I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men.
We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."
-Woodrow Wilson
Sources: Famous Quotations On Banking, PBS, Rescue America, Youtube
The US Senate Permanent Subcommittee on Investigations released a voluminous report last Wednesday on the Wall Street crash of 2008 that documents the fraud and criminality that pervade the entire financial system and its relations with the government.
The 650-page report is the outcome of a two-year investigation that involved over 150 interviews and depositions as well as the examination of subpoenaed emails and internal documents of major banks, government regulatory agencies and credit rating firms. The report, entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” establishes that the financial crash and ensuing recession were the result of systemic fraud and deception on the part of the mortgage lenders and banks, carried out with the collusion of the credit rating corporations and the complicity of the government and its bank regulatory agencies.
The World Socialist Web Site will analyze the contents of this important document in detail in the coming days. However, its basic thrust is clear. As the executive summary states: “The investigation found that the crisis was not a natural disaster, but the result of high-risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
At a press conference Wednesday and in subsequent interviews, Senator Carl Levin (Democrat from Michigan), the chairman of the subcommittee, was even more explicit. “Using emails, memos and other internal documents,” he said, “this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses and markets. High-risk lending, regulatory failures, inflated credit ratings and Wall Street firms engaging in massive conflicts of interest contaminated the US financial system with toxic mortgages and undermined public trust in US markets.
“Using their own words in documents subpoenaed by the subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high-risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them. Rampant conflicts of interest are the threads that run through every chapter of this sordid story.”
Levin went on to say that the investigation had found “a financial snake pit rife with greed, conflicts of interest, and wrongdoing.” He told the New York Times: “The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest.”
The report is divided into four sections, each focusing on a different contributor to the network of fraud and abuse: the mortgage lenders, the regulators, the credit rating firms and the Wall Street investment banks. The first section takes Washington Mutual (WaMu) as its case history, detailing the predatory and deceptive lending practices and accounting and reporting subterfuges that led, following the implosion of the subprime mortgage market, to the bank’s collapse and takeover by JPMorgan Chase in September of 2008.
The second examines the corrupt role of the federal Office of Thrift Supervision (OTS), which oversaw three of the biggest financial failures in US history—Washington Mutual, IndyMac and Countrywide Financial. “Over a five-year period from 2004 to 2008,” the report states, “OTS identified over 500 serious deficiencies at WaMu, yet failed to take action to force the bank to improve its lending operations and even impeded oversight by the bank’s backup regulator, the FDIC.”
The third section documents the systematic manner in which the rating firms Moody’s and Standard & Poor’s gave top credit ratings to collateralized debt obligations (CDOs) and other complex securities backed by subprime and other toxic mortgages, enabling the banks to make billions of dollars by palming off these junk securities as top-grade investments. In return, the rating companies raked in huge profits for their services.
As the report states: “Credit rating agencies were paid by Wall Street firms that sought their ratings and profited from the financial products being rated… The ratings agencies weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom.”
The final section examines the fraud and deception perpetrated by the major investment banks as they profited first from the inflation of the US housing market and then from its implosion. It takes as its examples Goldman Sachs and Deutsche Bank. Goldman began betting heavily in 2007 that the housing market would collapse, packaging and selling subprime mortgage-backed CDOs even as it secretly bet that the same securities would plummet in value.
The report cites emails by Deutsche Bank’s top global CDO trader, Gregg Lippman, calling risky mortgage securities marketed by the bank “crap” and “pigs” and the bank’s operations a “CDO machine,” which he characterized as a “Ponzi scheme.”
The document points to the central role of the big Wall Street banks in promulgating the fraud, stating: “Investment banks were the driving force behind the structured finance products that provided a steady stream of funding for lenders originating high-risk, poor-quality loans and that magnified risk throughout the US financial system. The investment banks that engineered, sold, traded and profited from mortgage-related structured finance products were a major cause of the financial crisis.”
The overall picture is one of criminality on the part of the entire financial establishment that, with all levels of government serving as its co-conspirator, systematically looted the economy in order to further enrich itself. The result is a social tragedy for tens of millions of people in the US and many millions more around the world. And yet, the result of this historic crime is that the bankers and speculators are richer and more powerful than ever.
Not a single senior executive at a major US bank, hedge fund, mortgage firm or insurance company has gone to jail. Not one has even been prosecuted.
