In a recent column I focused on three brief passages from George Akerlof and Paul Romer’s 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) that had they been listened to would have prevented the fraud epidemics that drove our recent financial crises.
Here is one of those three passages. Notice how unequivocal they were in their statements about causality.
This is the third article in a series on some of the additional lessons we should learn from the mass murder of Bangladeshi garment workers by anti-employee control frauds. I discuss new allegations about the senior executives involved in producing the terrible loss of life and maiming of so many workers because they are relevant to the broader harms that control fraud can cause that I discussed in the first and second articles in this series. Continue reading →
The central point that I want to stress as a white-collar criminologist and effective financial regulator is that Goldman Sachs is not a singular “rotten apple” in a healthy bushel of banks. Goldman Sachs is the norm for systemically dangerous institutions (SDIs) (the so-called “too big to fail” banks). Impunity from the laws, crony capitalism that degrades democracy, and massive national subsidies produce exceptionally criminogenic environments. Those environments are so perverse that they produce epidemics of “control fraud.” Control fraud occurs when the persons who control a seemingly legitimate entity use it as a “weapon” to defraud. In finance, accounting is the “weapon of choice.” It is important to remember, however, that other forms of control fraud maim and kill thousands.
On January 25, 2013, I made this comment on Frontline’s web site discussing its documentary: “The Untouchables” and an accompanying (January 22, 2013) article by Jason Breslow entitled: Were Bankers Jailed In Past Financial Crises?
I addressed two statements in that article. The first statement reads:
It is fitting that Goldman Sachs is the recipient of this year’s “Public Eye” designation, but it is even more fitting that it is being announced during the World Economic Forum (WEF) at Davos. Goldman Sachs exemplifies the travesty that WEF has created. It is not the worst of the worst. It is representative of the financial world of systemically dangerous institutions (SDIs) that are spreading crony capitalism through the West. The SDIs are the so-called “too big to fail (or prosecute)” banks.
One of the distinctive features of banking in scores of developing nations is the very large spreads between the rate of interest they pay their depositors and the rate they charge borrowers. Academics have frequently focused on the exceptionally high spreads in Latin America in articles published over the last three decades. Economic theory predicts that these spreads should impose a major drag on development. The high interest rates charged to lenders should lead to very large “hurdle rates” for prospective borrowers’ projects. The two obvious implications of high hurdle rates, sometimes discussed in the literature, are that fewer worthwhile investments will be made by prospective entrepreneurs and more of the loans in Latin America are likely to go to high risk borrowers. High risk investments should be, if financial markets are efficient, more likely to produce higher returns exceeding the hurdle rate. The standard neo-classical economic assumption is that financial markets are efficient.
In criminology, we recognize that one of the leading restraints on the effectiveness of law enforcement is “systems capacity.” Indeed, my mentor, Henry Pontell (UC Irvine), defined the concept. In the context of crimes of the street (other than Wall Street), there is normally no lobby trying to allow the typically lower class criminals to commit their crimes with impunity. In crimes of the business suites, however, it is the norm that there are well-funded, powerful, and seemingly legitimate lobbyists for the elite criminals who seek to allow them to commit their crimes with impunity. Similarly, it is rare for street criminals to consult a lawyer before they commit their crimes. Elite white-collar criminals often consult with expert legal counsel before, during, and after they commit their crimes in order to try to minimize the risk of being sanctioned. Continue reading →
The plot of the movie WarGames (1983) involves a slacker hacker (played by Matthew Broderick) who starts playing the game “Global Thermonuclear War” with Joshua, a Department of Defense (DoD) supercomputer that has been given partial control by DoD of our nuclear forces. The game prompts Joshua, who has been programmed to win games, to trick DoD into authorizing Joshua to launch an attack on the Soviet Union so that Joshua can win the game. The hacker and the professor that programmed Joshua realize that the only way to prevent Joshua from attacking is to teach “him” that no one can “win” global thermonuclear war. The insanity is that the people who created the game “Global Thermonuclear War” thought it could be won. Joshua races through thousands of scenarios and ends his plan to win the “Global Thermonuclear War” game by attacking the Soviet Union when he realizes that “the only winning move is not to play.”
The JOBS Act is insane on many levels. It creates an extraordinarily criminogenic environment in which securities fraud will become even more out of control. One of the forms of insanity is the belief that one can “win” a regulatory “race to the bottom.” The only winning move is not to play in a regulatory race to the bottom. The primary rationale for the JOBS Act is the claim that we must win a regulatory race to the bottom with the City of London by adopting even weaker protections for investors from securities fraud than does the United Kingdom (UK).