By William K. Black
One of the “tells” that reveals how embarrassed Lanny Breuer (head of the Criminal Division) and Eric Holder (AG) are by the disgraceful refusal to prosecute HSBC and its officers for their tens of thousands of felonies are the false and misleading statements made by the Department of Justice (DOJ) about the settlement. The same pattern has been demonstrated by other writers in the case of the false and disingenuous statistics DOJ has trumpeted to attempt to disguise the abject failure of their efforts to prosecute the elite officers who directed the “epidemic” (FBI 2004) of mortgage fraud.
HSBC was one of the largest originators of fraudulent mortgage loans through its acquisition of Household Finance.
Three recent books by “insiders” have confirmed earlier articles revealing the decisive role that Treasury Secretary Geithner has played in opposing criminal prosecutions of the elite banksters and banks whose frauds drove the financial crisis and the Great Recession.
Bair, Sheila, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself” (2012); Barofsky, Neil, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street (2012); Connaughton, Jeff, The Payoff: Why Wall Street Always Wins (2012).
Geithner’s fear is that the vigorous enforcement of the law against the systemically dangerous institutions (SDIs) that caused the crisis could destabilize the system and cause a renewed global crisis. I have often expressed my view that the theory that leaving felons in power over our largest financial institutions is essential to producing financial stability is insane. Geithner, it turns out, is very sensitive to that criticism. I will return to that subject after setting the stage.
The UK authorities admit openly the arrival of “too big to prosecute”
The title of the article in The Daily Telegraph says it all: “Banks are ‘too big to prosecute’, says FSA’s Andrew Bailey.”
The FSA was the U.K.’s faux financial regulator during the run-up to the crisis. The U.K. “won” the regulatory “race to the bottom” that destroyed effective regulation and supervision in the U.K. and Europe and helped degrade to near impotence in the U.S. The FSA’s goal was to attract the world largest financial firms to relocate much of their operations to the City of London. The FSA offered “light touch” (non) regulation and (non) supervision to firms operating in the City of London. The results were the typical result – the City of London attracted the worst of the worst. The “control frauds” produced a “Gresham’s” dynamic (Akerlof 1970) because the frauds gained a crippling competitive advantage over honest competitors and dishonest and unethical officers became wealthy through fraud and modern executive compensation’s perverse incentives. “Control fraud” refers to criminal enterprises in which the people that control a seemingly legitimate enterprise use it as a “weapon” to defraud. Control frauds can create a Gresham’s dynamic causes markets to become so perverse that bad ethics drive good ethics out of the marketplace. The result was that the City of London became an intensely criminogenic environment and many of the largest financial firms in the world became criminal enterprises.
The newly designated head of the FSA decided to endorse the concept of “too big to prosecute.”
Mr Bailey told The Daily Telegraph that some banks had grown too large to prosecute. “It would be a very destabilising issue. It’s another version of too important to fail,” he said,The U.S. and U.K. have made noise lately about how they had ended the pernicious doctrine of “too big to fail.” As I explained in a prior column, this pretense lasted about four hours before both nations’ true preferences were revealed. The systemically dangerous institutions (SDIs) already had crippling competitive advantages because the government bailed out their general creditors. Conservative economists agreed that this advantage was so large that it made “free markets” a farce. The doctrine “too big to prosecute” grants SDIs that are control frauds two additional advantages over their smaller, honest competitors. First, fraud pays enormously for the controlling officers. It is a “sure thing.” (Akerlof & Romer 1993.) The HSBC compliance officers (the minnows) may lose, but the controlling officers were made very wealthy by HSBC’s manifold frauds. (continued at link above)
“Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment,” he said.
His comments come days after HSBC’s record $1.9bn (£1.2bn) settlement with the US authorities over money-laundering linked to drug-trafficking. US assistant attorney general Lanny Breuer said of the decision not to prosecute: “In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision.”
