Legal War on Wall Street Chicanery Isn’t Finished



Updated Sept. 9, 2014 –

Wall Street continues to prove again and again that it needs a moral compass.

True, JP Morgan Chase was fined $20 billion in fines in 2013 and Bank of America was fined more than $16 billion for their companies’ behavior in Wall Street’s collapse in the Great Recession.

But company executives haven’t contrite, they haven’t gone to jail and transparency is questionable.

So, the Obama Administration’s record in prosecuting Wall Street’s behavior has been weak. That also means there are many unanswered questions. Instead, the Federal Reserve and the New York Attorney General are in the forefront to force change.

ID-10074458 chanpipatBreak up the big banks

Meantime, the time has come to break up the big banks. There are 5,000+ banks in the U.S. However, just a dozen of them dominate with 69 percent of the assets in the banking sector.

The eight biggest banks, which are interconnected in many ways, are  JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Wells Fargo, Morgan Stanley, Bank of New York Mellon and State Street Bank.

When their predatory behavior causes their demise and they beg for dollars in massive bailouts, the nation’s economy is practically swallowed up, as we experienced in the events causing the Great Recession.

It prompted me to write the article, Major Banks Are Too Big to Fail, But Not to Break Them Up.

Downsizing banks?

While the administration has failed to prosecute the people responsible, the Federal Reserve appears to be pressuring the big U.S. Banks to merely downsize so they become less risky for the nation’s economy.

Fed Gov. Daniel Tarullo testified before Senate hearing that the Fed is working on several ideas to cut risks and shrink the big banks.

One idea is to impose  more capital requirements for the eight biggest banks to have sufficient assets to cover losses instead of relying on taxpayers. It’s a silly solution in that it doesn’t go far enough, and some of the banks already meet the proposed capital requirements.

There are 5,000+ banks in the U.S. However, just a dozen of them dominate with 69 percent of the assets in the banking sector.

Another idea is to force banks to reduce their dependence of using short-term borrowing from other banks. Why? In a crisis like the Great Recession, all banks are affected so such short-term borrowing is unproductive.

True, JP Morgan Chase was fined $20 billion in fines in 2013 and Bank of America was fined more than $16 billion for their companies’ behavior in Wall Street’s collapse in the Great Recession. But company executives haven’t gone to jail.

But the Fed hasn’t adequately addressed the corruption.

New York Attorney General

In another legal arena, BlackRock, the world’s-largest asset manager has agreed to terms in an investigation that it has been giving some investors early insider information — an unfair advantage to make money.

After being pursued by New York Attorney General Eric Schneiderman, BlackRock will stop giving data and analyst sentiment to Wall Street elitists.

Mr. Schneiderman calls the illegitimate practice, “insider trading 2.0.”

But six years after Congress promised answers in the big banks’ roles in the financial scandal, mostly questions remain.

Fortunately, Mr. Schneiderman has also been investigating Wall Street’s role in the mortgage quagmire.

Return to massive profits

Meantime, elite investors seem giddy over the big banks’ 2013 profits, which would be at an all-time high, if weren’t for their legal costs.

The profits are up an aggregate 21 percent — $74.1 billion for Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Six banks paid nearly $19 billion over their chicanery — violating the Bank Secrecy Act, lying about the quality of mortgage-backed securities, trading manipulations and for selling contaminated mortgages to government-owned financiers.

But the legal war on Wall Street Chicanery shouldn’t finished.

Unanswered questions

Even as a free-market advocate, I remain unconvinced there are at least six unanswered questions:

— The banks’ roles in the role that led to the housing bubble?

— What about guaranteed transparency including securitization details?

— What about jail time for perpetrators?

— What will be sufficient to prevent the future devastation of investors?

— What will be done to stop all the illegalities, including the robo-signing in the foreclosures of homeowners?

— What about a cultural change — a moral compass to halt the practice of giving multi-million dollars in bonuses to employees at the big banks bailed out by taxpayers?

