Where did our wealth go? How do we claw it back? When are we going to punish the culprits?
Chris Whetzel
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Author James Lieber is a lawyer whose books on business and politics include
Friendly Takeover (Penguin) and
Rats in the Grain (Basic Books). His previous story on the Wall Street meltdown, "
What Cooked the World's Economy?," appeared in the
Voice this past January.
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When Barack Obama donned the crusader's mantle during the 2008 presidential campaign, his Web-savvy campaign team created KeatingEconomics.com and pushed it on millions of voters. The main video showed the Ichabod Crane–like Charles Keating—the wealthy, politically connected poster child of the '80s savings-and-loan scandal—in handcuffs.
The Obama video portrayed John McCain as Keating's stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys bigger and badder. Today's corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae, and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and lead lawyer at the Office of Thrift Supervision, who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.
Those watching the compelling attack ad (still online) had every reason to believe that Obama's approach would be just as hard-edged, and that felon-busting G-men would rout the crooks and recover our money.
This was not to be.
As it stands now, there is only one federal prosecution related to the credit crash and bailout cycle, and it was begun by the Bush administration's Justice Department in June 2008.
Not that there aren't culprits. Bernie Madoff and the other accused Ponzi schemers like Allen Stanford are mere pickpockets compared with Wall Street's institutional buccaneers, who, so far, have carted off up to $12.7 trillion—almost the size of the entire gross domestic product. They've multiplied their booty with billions in subsidies and a flood of derivatives—some of them merely old, soured wine in new bottles. Today's pirates are sailing away from the light regulatory scrutiny that apparently will continue in our benighted, weakened, financially top-heavy, and bubble-addicted economy.
Black says that Obama's current efforts are doomed to fail—and, in a twist, it's for lack of trying. "There is not a single successful regulator giving him advice," says Black. Obama's is a fresh face, but those of his crew aren't. Black pointedly views Treasury Secretary Tim Geithner and SEC Chair Mary Schapiro as flops in the prelude to the crisis, who flacked for the financial industry's "self-regulation." Some of Obama's appointees have a history as ardent advocates for financial crooks and active foes of regulation. Because neither the Obama team nor its proposed reforms pack the requisite punch, Black predicts, "There will be far more catastrophic losses." That would be on top of the trillions of dollars already lost.
Though the public has been cast away, all hope for justice is not lost. Scammed consumers could get their day in court, thanks to a Supreme Court decision this past June in Cuomo v. Clearing House Association. Justice Antonin Scalia broke ranks and joined the court's four most liberal judges in ruling that the federal government cannot stop states from conducting their own crackdowns on financial crooks—with more stringent laws than Washington's—against such evils as the predatory mortgage lending that sparked last fall's meltdown. In that case, the Obama administration shed its crusader's mantle and defended the dark side in vain.
In 2008, American households lost 18 percent of their wealth—more than $11 trillion. But, like energy, wealth doesn't just vanish. Most of it is parked in unregulated hedge funds, in ex–hedge funds that are now just bulging foreign bank accounts, and in a variety of opaque financial institutions. The money almost certainly remains parked—otherwise, there would be massive inflation after the amount of bailout money that has spewed from the Fed, the U.S. Treasury, and foreign central banks.
Conceivably, what money was taken away could be "clawed back," in the parlance of regulators. A precedent exists: a similar crisis a decade ago involving Long-Term Capital Management, a Connecticut hedge fund that included two Nobel Prize–winning economists and a few ace traders from Wall Street, and had bet on bond spreads in Russia, Italy, and Latin America. The outfit started well, but then crashed and dug a trillion-dollar hole that was considered dangerous to the entire system at the time. Instead of paying the fund's many investors at retail, the New York Fed forced Wall Street to settle the whole thing for about $3.5 billion—in other words, a couple of beans on the dollar. There was no bailout by taxpayers.
It's clearly too late for that approach to the current crisis. The best way to retrieve at least a significant portion of our wealth is through prosecution, followed by forfeiture. This is what we do when we catch money launderers and drug lords. It's what we're trying to do to Ponzi schemers like Bernie Madoff. It's retributive justice. It fills a social need as well as an economic one.
So, where is the justice in the current crisis? Why have there been so few prosecutions and only feeble attempts, at best, to claw the money back? One reason may be that, in such infamous cases as the Lehman Brothers collapse and Bank of America's absorption of Merrill Lynch, the Fed and the Treasury were intimately involved with the financial elite's deal making at the time. It's difficult to prosecute others for securities fraud if you condoned the deals to begin with.
