Jeffrey Sachs Channeled His Inner Bill Black – and Obama and Holder Ignored Him Too

By William K. Black
Kansas City, MO: December 4, 2014

“Yves Smith,” the nom de guerre (and plume) of the finance expert who created and runs the invaluable blog Naked Capitalism, wrote an introduction to a piece roughly 18 months ago that mentions me. The points she made in that introduction, including the reason she invoked my name, are important but the lapse of time since she wrote it teaches us another important lesson. Here is the introduction.

“One of the things that Matt Stoller has stressed that the possibility of reform is remote until breaks within the elites take place.

Jeffrey Sachs, Columbia professor and director of the Earth Institute at Columbia, is a controversial figure for his neoliberal stance on macroeconomics and his role in promoting the use of ‘shock therapy’ in emerging economies. But it is also important to recognize that criticism from a connected, respected insider has more significance than that of someone like Bill Black, who has made a career of taking on bank fraud but has never reached a top policy-making level.”

I think Matt Stoller is right, though I can personally testify that “remote” does not mean impossible. The powerful response to savings and loan debacle was not led by “elites.” The elites acted overwhelmingly to try to stop our reregulation of the industry and our taking on the CEOs leading the frauds. It was critical that the head of our regulatory agency, Edwin Gray, led the reregulatory effort. It was overwhelmingly an effort by over 2,000 of us, none of us remotely “elite,” that led to our successes in regulation, supervision, enforcement, and prosecutions. Though far from elite, we contained the debacle before it caused even a minor recession by shutting down a raging epidemic of accounting control fraud committed primarily through fraudulent commercial mortgage lending, prevented an incipient epidemic of liar’s loans in 1991, and produced the greatest success in convicting financial elites in history. All of this was done over the fierce opposition of the elites even though it cost Ed Gray and Joe Selby their careers. Many of us were attacked repeatedly by the corrupt elites.

Yves Smith is right that Sachs is a “connected, respected insider” and that his criticism has vastly “more significance than … Bill Black.” She is also right about that my criticisms (though more expert than Sachs) have less “significance” precisely because I “never reached a top policy-making level.”

The setting for Sachs’ remarks was important.

Professor Jeffrey Sachs, Columbia University
Fixing the Banking System for Good conference
Philadelphia Federal Reserve
April 17, 2013

We have an elite speaking to other elites at a conference dedicated to “Fixing the Banking System for Good.” Here are several key takeaways about what Sachs said about elite bank fraud.

Sachs introduces the topic of why we have recurrent, intensifying financial crises with a discussion of the dual depravity of effectively repealing Glass-Steagall – and then President Obama appointing the people who brought us that disaster to positions controlling our response to the financial crisis where they promptly screwed up again.

“Glass-Steagall [worked] successfully … for quite a long time, and its removal was a very, very cynical play by Rubin, Summers, Clinton, Gramm and others who all had very strong interests, personal interests, in the outcomes of that deregulation, and exploited the gaps that they created, and then to the chagrin of some of us at least were invited right back into the White House in early 2009, after they had made this calamitous mess, to be the ones supposedly to fix it. And I know that Summers, for example, continued to really institute moral hazard policies right and left by fighting against any limits on compensation of these [bankers].”

Sachs then showed he was just warming to his subject.

“I would add this other point, which is that a lot of what’s happened actually and what’s been revealed is in my view prima facie criminal behavior. It’s financial fraud on a very large extent. There’s also a tremendous amount of insider trading, and you can even watch it when you’re living in New York, how that works.

So it’s not so mysterious, but we don’t even act – take John Paulson, for example. Paulson worked together with Goldman Sachs to defraud massively many European banks which bought the toxic mortgages that Paulson had put together. When this Abacus deal was taken up by the SEC, Goldman ended up paying a small fine. The chair of Goldman, of course, continued in his position and continued at White House state dinners, and Paulson wasn’t even mentioned once in any of the proceedings, and he took home a $1 billion dollar paycheck the next year, even as Goldman was paying a roughly $700-million-dollar fine, if I remember correctly, for the abuse that Paulson was part of. I can’t believe, no matter what the financial regulations, we can’t do better than that. That’s really pathetic.”

