We know that insider trading is an activity in which cheaters prosper. We know that Wall Street and the City of London are dominated by a fraudulent culture and we know that firm culture is set by the officers that control the firm. We know that the Department of Justice (DOJ) has allowed that to occur by refusing to prosecute any of the thousands of senior bank officers who became wealthy by leading the three most destructive financial fraud epidemics (appraisals, “liar’s” loans, and fraudulent sales of these fraudulently originated mortgages to the secondary market) in history. No one is surprised that Wall Street’s elites have also engaged in widespread efforts to rig the stock markets so that they can shoot fish in the barrel through insider trading. Unlike the three fraud epidemics, one DOJ office, the Southern District of New York, has brought a series of criminal prosecutions against these officers.
(I’m participating in the annual meeting of the American Society of Criminology. I presented Wednesday on a panel honoring the 75th anniversary of Edwin Sutherland’s announcement of the concept of white-collar crime.)
John Cochrane has written an article with an initial sentence that should spark broad agreement: “confiscating wealth is ultimately about political power.” The banksters who led the frauds that caused the financial crisis “confiscate[ed]” immense wealth from the public and “their” firms’ customers, creditors, and shareholders. They did so with nearly complete impunity, which is “ultimately about political power,” indeed it defines the extraordinary nature of their power. The banksters’ confiscation of wealth has caused a dramatic increase in inequality, which has exacerbated the banksters’ domination of the levers of power. In a prior article, Cochrane stated that the financial crisis was driven by runs on financial institutions and that the runs were typically driven by elite accounting fraud.
“Not for nothing have most runs been sparked by an accounting scandal or fraud.”
Clarence Ditlow and Ralph Nader wrote a column in the New York Times on October 29, 2014 that should be reread in light of the November 6, 2014 NYT article’s subsequent revelations about the Takata’s cover up of sometimes lethal defects in its airbags – a cover up that reportedly continued for over a decade.
Yesterday National Public Radio ran a segment on penny hoarders. These are people whose hobby is to hoard pre-1982 pennies. Some even go to their local banks and ask to convert dollar bills into pennies and then spend their evenings triaging boxes of pennies. Why would they do that would you ask? Well, pre-1982 pennies are made mostly of copper and, given the price of a pound of copper tripled over the past ten years, the face value of a penny is half the value of the content of copper: face value is 1 cent, intrinsic value is 2 cents. 100% profit from selling pennies for their copper content!
Politico has joined Deal Book in a “competition in sycophancy.” The contestants are competing to see which can author the most extreme version of a fantasy meme in which heroic Wall Street “banks” are oppressed by “Washington.” I had not believed that any “serious” journalist could compete with Andrew Ross Sorkin’s Deal Book in pounding this meme. Ben White, Politico’s economics reporter, has become my dark horse favorite in the race to the bottom of the “serious” business press with his whitewash entitled “How Washington beat Wall Street.”
Perhaps the only useful thing to come out of the Obama administration’s inept contest between Larry Summers and Janet Yellen as Ben Bernanke’s successor is the purported agreement among economists and other policy makers that the Fed Chair should make the introduction of effective regulation and supervision by the Federal Reserve a top priority. It would be even better if this agreement were real and would be sustained. Regulation and supervision have never risen above tertiary concerns at the Fed and every institutional pressure will push the new Fed Chair to ignore supervision.
The Appraisers’ Warning of the Lenders’ Fraud Epidemic
Two of my recent columns have explained the effort by a very large number of appraisers to combat the “Gresham’s” dynamic that home lenders and their agents were deliberately generating by extorting appraisers to inflate appraisals. A “Gresham’s” dynamics perverts market forces. When cheaters prosper the markets drive honest firms and professionals out of business. Honest appraisers tried to block this dynamic.
There are many forms of control fraud. I have written primarily about accounting control frauds because they drive our recurrent, intensifying financial crises and we are in the midst of the worst such crisis in modern history. I wrote recently about the intersection of anti-purchaser and anti-employee control fraud in Bangladesh that killed 1,127 employees (and injured roughly twice that number) and made the point that control frauds kill and maim more people than traditional blue collar crimes and cause greater financial losses than all other forms of property crime combined. Control frauds also cause a greater number of crimes than do traditional blue collar crimes. Think for example of the number of victims of the Libor scams, measuring in the hundreds of thousands and the foreclosure frauds.
The central questions for a theorist are whether his theory showed strong explanatory power and to what extent it proved useful in diverse settings. A distinguished economist, Dr. Jayati Ghosh, has addressed those questions in an article in which she was explaining to Indian readers that a large fraud, Satyam, was not the product of unique defects in Indian regulation.