And to Black's point, the real issue is fraud. Why is no one at Treasury willing to use the F word?

From Naked Capitalism:

"Wiliam Black Savages Treasury's Conduct on AIG

William Black, now a professor of economics and law at the University of Missouri (Kansas City) was a senior bank regulator during the savings loan crisis (his claim to fame was his pursuit of Charles Keating of Lincoln Savings, in which he was removed from the initiative and more management friendly investigators were assigned, and events later proved Black correct). Black has seen a lot of bad behavior at close range.

He is not at all impressed with how the Treasury has handled AIG. Via e-mail:

This is the consequence of six things on the Treasury end of things:

(1) the failure to use Chapter 11 bankruptcy/pass-through receivership to deal with deeply insolvent financial institutions

(2) the failure to expose, and to the extent possible, remedy through restatements the massive accounting fraud that AIG was/is engaged in that triggers the bonuses

(3) the failure to bring criminal charges against the control frauds

(4) the failure of Treasury as negotiators -- they had all the leverage when they bailed out AIG and could have conditioned the aid on at least the VP tier and above giving up their bonuses

(5) the weakness of Treasury's current lawyers who, if press reports are accurate, couldn't think of any way for the U.S. government to take effective action against what it reportedly views as a scandal,

(6) (and I haven't seen this discussed) why was Treasury blind-sided by this? It confirms that they did not conduct even the most obvious due diligence on AIG's assets and contingent liabilities

Given what we know about the lack of due diligence by AIG on underlying assets, particularly nonprime paper, this confirms exactly how dangerous Treasury is to the the nation. It is also consistent with the concern that it faces such a critical staff shortage, particulary in the relevant skills (which the folks it hires from Wall Street lack). I doubt that they have five senior officials that have ever reviewed loan files for a living or conducted meaningful due diligence (which requires cracking the loan files).

On the AIG end we see the perverse incentives of keeping the senior level folks on that caused the crisis. They have every incentive not to be honest about the true extent of the losses. They know the place is dead (hopelessly insolvent) and have strong incentives to loot the corpse, e.g., through bonuses. They do not alert Treasury sufficiently in advance even to bonuses that they should know will be perceived as scandalous (though another problem with keeping these failed elites in power is that they are clueless about the reaction of normal people). They do not work to limit bonuses, e.g., by being honest about past accounting fraud. I believe when the facts come out that we will find that they did not make criminal referrals on the prior senior officials that led AIG's accounting fraud (which would have given AIG and the Treasury a far stronger legal basis for refusing to pay bonuses that were "earned" via accounting control fraud.

I don't oppose bonuses that are actually earned through long term performance. That is not the case with the AIG bonuses. We can offer well designed performance pay if we use bankruptcy or receiverships.

We see tonight another lame defense that the Treasury is trying really hard to claw back the bonuses. Please. Even if Treasury consulted outside counsel, I would strongly suspect it would be a large firm with a big corporate clientele.

Guess what? At those firms, HR is a backwater. The best HR lawyers are typically at boutiques or solo operators because they sue large corporations (that would represent a rather insurmountable conflict of interest for any firm seeking to represent those nice big meal ticket clients). I'm not current, but a decade ago, there was a woman lawyer (I cannot recall her name to save my life) who was an absolute killer, When a wronged executive or employee walked in with her at their side, BIg Co. knew they had a very serious problem on their hands. I am told by people who used her she was also a phenomenal negotiator on deals. It's certain that Treasury did not attempt to secure advice from that sort of attorney.

And to Black's point, the real issue is fraud. Why is no one at Treasury willing to use the F word? Who would it embarrass? There is not reason for NOT pursuing that angle, save that AIG must have the 5x7 glossies on some pretty influential people, or that pursuing fraud at AIG would, via a daisy chain of connections, reveal that fraud was pervasive, and the Treasury is desperate to preserve the false image that the system has integrity.

Posted by Yves Smith at 11:24 AM"

Me:

Don said...

"And to Black's point, the real issue is fraud. Why is no one at Treasury willing to use the F word? Who would it embarrass? There is not reason for NOT pursuing that angle, save that AIG must have the 5x7 glossies on some pretty influential people, or that pursuing fraud at AIG would, via a daisy chain of connections, reveal that fraud was pervasive, and the Treasury is desperate to preserve the false image that the system has integrity. "

I agree. A terrific post. People should read Pizzo's "Inside Job" about the S and L Crisis. It will at least teach them what to look for.

Don the libertarian Democrat

March 16, 2009 11:35 AM

in most cases, we won't be able to hold the board and officers criminally liable

From Justin Fox:

"Making the financial miscreants pay (it's harder than you might think)

Posted by Justin Fox | Comments (6) | Permalink | Trackbacks (0) | Email This

In a comment to my rambling attempt to explain the mess that is AIG, curmudgeon57 asked:

At what point can we hold the board and officers criminally liable for running a scam? (if you sell something you can't deliver, you either have to return the money or go to jail. It's that simple, right?)

