrimination in Employment Act prohibits age discrimination.
  • One Executive Order prohibits all forms of discrimination and requires affirmative action.  This includes training and outreach programs and other positive steps which must be incorporated in written personnel policies and a plan which must be updated annually.
  • The Equal Pay Act requires that men and women in the same workplace be given equal pay for equal work.
  • The Americans with Disabilities Act prohibits disability discrimination. The Rehabilitation Act requires most federal contractors and subcontractors to take extra measures to hire and promote qualified disabled individuals.
  • The Occupational Safety and Health Act requires employers to meet legal health and safety standards.
  • The Employment Retirement and Income Security Act (“ERISA”) sets uniform minimum standards to assure that employee benefit plans are established and maintained in a fair and financially sound manner.
  • The Workers Adjustment and Retraining Notification Act requires that covered employers provide notification sixty days before a plant closing or a mass layoff.
  • The Family and Medical Leave Act provides covered employees with entitlement to up to 12 weeks of job-protected, unpaid leave during any 12 months for the following reasons:

-Birth and care of the employee’s newborn or adoption or foster care of a child

-Care of an immediate family member (spouse, child, parent) who has a serious health condition

- The employee’s own serious health condition

These are the major pieces of federal labor and employment legislation, but there are additional enactments regulating the employment relationship.

Since we live in a federal system, state and even municipalities impose additional employment, benefit and labor obligations.  Moreover, the courts have intervened to create doctrines such as wrongful discharge to limit an employer’s right to dismiss an employee at will.

Real World Consequences

Much of the above legislation is grounded in noble sentiment: workplace fairness and employee protection.  But there are real world consequences: a loose definition of “serious health condition” allows employees to take large unpredictable amounts of time off, harming production schedules.  Affirmative action programs require lots of staff and recordkeeping, extra recruitment and training, and slower hiring.  ERISA imposes fiduciary liability on plan sponsors. With virtually every workplace sector protected, firing an employee is difficult, with the ever present danger of a discrimination or retaliation charge. And so the American workplace is now one of the most regulated areas of our economy.

Laws are often a hidden tax. See Ask Your Congressional Representative to Do Nothing.   Allen Sinai has reached the correct conclusion: why hire expensive workers who have a host of protections and entitlements when you can substitute cheaper capital (automated machinery, robots, computers, etc)?  In a globalized economy where a highly motivated, well-trained Chinese worker makes about $1 per hour, the over protected American worker may have priced himself out.

If the Obama Administration is serious about reducing the unemployment rate, it should be thinking about shelving expensive health care initiatives and the Employee Free Choice Act.  More employer cost will equal less American employment.

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27
Jan 10

We Can Handle the Truth

“You can’t handle the truth!” Col. Nathan R.Jessep in A Few Good Men

After his election President Obama had the opportunity to educate the public on the causes of the financial crisis and the necessary steps to help us emerge from it.  Over this past year, he has squandered this chance, and in so doing has created the political backlash that is occurring today.

Policy Making and the Truth

With great fanfare, we inaugurated President Obama against the backdrop of the greatest financial crisis since the Great Depression.  In any new Administration, policy making is never easy and advisors at times seem to operate in virtual echo chambers, hearing only themselves.  They presented Obama with a range of options: nationalize the banks; let them fail and let the bankruptcy courts sort it all out; continue the Bush/Paulson bailout policies.  From the beginning, Obama advisors took the middle of the road policy to continue the bailouts.  As voters and participants in a democracy, we can now see the missing piece in this scenario. President Obama owed the public an explanation of this policy choice.  My guess is that his advisers warned against candor.  I would further conjecture these advisers felt that candor would have made the crisis worse.  Elites always worry about scaring the masses. This was confirmed at today’s Congressional hearings on AIG.  AIG was viewed by both Timothy Geithner and Henry Paulson, as the “end of the financial world as we knew it.”  The Administration and we are now suffering the consequences of this subterfuge.

Back to the Future

President Obama could have made a few simple points that would have educated the public, built a consensus for his policy choice and left open future policy options if the bailout approach failed.

President Obama could have made these simple and direct points:

  • We are facing the greatest financial crisis since the Great Depression
  • We got into this problem by borrowing too much, and producing and saving too little
  • At the center of this crisis are the large money center banks and Wall Street investment firms
  • Using inappropriate levels of borrowing and creating non-transparent products, derivatives, which could not be accurately valued or traded, these banks and firms gambled with our money.
  • Banks, however, are the transmission mechanism for getting money into the economy through check clearing, making loans and other services.
  • We are going to provide enough support for the banks to continue their necessary and transparent functions.
  • There will be a consequence to any bank for needing this ad hoc and unusual government support.
  • Shareholders and creditors of the banks must share in some of the losses.
  • Bank employee bonuses will be severely limited or eliminated until the banks recover.
  • The government will take part ownership in the banks until they return to financial health.
  • I have asked my Attorney General to investigate whether these institutions committed any crimes.  I will ask him to hold indictments in abeyance until we are on our way to recovery.
  • Let me assure you that the government will punish wrongdoing.