There is every indication that none will be criminally indicted in the future. As with the similarly damning report released in January by the US Financial Crisis Inquiry Commission, the Senate report has been largely buried by the mass media. It was reported perfunctorily on the inside pages of some of the major newspapers and barely mentioned by the broadcast and cable networks, and then dropped.
One day after the release of the Senate report, the New York Times published a long article on the failure to prosecute any of the Wall Street criminals. It recounted a private meeting between the then-president of the Federal Reserve Bank of New York (now Obama’s treasury secretary) Timothy Geithner and then-New York Attorney General Andrew Cuomo in October 2008 at which Geithner urged Cuomo to back off on investigations of the banks and rating agencies.
The article contrasted the absence of criminal charges against bankers today with the aftermath of the savings and loan debacle of the late 1980s, when government task forces referred 1,100 cases to prosecutors and more than 800 bank officials went to jail. It noted the precipitous decline in referrals by bank regulators to the FBI, from 1,837 cases in 1995 to 75 in 2006. Over the ensuing four years, at the height of the financial crisis, an average of only 72 a year have been referred for criminal prosecution.
The Office of Thrift Supervision has not referred a single case to the Justice Department since 2000, and the Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.
How is this to be explained? Why are Goldman CEO Lloyd Blankfein, JPMorgan CEO Jamie Dimon, the former CEO of Washington Mutual, Kerry Killinger, as well as Treasury Secretary Geithner and his predecessor, Henry Paulson (previously CEO of Goldman), not in prison?
Such financial manipulators are being shielded while workers are being stripped of their jobs, wages, homes and basic social services to pay for the debts resulting from the transfer of trillions in public funds to the banks. Collective resistance to this attack is being criminalized in the form of anti-strike laws, imposing fines and jail terms for workers who fight back.
One reason for the absence of prosecutions is the power of the individuals involved, all of whom wield immense influence over politicians, the media and the legal system. But it goes deeper than the status of individuals, just as the sordid state of affairs as a whole arises not from individual greed, but rather from a profound crisis of the entire system.
The criminalization of the American ruling class is the outcome of more than three decades in which the accumulation of wealth by the corporate-financial elite has become increasingly separated from real production. In its pursuit of profit, the ruling class has dismantled huge sections of industry and turned ever more decisively to financial manipulation and speculation.
The ascendancy of the most parasitic sections of the capitalist class has been accompanied by a sharp decline in the living standards of the working class. The richest and most powerful layers have acquired staggering levels of wealth by plundering society.
The ruling class itself senses that to prosecute any of the leading figures in the defrauding of the American people (and the rest of humankind) would rapidly expose the criminality of the entire system. It would mean putting the capitalist system itself on trial.
As the Republican presidential candidate in the fall of 2008, no one had more power to upend the Wall Street rescue package than Arizona Sen. John McCain.
But McCain now feels duped by former Republican Treasury Secretary Henry Paulson.
“We were all misled," McCain said Sunday on NBC's "Meet the Press." "What did he do? He started pumping money into the financial institutions. Now the financial institutions are fine -- Wall Street’s doing great. Main Street is in deep trouble.”
Paulson and other former Bush administration officials told Congress at the time that the $700 billion lawmakers approved would be used to buy toxic debt from the real estate market. Instead, the former Treasury secretary made direct injections into some of the biggest banks in the country, and the Obama administration even used the money to prop up major U.S. companies, like General Motors.
"Whoever thought when we passed that we would own General Motors and Chrysler, GMAC," McCain said. "It's beyond what anyone had anticipated."
New York Attorney General Andrew Cuomo unveiled a major legal action against senior Bank of America executives Thursday over its controversial purchase of Merrill Lynch, including bringing civil charges against its former CEO Ken Lewis.
Cuomo's office, which has been aggressively pursuing an investigation into the merger and subsequent bonuses paid to former Merrill employees, said it was charging Lewis and Bank of America's chief financial officer Joe Price, who was recently appointed to lead the firm's consumer banking business.
The lawsuit contends that the bank's management team understated the losses at Merrill in order to get shareholders to approve the deal, then subsequently overstated the firm's willingness to terminate the merger in order to get $20 billion of additional aid from the federal government.
"Bank of America, through its top management, engaged in a concerted effort to deceive shareholders and American taxpayers at large," Cuomo said in a statement.
"This was an arrogant scheme hatched by the bank's top executives who believed they could play by their own set of rules."
