Capitalism can be divided into two functional parts. Production and finance. Here in America the rules for the two parts are not the same. Discovery in the Ambac case is uncovering emails that show us just how far we are from the same.
Their participation as corporate persons are not equal, either. During the 2003-2008 Big Bubble mortgage antics, despite statute, only 25 of the nation’s 9,000 regulated mortgage brokers reported criminal frauds on a regular basis. Go on up the food chain to Wall Street and the number of firms reporting accounting frauds falls to a flat zero.
Participation in crime became the norm for Wall Street bond traders. Emails read like what we saw from corrupt energy trading at ENRON.
It is becoming clearer — overwhelmingly so — that criminal conspiracy is evident in emails generated at Bear Stearns EMC (now part of JPMorgan Chase) during a 2006-2008 scam aimed at the Ambac insurance company. These scams involved multiple companies, which would lead to Federal RICO anti-racketeering actions if carried out in the production side of American capitalism.
This pattern appears to be typical of what Wall Street did to investors, generally, during the 2003-2008 Big Bubble mortgage debacle. Analysis of rating agency performance indicated that the Ambac scam amounted to less than 1% of the overall conspiracy. . . .
Ambac Financial Group provided open-contract insurance services that addressed the risks of holding financial instruments. From their 2009 Annual Report:
Ambac Financial Group, Inc. headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac’s principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has a Caa2 rating under review for possible upgrade from Moody’s Investors Service, Inc., and an R (regulatory intervention) financial strength rating from Standard & Poor’s Ratings Services. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK).
Not any more. Ambac went bankrupt in 2010.
Bear Stearns personnel stole the better part of $1.7-billion from Ambac and Ambac’s covered contracts. These individuals, the ones who carried out the thefts, have not been banned from participation in the financial industry. No one has been charged. No one has been fired except at the rating agencies. There have been no criminal referrals to date.
Industry leaders, including CEO Jamie Diamond at JPMorgan Chase, are siding with the criminals. JPMC is spending millions to delay or prevent public exposure of these crimes.
The situation shapes up as a classic: Wall Street vs. Rule of Law.
The likes of Tom Marano, Mike Nierenberg, and Jeff Verschleiser ran the scam mortgage operation at Bear Stearns EMC. As we are finding out through the Ambac law suit aimed at Bears Stearns assets, their emails discuss overt, ongoing criminal operations. As David Dayen noted here at Firedoglake last Tuesday:
They falsified that data for the rating agencies to get AAA ratings, never told the investors about the bad loans in the pools, and sold the shit as gold. …
…the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds….
The whole industry did rating-fakery. Every one of the mortgage-backed asset sellers. Otherwise they could not have competed with the returns-to-ratings offerings coming out from the criminals.
Bear Stearns competed with Goldman, Sachs and Merrill and the other 185 major “sell-side” providers of financial products. Bear used Fitch, Moody’s, and S&P. They faked “AAA” gold-merde ratings. The same deals were cut with Goldman, Sachs and scores of other sell-side firms. The raters took their pay-offs with 10-times normal fee payments. Same-old-same-old for everybody in finance.
Unlimited crimes and so far no punishment. No thought of the R.I.C.O. Act. No concerns in New York. So far, it appears, no thought in Washington.
By way of comparison, corruption in poor-and-openly-corrupt countries such as Tunisia and Egypt is restrained to 10% off the top. You pay the 10% to someone with influence and you get your contract. That has been the standard take since the Shah of Iran, the likes of Pinochet, and the Banana Republics.
The 10% figure for Third World corruption would have been a joke compared to what Bear and the other MBA bond sellers pulled off.
Back when we went through the Savings & Loan Crisis 1986-1992 a total of 747 institutions went under due to bad loans. More than 1,000 S&L officers and employees were prosecuted and convicted for accounting fraud and related crimes — mostly trying to hide what was going on — though the underlying economic contraction resulted from enactment of the Tax Reform Act of 1986.
The S&Ls had not been out planning scams, they were caught out when TRA86 wiped away the most of the tax advantage to investors writing off REIT losses against personal income. Holding a “Loser” property suddenly became untenable. Still, when regulators and tax men found crimes there was no shyness to making prosecutorial referrals. Two and three year sentences went off like popcorn.
This Ambac law suit has opened to plain view a very different world. Bush & Co. had the regulatory climate and practices changed. Referrals for fraud disappeared.
The Wall Street sell-side scams for fraudulent bonds proceeded in four stages:
— 1. Create a packet offering (a bond) that contained claims on junk “troubled” mortgage payments, fabricate false guarantees of quality, then get the packet rated “AAA” at a co-conspirator rating agency
— 2. Sell the packet to either an end-user investor (insurance or retirement, typically) or an intermediary such as Ambac at the market rate for a true “AAA” asset
— 3. When a single mortgage from a sold packet goes belly up, issue a claim for compensation to the originating bank. “Double-dip” by pocketing the money, despite that this is not a legal claim
— 4. When you have a client full-up with faked “AAA” bonds, really junk, go over to the futures market and take a short position. Bet that the client/victim’s stock is going down.
Wall Street criminality rivaled the take from a major drug gang:
January 2007, a Bear internal audit also reported the firm had collected $1.7 billion in repurchase claims
That is from individual mortgages that had gone belly-up and produced $1.7-billion in compensation payments, the most of which Bear Sterns EMC pocketed. Illegally.
