San Francisco California: November 24, 2014
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Peter Henning, in his self-bowdlerized Dealbook feature he branded as “White Collar Watch” (note his deletion of the word “crime”) has come up with an article that illustrates that the New York Times is clueless about bank regulation. The good news is that once the fundamental error in their understanding of banking regulation is corrected the supposed dilemma that the Henning claims has placed the NY Fed in a terrible “bind” disappears. The title of Henning’s November 24, 2011 article has morphed during the course of the day into “Fed’s New ‘Cop on the Beat’ Role Put it in a Bind.” The title exemplifies three fundamental errors. First, the role of federal financial regulators as “regulatory cop on the beat” is not “new.” It has always been our paramount role as financial regulators. Second, Henning’s columns was prompted by William Dudley, the NY Fed’s President’s testimony before a Senate banking committee subcommittee in which he expressly refused to function as the “cop on the beat” our Nation vitally needs. Third, were Dudley to embrace the role of “cop on the beat” and perform it properly he and our Nation would escape the desperate “bind” we are in – not create a “bind.” Henning’s article tries to support the three errors encapsulated in his title in the reverse order, which I will track.
Henning’s False Dilemma: Prosecuting Banksters is Essential to Effective Regulation
Henning begins his argumentation by asserting a false dichotomy that frames his entire article.
“The issue is how the Fed will balance the conflicting roles it plays as an overseer of the banks, protecting them to ensure they operate successfully, and as a law-enforcement agency charged with pursuing misconduct.”
Even if one knew nothing of banking, the statement fails the minimal test of logical consistency. If our role were “protecting [banks] to ensure they operate successfully” [it isn’t] then there would be no “conflicting role” in “pursuing misconduct” by the banks’ officers and employees. The opposite would be true – our highest priority essential to “protecting” banks would be to remove criminal bank officers and our second highest priority would be deterring such criminality by aiding DOJ in prosecuting those officers.
Henning’s statement is not correct, our mission is not to ensure that banks “operate successfully.” That will often be beyond anyone’s capability, and it is the wrong concept. Banks fail and they should fail. That is why we have the power to place them in receivership. Banks start out with such pathetically small amounts of capital that when the controlling officers are looting the bank it will typically be insolvent within weeks. It is vain to think that regulators, creditors, or shareholders can “ensure that [banks being looted] operate successfully.” What the regulators must do is to ensure that the bank is promptly placed in receivership before it can grow rapidly and spread its frauds through the system by creating a Gresham’s dynamic. But Henning’s false understanding of a financial regulator’s mission does not affect the basic point. We greatly aid our supervisory effectiveness when we serve as vigorous “regulatory cops on the beat.” The twin roles are complementary, not “conflicting.” Indeed, the only way to be an effective supervisor is to be an effective “regulatory cop on the beat.” Success in each role is indispensable to success in the other role.
Henning Knows that Dudley Refused to Serve as the Regulatory Cop on the Beat
Henning’s article accurately reports Dudley’s refusal to take on the elite bank frauds.
“At a hearing on Friday before a Senate subcommittee looking at how the Federal Reserve Bank of New York has dealt with Wall Street banks, the New York Fed’s president, William C. Dudley, said that his agency ‘is not like a cop on the beat.’ Instead, ‘It’s more like a fire warden.’”
Henning’s article even indicates some of the problems with Dudley’s “fire warden” metaphor.
“The vision of the New York Fed ushering people out of the building during an emergency preparedness drill is unlikely to instill confidence among those who remain fearful of what the Wall Street banks can do to the economy when they ignore the rules.”
Henning does not explain the extraordinary nature of Dudley’s refusal to have the NY Fed take on the CEOs leading the control frauds. We have just seen the three most destructive epidemics of financial fraud in history cause a Great Recession that cost $21 trillion in lost U.S. GDP and over 10 million jobs – and both numbers are far larger in Europe. In addition we have the world’s largest banks and bankers leading the two largest financial frauds in history – the Libor and FX conspiracies – plus banks helping fund one of the most violent drugs cartels (Sinaloa) in the world, genocide in Sudan, and (the U.S. government believes) Iran’s development of nuclear weapons. They also manipulated commodity prices, conspired with the ultra-wealthy to evade taxes, rigged municipal bond bids throughout the U.S., and led the massive sale of grossly inappropriate financial products to millions of people in the UK.
In the face of this devastating criminal recidivism produced by the refusal to prosecute senior bankers, what even Dudley agrees is a corrupt culture dominating Wall Street and the City of London, and the immense criticism of the Fed, the Department of Justice, and the Serious Fraud Office it almost defies belief that Dudley would openly reject taking on the banksters leading the frauds. The question I have been asking for eight years is “what would it take for the anti-regulators to take fraud seriously?” It appears it will take another Great Recession.”