We Build Prisons of our Own Making

We know this fictional address to the public did not take place.  The Obama Administration now owns the policies of failed bailouts.  The recovery is precarious and now the government asserts that the health of the stock market hinges on re-appointing Ben Bernanke as Federal Reserve Chairman.  The Massachusetts senatorial election was a wakeup call that the middle class is “mad as hell and isn’t going to take it anymore.” See The President Wakes Up and Smells the Election Results.

In tonight’s State of the Union Address, President Obama scratched the surface of candor. He stated that he hated helping the banks, but that failure to do so would have led to greater unemployment, business closure and lost homes.  President Obama, it is not too late for complete candor. It is not too late to commence investigations and prosecutions.

Col. Jessep was wrong: the American public can handle the truth!

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1
Dec 09

Uncomfortable Questions

By nature Americans are optimistic people.  But, optimism should not be an excuse to suspend critical thinking.  There are uncomfortable questions which should be asked:

To Congress:

  1. Is this financial crisis different from past recessions?
  2. If this crisis is different why are we continuing to employ the same failed policies of the past?
  3. Ben Bernanke and Tim Geithner were in positions of responsibility at the inception of the financial crisis. Why should they continue in their positions?
  4. If easy monetary policies have gotten us into past financial trouble, why will easier monetary policies not cause further financial trouble?
  5. How is a jobless recovery a genuine recovery?
  6. After passing the TARP and a stimulus program, have Americans received value for money spent?

To the Federal Reserve Chairman:

  1. You have been a student of the Great Depression; explain how and why current circumstances differ from the 1929 Depression?
  2. Your zero interest rate policy created the housing bubble and much of the current financial crisis.  Why continue this zero interest rate policy and cause further financial damage?
  3. Under what authority did the Federal Reserve have the right to purchase mortgages, equity stakes in private entities?
  4. If you believe a recovery is in progress, why are you not removing government guarantees and selling the mortgage backed securities the Federal Reserve purchased?
  5. Isn’t a zero interest rate policy antithetical to a strong dollar?  And might not a weak dollar actually hurt the US economic recovery?
  6. Won’t a zero interest rate policy lead to dangerous speculative excess and misallocation of capital?
  7. Given the scope and nature of guarantees and expansion in the Fed balance sheet with securities of dubious quality, what is the chance of a US default on its debt?
  8. Did the Federal Reserve buy private mortgage backed securities at face value? If so, why?
  9. Why are you afraid of an audit of the Fed’s balance sheet?

To the Executive Branch and Treasury Secretary:

  1. Given the massive amount of public and private debt (almost 400% of GDP) should government policy be encouraging businesses and individuals to go further into debt to spur a recovery?
  2. Why are record bonuses being paid to Wall Street executives when these entities caused the financial crisis and needed public support to avoid bankruptcy?
  3. Has China directly threatened the Administration with boycotting the purchase of US debt?
  4. With meager internal savings and the potential for a threatened foreign boycott of US debt purchases, how does the Administration intend to fund the rapidly growing federal deficit?
  5. How many banks are actually insolvent?
  6. Why have we not promptly closed problem banks?
  7. Is the FDIC insolvent?
  8. How much more public money will be required to continue to fund the losses at Fannie and Freddie?
  9. Is massive federal assistance to select private companies like GE, American Express or AIG constitutional?
  10. With ever growing deficits, why is the Administration proposing costly health care proposals and expanded troop levels in Afghanistan?
  11. Is the government secretly intervening in the public debt and equity markets?  If so, why?
  12. You have current regulatory power to reform the financial system. Why are you not:

a. Forbidding the creation and trading of private, customized credit derivatives?

b.Imposing windfall profit taxes on Wall Street that received any form of federal assistance?

c. Breaking up the “too big to fail banks?”

    General Questions for Economists:

    1. How is the constant tampering with interest rates and providing taxpayer supported financial guarantees consistent with capitalism?
    2. How does a zero interest rate policy affect pension funds and the elderly population living on a fixed income?
    3. Why is the market incapable of determining an appropriate level of interest rates?
    4. Does our level of national income support our current projected debt levels?
    5. Does FDIC insurance lead to reckless lending?
    6. What is the long-term effect of government meddling in supposedly free capital markets?
    7. Many of you did not predict the last financial crisis. What did you learn which would help you predict the next crisis?

    To the Judiciary:

    1. Has the US Constitution been violated in favoring select private entities with public support, backdoor “make whole” schemes at the expense of competitors and at the expense of taxpayers?
    2. What theory of preemption permitted the Treasury and the Federal Reserve to effectively take over AIG when insurance companies are state regulated enterprises?