Ineffective Feds

“These days the Justice Dept. and the Securities and Exchange Commission are investigating Wall Street with tactics, such as wire taps, usually reserved for professional criminals and terrorists,” blogged Peter Morici, Ph.D., in May 2011. He’s a business professor at the University of Maryland and former chief economist at the U.S. International Trade Commission.

“Apparently, those agencies recognize what Treasury and the Federal Reserve simply won’t admit – insider trading, robo foreclosures and peddling dodgy securities to unsuspecting investors are good old fashioned fraud,” he wrote. “Like the corruption tolerated by Third World autocrats, those practices handicap American capitalism in global competition and undermine prosperity.”

He cited the subpoenas for executives at Goldman Sachs and SAC Capital advisors.

“Punitive settlements and convictions-resulting from investigations into insider trading at Galleon and SAC, shoddy mortgage foreclosure practices at Bank of America, and shady marketing of mortgage backed securities at Goldman Sachs — ultimately, would curb cynical behavior and ever bigger paydays on Wall Street, and improve returns for stock investors,” he asserted. “As importantly, it would redirect American capital and talent toward more productive, jobs-creating purposes.”

Stocks as investment

Dr. Morici indicated stocks aren’t an optimized investment.

“In February 1998, the S&P 500 first closed above 1000 — since corporate profits are up about 210 percent but equities less than 35 percent,” he recalled. “Corporate profits rose 6 percent annually but investing in stocks paid a disappointing 2.3 percent a year.”

Why else?

“Buying stocks doesn’t seem to pay, because too much of the profits created by innovators with ordinary investors capital is captured by hedge funds, Wall Street trading desks, private equity houses, aggressive M&A shops, and then paid to Wall Street executives and traders,” he wrote.

Dr. Morici suggested an eye-opening thesis.

“In the drive for ever bigger compensation packages, Wall Street’s best and brightest violate boundaries of ethical behavior and the law,” he explained. “Not all of our problems can be laid on Wall Street’s steps, but its culture of entitlement and sharp practices impose enormous burdens.

“The carnival culture on Wall Street is attracting too many young people to business schools to study economics and finance, instead of pursuing physics and engineering,” he added. “That’s why the best business schools are overwhelmed with applicants from Connecticut and California, while engineering colleges depend on students from China and Asia, who will then return home to compete with American businesses.

Wall Street paychecks

He believes that the obscene Wall Street paychecks hurt individual shareholders and pension funds, alike.

“The absence of significant appreciation in equities for more than a decade means that many retirees dependent on IRAs and other defined contributions vehicles can no longer live comfortably, and many baby boomers who have been pushed into such pension vehicles can’t retire,” he wrote. “Their money may be working hard, but only for Wall Street titans and not for them.”

He maintains the financial chicanery costs jobs.

“These days, too much money and talent are directed to financial engineering-efforts to design the next complex derivative-and not enough is going into physics and real engineering-designing electric cars, new materials, and products and services that will define U.S. global competitive success and prosperity for the next 25 years,” he maintained.

“Increasingly, venture capital and stock investors look abroad for the best returns, and this deprives small and moderate sized U.S. companies of capital needed to expand and invest in new ideas and create jobs,” he added.

Conclusion

So, what can Mr. Schneiderman, the Justice Department, and the Securities and Exchange Commission accomplish – while the Treasury Dept. and Federal Reserve appear incoherent?

“Prosecuting Wall Street will do a lot to curb abusive practices and excessive compensation, make stocks and IRAs sensible investments, redirect capital and talent into productive purposes, and get the American growth machine back on track for our children and grandchildren,” concluded Dr. Morici.

Agreed. At one time, my free-market philosophy would have differed on this scandal. But not now. The economic liberty of countless people is at stake.

From the Coach’s Corner, Dr. Morici’s analyses are regularly published in this portal’s Economic Analysis Op Ed section.

Here are links on the background of the financial scandal:

“There is two things that can disrupt business in this country. One is war and the other is a meeting of the Federal Reserve.”

-Will Rogers

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

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Seattle business consultant Terry Corbell provides high-performance management services and strategies.