A spokesperson for Bank of America called the charges "regrettable" and "totally without merit."
Separately, the Securities and Exchange Commission said Thursday it had struck an agreement with Bank of America over the company's decision to pay $3.6 billion of bonuses to former Merrill employees for fiscal year 2008.
Under the terms of the proposed settlement, the Charlotte, N.C.-based lender will pay a $150 million penalty to its shareholders who were affected by the disclosure violations.
The company also agreed to implement a number of corporate governance changes for the next three years including giving its shareholders an advisory vote, or "say on pay" of its executives.
The settlement will be subject to the approval of U.S. District Court Judge Jed Rakoff, however.
Rakoff scuttled a previous agreement between the two parties last fall, arguing that the original $33 million settlement was not only paltry, but would only impact those who were hurt by the bonus scandal: the company's shareholders.
Bank of America (BAC, Fortune 500) shares fell more than 3.5% in midday trading.
Bank of America Corp., the nation's largest lender, will pay investment-banking employees bonuses of about $4.4 billion for last year, or an average of $400,000 each, a person close to the bank said.
As much as 95 percent will be paid in stock vesting over about three years, the person said. Those receiving the smallest bonuses will get about half their compensation in cash, paid later this month, the person said. The unit accounts for 10,000 people, or 4 percent of the Charlotte-based bank's 283,000 workers.
Bank of America, the target of political wrath for its acquisition of Merrill Lynch & Co. even as the faltering Wall Street firm handed out $3.6 billion of employee bonuses, reaped a $6.3 billion profit in 2009. This year's investment bank bonuses are a third less the than $6.5 billion that the combined units would have paid in the peak year of 2006, the person said, citing internal Bank of America calculations.
"Fixed-income traders are receiving the biggest bonuses at Bank of America and other firms because that was what drove Wall Street profits last year," said Richard Lipstein, managing director at Boyden Global Executive Search Ltd. in New York. "Psychologically Wall Street is paying people compared with 2006 levels because 2008 was such a disaster."
The Financial Times cited unidentified people as saying that top Bank of America performers in global banking and markets will receive bonuses of about $5 million, while managing directors will get $2.5 million to $3 million. Senior investment bankers often receive bonuses that are eight to 10 times their base salaries, which tend to be $250,000 to $300,000, Lipstein said.
"We attempted to balance the need to pay competitively with our understanding of the general concern over the level of compensation on Wall Street," spokesman Bob Stickler said. "The most important thing is that much more of year-end compensation is now deferred and tied to long-term stock performance and there are clawbacks."
Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.'s investment bank slashed their compensation in the fourth quarter. The three firms set aside $39.9 billion for pay in 2009, below the 2007 record of $44.7 billion. The total fell short of the $46.1 billion five analysts expected this year and is almost $10 billion less than what some analysts estimated in October.
JPMorgan's investment bank had the lowest ratio of the three of total pay to revenue, at 33 percent. Goldman Sachs's rate was 36 percent and it was 62 percent at Morgan Stanley.
At Bank of America, the bonuses equate to 19 percent of the $23 billion in revenue at the investment bank. That ratio would have been 26 percent in 2006, the person briefed on the matter said.
Bank of America is relying on growth in Merrill's capital markets and wealth management units. The bank, which bought Merrill last January, plans to add "hundreds" of trainees this year as it rebuilds its stock brokerage unit, spokeswoman Selena Morris said, declining to provide a specific number. Merrill had 15,006 financial advisers at the end of 2009, down from almost 18,000 at its peak several years ago, she said.
About 80 percent of Merrill's brokerage revenue stem from financial advisers who were trained by the company, with the balance from brokers recruited from peers, Morris said. Merrill Lynch's wealth management unit had revenue of $6.1 billion last year, six times greater than Bank of America's stand-alone brokerage business in 2008.
Democrats and Republicans alike pummeled Treasury Secretary Timothy Geithner on Wednesday over his role in the $180 billion bailout of insurance giant AIG Inc., venting public anger over Wall Street's return to prosperity while 10 percent of Americans are still jobless.
Geithner, one of the original architects of the government's 2008 response to the financial crisis as president of the Federal Reserve Bank of New York, defended the use of taxpayer money as necessary to head off "potentially catastrophic damage to the economy."