As an added feature, Dudley demonstrated his startling indifference to stopping fraud by elite bankers in his testimony before the Senate on November 21, 2014 while the American Society of Criminology was holding its annual meeting and we were presenting panels on the 75th anniversary of Edwin Sutherland’s speech announcing the concept of white-collar crime and during “International Fraud Awareness Week” (Nov. 16-22, 2014). Dudley was observing the NY Fed’s traditional “International Fraud Indifference Decade.”
Henning Knows that Enforcing the Law is a Long-Standing Regulatory Role
Henning knows that we, the S&L regulators working with the FBI and the Department of Justice, stopped a raging epidemic of mortgage fraud in 1983-1987, deliberately burst a regional real estate bubble, and prevented the debacle from reaching the point that it drove even a minor recession. He also knows that we produced the most successful record of prosecuting elite white-collar criminals in history. CNN quoted Henning about this point.
“It wasn’t until the Savings and Loan crisis of the late 1980s, and the many prosecutions that followed, that prison terms for professional perps started to pop, said Henning.”
Henning should also know that we drove “liar’s” loans out of the S&L industry beginning in 1991, shortly after they were first created (The loans were not yet called “liar’s” loans by the industry in our era.) With the benefit of hindsight from the current crisis, where the anti-regulators took no effective action for over a decade against the three fraud epidemics despite our experience and copious warnings, Henning also knows that we saved trillions of dollars and prevented a Great Recession precisely because we exemplified the phrase “regulatory cops on the beat.” Again, this complemented our successful reregulation and resupervison of the industry rather than “conflicting” with it.
The good news is that Henning’s supposed dichotomy is false – regulators that make it a priority to remove and aid the prosecution of elite, fraudulent bankers are vastly more effective than those who do not make holding the elite frauds accountable a top priority. The bad news is that Dudley, Henning, and Dealbook cannot understand this point. The even worse news from Dudley and the Obama administration, which the NYT has scrupulously avoided informing its readers, is about Dudley’s admission at the Senate hearing that the Obama administration deliberately blocked the prosecution of elite bank frauds. Fortunately, the Huffington Post made Dudley’s confession its lead.
“‘We were not willing to find those firms guilty before, because we were worried that if we found them guilty, that could somehow potentially destabilize the financial system,’ Dudley said. ‘We’ve gotten past that and I think it’s really important that we got past that.’”
Senator Brown’s office, however, has released a video and transcript of the exchange with this language:
[Dudley:] “the argument that was made a year ago or a year-and-a-half ago was that large financial institutions could not plead guilty to crimes because this could destabilize those institutions, which could lead to problems.”
Anyone “regulator” who thinks that giving elite, fraudulent banks and bankers immunity for leading the most destructive epidemics of financial fraud in history “stabilizes” “large financial institutions” should resign today and never be allowed to hold a position again in government or any financial institution.
Our paramount mission as financial regulators was to protect the financial system and the Nation from the elite frauds. Dudley has now confessed that an entire administration tried to appease the elite frauds and protect them from accountability. It is critical to remember that the administration did not simply shield the fraudulent banks from prosecution – it shielded the bankers that led the fraud epidemics from prosecution, from civil suits, from serious enforcement actions, and even from having their fraud proceeds “clawed back.” During the entire Obama administration, not a single senior prosecutor, regulator, White House official, or Treasury official resigned in public protest at this assault on the rule of law that once made our Nation great. No greater indictment of their lack of integrity (and competence) is possible. They were tested in the crucible and they all failed.
Real regulators uphold the rule of law and hold even the most elite criminals accountable. Anti-regulators and their media apologists crafted the myth that our system would be endangered if we had a rule of law. Logically, that can only be true if they believe our system is crony capitalism run by the elite, fraudulent bankers and their corrupt political patrons. If they are correct that our system is crony capitalism, however, then that system must be destroyed and the way to destroy it is to restore the rule of law. The NYT needs to become a leader in restoring the rule of law rather than an apologist for those that betrayed it. The “Justice” department deliberately chose to act in the most unjust fashion possible, and the results are already proving catastrophic for the global economy.
Even Professor Cochrane, the U. Chicago economist that detests regulation, now admits that runs cause financial crises and that runs are typically driven by fraud. “Not for nothing have most runs been sparked by an accounting scandal or fraud.” There is nothing more destabilizing to a financial system than fraud by elite bankers that is immunized by their political allies.
How long will it take Dealbook to report Dudley’s confession about the Obama administration’s refusal to prosecute crimes by large banks and senior bankers and its purported recent decision to end that refusal?
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