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Zero Prosecutions Aren’t Few Enough – Wall Street Wants SEC Sanctions Reduced to DMV Points

by William Black, New Economic Perspectives

Posted on November 10, 2014

Let’s begin by reviewing the bidding. We have just suffered through the third economic crisis driven by epidemics of control fraud. In two of the crises the financial industry led the fraud epidemics. In the Enron-era fraud epidemic they eagerly aided and abetted Enron’s frauds. In the current crisis we know that U.S. government investigators have found that 16 of the largest banks in the world conspired to falsify Libor, which is used to price $350 trillion in assets. This is the largest cartel in world history by at least three orders of magnitude. Note that all 16 of the banks that participate in creating Libor falsified their statements for the express purpose of falsifying the Libor “fix.” There were no honest banks and there is no reason to believe that if 25 banks participated in setting Libor the results would have differed. The conspirators are not known to have blackballed any bank from participating in “fixing” Libor because of fears that the blackballed bank was led by an honest CEO who would expose and end the conspiracy.

Government investigators have found that over 20 of the largest banks defrauded Fannie and Freddie by selling them vast amount of toxic mortgages through fraudulent “reps and warranties.” Government investigators have found that over 20 of the largest banks defrauded a series of credit unions by selling them toxic mortgages and toxic mortgage derivatives through fraudulent reps and warranties. Government investigators have found other wide ranging frauds by the large banks to (1) rig bids for issuing municipal securities, (2) to foreclose on people through fraudulent affidavits, and (3) by conspiring to falsify foreign exchange (FX) rates. In sum, the leaders of the largest banks in the world are overwhelmingly leading criminal enterprises that commit financial frauds of unprecedented scope and damage. The resulting financial crisis caused by the three most destructive fraud epidemics in history caused over a $21 trillion loss in U.S. GDP and the loss of over 10 million American jobs. Each of those figures is much larger in Europe.

Worse, no senior banker who led the three fraud epidemics has been prosecuted in the U.S. for those crimes. Virtually no senior bankers who led the three fraud epidemics has even been the subject of a civil suit by the U.S. Virtually no senior banker in the U.S. has had his fraud proceeds “clawed back” by the government or the bank. The senior bankers were made wealthy through the “sure thing” of accounting control fraud – with nearly perfect impunity from the criminal and civil law.

This is the setting in which Fichera writes. As a sometimes good guy, one would expect his column to call for the Department of Justice (DOJ) and the SEC to end this impunity and immediately act vigorously to hold the senior bankers personally accountable for leading the frauds that blew up the global economy. Instead, Fichera wrote to urge (1) that the largest banks be treated as “too big to jail,” (2) to decry the “tendency to vilify all Wall Street firms as unscrupulous,” (3) to urge SEC sanctions to be reduced to the level of “DMV” “points,” and (4) to provide that no matter how egregious the fraud the SEC would have no power to remove a Wall Street firm’s license until it committed “multiple” cases of the equivalent of deliberate homicide in which each case could involve deliberately running over millions of investors. Under Fichera’s plan, every dog would get at least one bite – of every investor – which would mean hundreds of thousands of bites. Fichera wants banks to be – officially – entitled to commit securities fraud without effective sanction from the SEC.



This is a great system. I can’t wait for it to be applied to muggers who prey on Wall Street traders. A mugger will have to wait six years after getting caught battering and robbing a Wall Street trader (which will be a small percentage of the times they mug) for their “slate [to be] wiped clean.” I’m sure that if the muggers who specialize in attacking Wall Street traders only get caught every six years “the tendency [of bankers] to vilify all [muggers] as unscrupulous would fade.” But this doesn’t capture the true spirit of Fichera’s DMV plan. His plan proposes that the SEC “forgive points” if the mugger “takes a remedial class” that teaches that it is not appropriate to mug. And if you like a DMV point system for muggers you’ll love one for sex offenders that target your children, girlfriends, and spouses.

I can hear some of you saying – “but mugging and sexual molestation are real crimes” while defrauding people that trust you of tens of billions of dollars is just like driving without buckling your seatbelt. Accounting and securities fraud are really close to being victimless crimes, if one ignores a few million fraud victims who foolishly believed you when you said you were a fiduciary representing them as your principal.



Fichera could not be more wrong – and more revealing of why the “sometimes good” elements of Wall Street cannot be relied upon to clean up its intensely criminogenic environment. First, no banker is ever “too big to jail” or “too big to bar from securities or banking. Second, no “bank” can be “jail[ed].” Third, no matter how big the bank it can be placed in receivership or have its senior managers “removed and prohibited” when they are leading frauds or unsafe and unsound practices. Fourth, the “principles of regulation and justice” do not conflict when we hold elite frauds accountable for their frauds through prosecutions, receiverships, and removals and prohibition orders. Indeed, “the principles of regulation” are: (1) create incentive systems and controls that minimize fraud and unsafe and unsound practices, (2) to remove from any position in which they can endanger the bank, customers, or the public, and (3) to prosecute the most elite criminals to increase deterrence and use enforcement and civil actions to ensure that no senior officer gains a penny from leading the frauds and unsafe and unsound practices. Vigorously pursuing justice not only does not “conflict” with “the principles of regulation” – it is essential to achieving “the principles of regulation.”

What is clear is that when Fichera uses the word “principles” he means “unprincipled.” Fichera has forgotten the most fundamental principle of justice expressed in the famous Latin maxim:. Fiat Justitia Ruat Caelum (Let Justice be done, though the Heavens Fall).

Fichera considers the ancient Latin principle hopelessly naïve, and the fact that he does so demonstrates further that he does not understand that there is nothing more practical than consistently seeking justice through the legal and regulatory systems. Financial crises occur when we abandon the maxim, betray justice, and decide that some elite banks and bankers are so big or so politically powerful that they must be de facto immune from effective regulation and prosecution. A society that deliberately abandons justice and the principles of regulation in order to protect large banks and powerful bankers is a Nation that will see the heavens fall. A Nation that abandons justice encourages massive fraud by the wealthy and powerful and guarantees recurrent, intensifying economic crises and a descent into crony capitalism. There is nothing more practical for a person or a Nation than leading a principled life.

Only elite financial sector officers believe that they and their banks are entitled to being exempted from the rule of law. Normal human beings are nauseated when they read such claims. The reason that Fichera’s ode to the unprincipled life is so distressing is that he was believed to be in the top 10% of the distribution of financial sector CEOs when it came to integrity. That indicates how depressingly deep the rot runs among Wall Street’s CEOs.

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