By Chris Lane
By Jeff Balke
By Aaron Reiss
By Angelica Leicht
By Dianna Wray
By Aaron Reiss
By Camilo Smith
By Craig Malisow
That lack of oversight is what led Americans last year to lose 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. Conceivably what money was taken away could be "clawed back," in the parlance of regulators.
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 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 approved the deals to begin with.
And there's another, more pertinent reason: The top federal law enforcement establishment is simply not in the mood. People who expect President Obama's Department of Justice to take the lead will be severely disappointed — not necessarily because the task is difficult, but because the Obama administration is showing that it lacks the will.
Instead, the new administration is putting its energy into creating what it believes will be a meltdown-proof new system of elite "too-big-to-fail" banks, regulated by a beefed-up Federal Reserve.
Black calls that elite group of megabanks, like Citigroup and Bank of America, "zombies." And they're not done feeding. All of the devilish tools remain in place, says Black, including "the subprime loans, with securitization and the credit default swaps. And the Obama administration astonishingly wants to re-create a secondary market in subprime loans — even though it cost us more than a trillion dollars."
It may seem that some sort of über-regulator is needed. But Camden Fine, a small-town banker who now leads a trade group of 5,000 community banks, sees a pumped-up, unified regulatory agency as "a big, hairy cyclopean beast" that would protect the megabanks no matter how reckless they are, and continue to favor Wall Street over Main Street. Compared with the Obama administration, America's small-town bankers look like populists.
Recently, Paul Volcker, the former Fed head and current Obama adviser, indicated that the White House remains committed to the concept of "too-big-to-fail," meaning that the megabanks will continue to have a safety net and may ask for more bailouts. Presently, 19 financial institutions are on the protected list. Their business model hasn't changed materially since the crisis.
In one of last year's most questionable bailouts, the Feds helped Bank of America buy Merrill Lynch for $20 billion. To make sure the deal got done, CEO Ken Lewis sold the Bank of America shareholders on the merger without telling them that the bank would not only swallow $12 billion of Merrill's $27.6 billion in losses but would also pay accelerated bonuses of $3.6 billion to Merrill executives.
It was such a clear case of securities fraud that Bank of America and the SEC reached a quick settlement of $33 million, a relatively skimpy amount. In September, federal judge Jed Rakoff rejected the settlement, which didn't specifically name Lewis or any other executive, as a shady deal between Wall Street and Washington. Rakoff said the agreement "suggests a rather cynical relationship between the parties: The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, and the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all of this is done at the expense, not only of the shareholders, but also the truth." The judge scheduled the case for trial in February and has ordered the SEC to tell him why it didn't charge Lewis personally. The New York Attorney General's Office announced it would also file civil charges against Bank of America and Lewis. On October 1, the embattled CEO resigned and received a platinum parachute of $125 million.
Such deals have fueled talk in Washington about creating one agency to oversee bank regulation, but such a monolithic regulator could make it easier for the big boys to influence it more easily.
The cyclops theory of bank regulation that would fuse all four bank regulators into one "superagency" is actually the heart of a bill by Senator Chris Dodd (after Obama, the No. 2 recipient of AIG money in the 2008 campaign cycle). A number of other proposals have been floated by the administration and Barney Frank, chair of the House Financial Services Committee. Dodd wants the Fed to lose its regulatory hold over banking and consumers (especially credit cards). Conversely, the Obama administration strives to make the Fed the über-regulator of banks and "shadow banks" like Countrywide and GE Capital.