Sachs was not clear in distinguishing John and Hank Paulson (no relation) during this discussion. John ran a hedge fund. Hank ran Goldman Sachs before President Bush named him Treasury Secretary. The audience response to these statements was to ask Sachs about Glass-Steagall. Sach’s response to that question ended with Sachs coming back to “the crooks.”

“The final point, of course, is separating the politicians from the crooks, but maybe that’s so close together that they can’t actually be separated. Maybe it’s just the same community.”

The audience reaction was to again ignore the criminality and ask a general question about international macroeconomic policies.

It was only after Sachs answered that question (and on his own initiative emphasizing the destructiveness of tax havens) that the token ethical finance guy spoke to thank him for raising the subject of morality.

“Audience: My name is Dennis Peacock[e], and I represent the faith-based side of macroeconomics, and I just want to congratulate you that you pulled us back to the reality that in spite of all the complexities and theories and mechanics that we deal with in economics, that economics is really about values and the values and ethics of people. Thank you very much.”

Needless to say, the Philadelphia Fed doesn’t invite or attract a crowd that emphasizes financial morality. It’s hard to knock a really slow pitch like this out of the park, but Sachs did his best.

“Jeffrey Sachs: ‘Well, thank you very much for saying it and practicing it. I do believe – by the way, I’m just going to end here because I’ve been told I have to run to the U.N. in fact right now – I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to people, counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, you know, in a quite literal sense. And they have gamed the system to a remarkable extent, and they have a docile president, a docile White House, and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say, and no party is – I mean there’s – if not both parties are up to their necks in this. This has nothing to do with Democrats or Republicans. It really doesn’t have anything to do with right wing or left wing, by the way. The corruption is, as far as I can see, everywhere. But what it’s led to is this sense of impunity that is really stunning, and you feel it on the individual level right now, and it’s very, very unhealthy.

I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language, and I’ve not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not going to happen anytime soon it seems.’”

Over 18 months have gone by since Sachs unleashed this broadside. On May 2, 2013, in the Wall Street Journal, Sachs launched an even stronger attack. During that time we have seen a major financial institution’s fraud made public at least monthly. But Sachs’ point about waiting in vain for “four, five years” “to see one figure on Wall Street speak in a moral language” can now be extended to six years – which is what Sachs predicted. But that same “shocking” failure includes our President, his administration, and the financial anti-regulators.

It is a sick indicator of the degraded state of regulation that William Dudley is alone in describing the corrupt “culture” of Wall Street (though he refuses to use the word “corrupt”). When Dudley, President of the NY Fed, is your least dishonest anti-regulator, you know that the anti-regulatory culture in finance is profoundly corrupt. Dudley is a Government Sachs alum who is infamous for openly stating his refusal to allow the NY Fed to respond to Wall Street’s corrupt culture and rampant fraud by acting as the essential “regulatory cops on the beat,” but instead should act like a “fire warden” telling us to make an orderly exit from the finance industry before it is consumed by the flames of fraud. But not to worry, as Geithner made infamous, the real function of the U.S. Treasury and the Federal Reserve in their “fire warden” capacity is to “foam the runways” with massive subsidies so that the elite bankers can walk away when they loot “their” banks so badly that the banks crash. To add to the obscenity, Geithner admitted that “foaming the runways” was done under the cynical pretext of helping people who suffer third-degree burns from the raging fraud epidemics led by elite bankers,

Sachs’ public evisceration of our most elite bankers was widely reported in financial publications. It should have been front page news nationwide and should have prompted other financial elites and the media to use the “f” (fraud) word and the “c” (criminal and corrupt) words to describe the banking elites. It should have provided the political cover our cowardly lion (President Obama) needed to roar. Daily Kos has a fine article showing the exceptional parallels between the disgraceful policy proposals and propaganda attacking the poor that FDR eviscerated in his October 31, 1936 speech during his first reelection campaign. He famously “welcome[d]” the hate of the corrupt bankers’ of his era. Sadly, in the financial sphere, Obama consciously decided not to follow FDR’s example of integrity, courage, success, and service to the Nation.