This situation with Bear Sterns EMC and JPMC is similar to what BoA is facing with its Merrill “acquisition.” Merrill’s bond people played the same games as Bear, arranged the same valuation games. (Merrill did not go short on its clients. Didn’t occur to them.)
At JPMorgan Chase, the new corporate owner of EMC, the situation is becoming grave:
CEO Jamie Dimon said… (the bank) had set aside $9-billion for litigation-related risk. Then “Ambac won a court order in December to add accounting fraud against JPMorgan to its suit, which can double or triple lawsuit awards.”
JPMorgan did fight tooth and nail for the Ambac suit not to be made public, however, because the firm argued it could damage the reputations of senior bank executives currently working in the industry. Individuals named as defendants in the amended complaint include: Jimmy Cayne, Alan Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein, Jeffrey Verschleiser, and Michael Nierenberg. But the court chose to fold these individuals into the charges against JPMorgan.
CEO Dimon had previously upped his litigation reserve from $1.5-billion to $9-billion.
Dimon has no idea what to do with his in-house criminals. Report them to DoJ/FBI ? Not good for his bonus, not something that any Wall Street CEO would take seriously.
The suspicion among old-timer financial people is that today’s Wall Street elite have no problem hiring criminals and putting them in high positions. Criminals generate revenue.
Wall Street can always lobby Congress, or threaten a president, or bribe a judge. They play by different rules.
For a simple example of the differences at work, the big substantive claim against ex-Gov. Rod Blagojevich was that he sought a high-paying job for his wife through one of the Illinois pay-to-play companies. Blago was not a tool of Wall Street, whatever else he was. That attempt to use his wife, Patti, to arrange a bribe is exactly what happened for Clarence Thomas using Heritage Foundation as the pass-through. $686,589 in wifely payments to a Wall Street favorite, but not a word about the latter in MSM-corporatist investigative journalism. (Update: Patti the Mouth was fired from her day job as fundraiser for Chicago Christian Industrial League. Hope she collects unemployment.)
Sin Is OK If You’re A Republican.
The first Dot.com scam cycle produced no prosecutions. The second cycle 1997-2001 ran up a half-dozen prosecutions while stealing some $200-billion. By January 2008, when Enterprise Engineering CEO George Anderson got DUI and killed Florence Cioffi on Water Street, there was no question that Wall Street owned the local prosecutors. Anderson admitted to the homicide but only served 16 days. There was also a $350 fine.
Compare/contrast with treatment of an admitted Democrat, Martha Stewart.
That differential matches up to what happens when we compare legal treatment for Wall Street financial companies and the ordinary run-of-the-mill production companies.
The ordinary production companies of American capitalism hire people, buy other resources, offer goods and services for sale, and take a profit based on their successes. They make things and provide services. They pay ordinary taxes. They have no general immunity with respect to criminal law.
Financial companies and their allies have created a legal environment where their operations are a state within a state. The big sell-side firms are known to use “naked short” sales — where they sell stocks that they do not own. This is explicitly illegal in the State of New York. Naked shorts continue to occur because lobbying in Washington changed the rules back in the 1990s, so that the New York Stock Exchange was designated a Self-Regulating Organization (SRO) with power to void state laws related to fraud.
The big players have been immune from prosecution for accounting fraud for at least 15 years. They are essentially lawless while acting out a paper dance, a charade called “compliance.”
Small criminals are shut down. The big criminals steal billions every year. Trillions on big years. Meanwhile the Fed continues to enrich the big players.
The Big Bubbles 1994-2000 and 2003-2008 provided Zero Interest Rate Policy low-cost money to financial industry insiders. That was Alan Greenspan’s way of saying “Thank you” for all the flattery he was receiving. What Wall Street did with all that money was to buy everybody else out. Mergers and Acquisitions (M&A) deals brought hundreds of American production companies under the Wall Street thumb. What had been dividends — going out to investors and retirement accounts — were redirected to make interest payments to Wall Street.
Fed money has always been used to concentrate wealth. That’s what Andrew Jackson didn’t like about Nicholas Biddle and the Second National Bank. There should be some way to flatten Pareto Effects from actions by the modern Fed without causing echoes of the 1837 and 1839 financial crises.
The single worst part of what we have going now is CEO Jamie Dimon using the resources of JPMC to obstruct the flow of criminal justice. JPMC has reported nothing to regulators or to local police or to DoJ/FBI. All efforts out of JPMorgan Chase are aimed to prevent public access to the information.
Meanwhile, Ambac is winning every motion in Court. Inclusion of Jimmy Cayne, Alan Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein, Jeffrey Verschleiser, and Michael Nierenberg into the suit means that their assets can be searched under warrant. (They do not have to testify even at depositions. 5th Amendment protections apply in civil suits.) One can assume that Ambac — after being driven to bankruptcy and losses of their careers — will be out for blood.
Best case: Ambac pulls everything out of the old Bear Stearns scam operation, plus getting emails and legal strategy out of the JPMorgan Chase cover-up effort. Then multiple copies sail out to Wikileaks from the honest employees at Ambac and at JPMorgan Chase.
Cross your fingers !