    Conclusion

    We are in uncharted waters.  When a real estate enterprise in Dubai dominates the financial headlines and shakes the world financial markets we are far from putting the financial crisis behind us.  Right now, I think we are in the “extend and pretend” phase of the crisis, wherein markets and government collectively believe that ignoring current problems will permit the economy to heal over time.  That is Plan A.

    The real question looms in front of us:  What is Plan B, if all government efforts fail?

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    14
    Sep 09

    Why are We Investigating CIA Officers Instead of Bankers?

    There are times when the American populace needs to be put through a values clarification exercise. An example: when a charity solicits us for a contribution, we often respond that we cannot afford to give.  What we really mean is that we would rather spend money on a movie, new clothes or a couple of beers. On a macro, social policy basis we also have trouble clarifying our values.  We rail against excessive health care costs, but we do not ban cigarettes or alcohol, or mandate that overweight people all attend Weight Watchers. We have technology to prevent a drunken driver from starting an automobile while inebriated, but after a DWI conviction do we consider mandating that safeguard?

    This brings us to the main point: why are we investigating CIA officers instead of bankers?  On Monday August 24th, the New York Times had a front page article heralding that Attorney General Eric Holder was naming a veteran prosecutor to investigate CIA interrogation techniques during the Bush Administration. The purpose of the investigation is to decide whether or not to bring criminal prosecutions. Here is the obligatory disclaimer so human rights advocates can move on and finish reading this piece.  If there are bona fide legal abuses of prisoners’ civil rights, then by all means the Department of Justice, the military or other governmental bodies should thoroughly investigate such abuses and bring criminal cases, if warranted.

    The actions of CIA officers should be examined in context.  Post-9-11, the government adopted a philosophical stance on terrorism and the threat to the US homeland.  The stance was that the United States was in mortal danger from jihadists and other terror organizations and, unchecked, these terrorists had the capability of inflicting untold harm on the American public.  Thus, as always, the CIA mandate was to protect the country. Post 9-11, these were extraordinary times and the danger was real and imminent.  Possibly extreme measures were needed to obtain information and protect Americans.

    Every intelligence gathering or law enforcement agency probably has a small minority of unbalanced individuals who go overboard in exercising authority. My guess is that 99.99% of CIA, FBI and other agents are professional, disciplined, well-trained patriots acting in good faith and with the highest motives and integrity. These are professionals who give up time with their families on a GS pay scale to protect us. How do we repay them?  Post-hoc, we investigate them.  The average citizen has no idea what this means.  These officials being investigated may have to hire their own attorneys, pay for their defense out of pocket and hope to be reimbursed for these expenditures if exonerated.  This does not take into account the psychological strain on the individual, the public humiliation, opprobrium of friends and neighbors and the strain on families.   Moreover, there is a chilling, trickle down, effect on others in the agency.  No risks will be taken and the best and brightest in the agency will avoid being involved in interrogations. DOJ investigations take a long time and that is one large cloud to be under.

    Contrast the treatment of CIA officials with the treatment of the principals in the financial industry who caused the 2008 market meltdown:

    • Rating agencies received a fee from the institutions that were being rated and essentially conspired to inflate ratings to the detriment of investors;
    • Stock brokers did not disclose the riskiness of investment products being sold to investors;
    • Real estate brokers pushed clients into houses they could not afford and conspired with mortgage brokers, banks and clients to obtain bogus financing;
    • Purchasers knowingly falsified their applications as to income and assets to obtain a larger mortgage or any mortgage;
    • Investment bankers took the suspect paper, packaged the paper into collateralized debt obligations and sold them to pension funds;
    • Pension fund managers had a fiduciary duty to investigate what they were buying, but instead chose to reach for a few extra basis points of yield to earn a bigger annual bonus;
    • Lawyers willing created CDOs and derivatives on the CDOs.  They counseled clients to provide the skimpiest of disclosures and misled investors.

    The mortgage and housing arena is but one part of the financial meltdown and there are more principals in the financial industry worthy of investigation. But the reality is that few individuals and companies are being investigated. The standard apology for this lapse is that investigations would disrupt the economy.  Who could have really understood the magnitude of these problems? This did not occur during my administration!  Let’s let bygones be bygones.

    That approach is too facile and disingenuous for my tastes.  For the average working man the catastrophic result has been lost homes, depleted retirement accounts, broken families and lost dreams.

    Who is more deserving of prosecution, members of the financial industry or members of the CIA?  Patriots versus Scoundrels.   People who tried to save lives versus people who destroyed lives. People earning a GS pay scale versus Goldman Sachs executives scheduled to share in $11.4 billion in bonuses for the first six months of 2009.  A values clarification moment –you decide!

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