But members of the House Committee on Oversight and Government Reform hammered away at why regulators allowed American International Group to pass on billions of the bailout money to big Wall Street banks that were business partners.
"In effect, the taxpayers were propping up the hollow shells of AIG by stuffing it with money. And the rest of Wall Street came by and looted the corpse," committee chairman Edolphus Towns, D-N.Y., told Geithner.
Geithner clearly was getting no cover from committee Democrats on the day that President Barack Obama was to give a State of the Union address intended to assure Americans he shares their economic priorities.
Rep. Marcy Kaptur, D-Ohio, suggested Geithner was more beholden to banking interests than to taxpayers at the New York Fed and cut him off abruptly when he tried to deny it.
Kaptur later called Geithner's performance weak and said it showed that "he shouldn't have been appointed in the first place." She said in an interview that he should leave the administration "but removing him would be an empty change without eliminating the revolving door between Washington and Wall Street."
Both Geithner and Federal Reserve Chairman Ben Bernanke have recently found themselves on the defensive, both targets of political discontent and rising voter anger sweeping the nation.
Bernanke had to scramble for support for confirmation for a second term. And Geithner faced speculation over whether his influence was fading after Obama reset his economic priorities to go with a far more aggressive attack on Wall Street and large banks and began paying more attention to advice from former Fed Chairman Paul Volcker.
But if Geithner risked being hung out to dry by the administration, it was not obvious in his testimony, in which he tied to deflect repeated congressional criticism and vigorously defended his record.
"Deciding to support AIG was one of the most difficult choices I have ever been involved in, in over 20 years of public service. The steps that were taken were motivated solely by what we believed to be in the public interest," Geithner said.
He also repeated an insistence that he played no direct role in AIG deals with business partners or in withholding information about them from the public.
When Obama picked him for the Treasury post on November 24, 2008, "I withdrew from monetary policy decisions ... and day to day management of the New York Fed," Geithner testified. "I don't think there was a better alternative available."
AIG eventually received an aid package from the government of more than $180 billion. At issue is the part of this money to repay banks that were its business partners, known as counterparties, and alleged efforts to cover up details of the payments.
The committee subpoenaed 250,000 pages of documents from the Fed.
Lawmakers are concerned with revelations about efforts to keep details of the AIG deals secret. Officials from the Treasury Department and the New York Fed worked to keep the public from learning details about those deals and other AIG decisions.
"I played no role in those decisions," Geithner said. "I will take complete responsibility for decisions I played a role in shaping," he said.
But lawmakers expressed skepticism.
"Many people, including people of this committee, have a hard time believing Secretary Geithner entered into an absolute cone of silence," California Rep. Darrell Issa, the committee's top Republican, said. Issa said he had "lost confidence" in Geithner.
Democrats and Republicans took turns lambasting the Treasury secretary.
"Either you made a bad decision there, or there was the attempt to cover up one of the biggest bailouts, backdoor bailouts, in history," Rep. John Mica, R-Fla., told him.
Recalling the early controversy over Geithner's failure to pay some personal income taxes, Mica said: "You gave lame excuses then, you are giving lame excuses now. Why shouldn't we ask for your resignation as secretary of the Treasury?"
"You have a right to your opinion," Geithner said.
Rep. Stephen Lynch, D-Mass., told Geithner: "It just stinks to the high heaven what happened here."
Lynch said later that Geithner's reputation "has been hurt greatly."
Bernanke also said Wednesday he was "not directly involved in negotiations" involving payments from AIG to its business partners including Goldman Sachs and other Wall Street firms. Those negotiations were handled primarily by the staff of the New York Fed, he said.
Bernanke made the comments in written responses to questions posed by Issa.
Although Bernanke and Geithner have taken the most heat, the government's bank rescue effort began under former President George W. Bush and Henry Paulson, his Treasury secretary.
Paulson, who followed Geithner at Wednesday's hearing, defended his own role. "An AIG failure would have been devastating to the financial system and the economy," he said. "AIG could not be effectively wound down."
Rep. Elijah Cummings, D-Md., asked Paulson if he didn't realize how angry people were at wealthy bankers and Wall Street barons who he said play golf together and are always "looking out for themselves" while the rest of the country suffers.
"I'm not a golfer but I sure know that's how people feel. Congressman, you've got it. People are very, very angry. And rightfully so ... They don't recognize that what was done wasn't done for the banks" but to save the nation's financial system and economy.
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