My friend Roger Parloff took a valiant stab at answering this—for Wall Street in general, not just AIG—in a Fortune cover story in January. His answer was that, in most cases, we won't be able to hold the board and officers criminally liable.

[B]ad business models - even business models that in retrospect look like prescriptions for disaster - are not crimes as long as they are fully disclosed to investors. And the fact that lenders were hawking outlandishly risky mortgages to people who were terrible credit risks was, in fact, no secret in America: It was bipartisan national policy. The fact that exotic mortgages (like "pick a payment option" ARMs and "Alt-A" loans with no documentation of the buyer's assets or income) were then being packaged into complex derivative securities - some rated AAA by Moody's, S &P, and Fitch - was not just well known but also hailed as ingenious by some of the putatively best financial minds in the country.

If CEOs did not foresee the imminent train wreck that, looking back, seems so inevitable, neither did former Federal Reserve chairman and erstwhile "maestro" Alan Greenspan, who has recently, if self-servingly, termed our predicament a "once-in-a-century credit tsunami."

A little further on, Roger writes:

The job of the prosecutors is not to ferret out the root causes of what went wrong with the economy. That's a task for historians. The prosecutors are to look for unambiguous, intentional wrongdoing - and since a lay jury will be the official scorer here, the simpler the wrongdoing, the better. While it might be true, for instance, that investors were misled by the way companies handled mark-to-market accounting of derivatives, a prosecutor who makes that the centerpiece of his case will end up with a swearing contest between opposing accounting experts - a morass in front of a jury.

So my answer to curmudgeon57 is, I dunno. There will be prosecutions of those who ran what seem to be obvious scams, such as Bernie Madoff. There will be many attempts to nail other Wall Streeters for crimes only tangentially related to their role in causing the financial collapse, because prosecutors at least stand a chance of winning those cases. But holding most of the people who got us into this mess criminally liable for doing so just isn't going to happen. And maybe we don't want it to: The former Countrywide president who is now running a company (PennyMac) that buys up delinquent mortgages and renegotiates the terms is providing a valuable service and helping clear the way for better days for all of us. Do we really want him behind bars? At the same time, his smug conviction that he's not in any way to blame for the housing mess is awfully hard to take. These people need to pay, somehow. But how? I've been struggling with this for a while. Here are the options I can think of:

1. Claw back the cash. Millions of Americans made big financial mistakes over the past five years. Only a few got paid millions of dollars (or hundreds of millions) for making them. Ever since Congress passed the Superfund law in 1980, polluting corporations have had to pay to clean up the messes they make. There are no punitive charges assessed. Just the cost of the cleanup. Why not demand the same financial polluters? I've written about this before, and the answer is that it's hard. There will be attempts—by plaintiffs' attorneys and by corporate boards of directors—to confiscate big executive paychecks that preceded implosions. But I don't see a lot of them succeeding except in cases of outright fraud. Congress could change the law to make clawbacks easier, but doing that retroactively seems awfully problematic. So does determining exactly who has to give their money back. For example: Is Hank Greenberg at fault for building AIG into such a monstrosity? Or would everything be okay now if Eliot Spitzer hadn't hounded Greenberg out of office in 2005 and left the company in the hands of lesser men? (I, like John Gapper, lean toward the former explanation, but it's not really up to me.) Morally, a well-targeted clawback is exactly what the financial world needs right now (the cash would come in handy, too). Practically, though, it's just not gonna happen.

2. Embarrass them on Capitol Hill. The 20th century saw two great Congressional inquiries into financial misbehavior—the Pujo hearings of 1912-1913 and the Pecora hearings of 1933-1934. The essential characteristic that both shared, other than their names begin with "P," was that the questioning was done not by blowhard members of Congress but by very smart New York lawyers hired by Congress: Samuel Untermyer in 1912-1913 (Arsene Pujo of Louisiana was the chairman of the subcommittee that held the hearings, but he let Untermyer do the talking) and Ferdinand Pecora in 1933-1934. So far all we've gotten from this crisis are some disappointing hearings where elected officials—most of them with little knowledge and no prosecutorial skills—ask the questions. But both the Pujo and Pecora hearings did come several years after the financial collapses they were meant to investigate (the Panic of 1907 in Pujo's case, in case you were wondering), meaning that we've still got lots of time.

3. Raise taxes on high earners. The financial crisis (and subsequent government bailouts) and the years of plenty on Wall Street that preceded it together constitute a pretty appalling case of socializing risk and privatizing reward. So why not socialize the reward a bit more, by raising taxes on the biggest earners, many of whom are Wall Streeters? That's already the direction the Obama administration is headed in, but there are limits to this approach. For one thing, it's a pretty blunt instrument: There are lots of high earners who aren't engaged in activities that pose major systemic risks (for some reason, LeBron James keeps springing to mind). For another, if you take the whole socializing reward thing too far you risk strangling the economy. Although ... we had a 90%+ top tax rate in the 1940s and 1950s, and the economy didn't act particularly strangled.

4. Let them fail. Another way to remedy the mismatch of socialized risk and privatized reward would of course be to privatize risk. Financial sector risk has a bad habit of not staying in the financial sector, though, which is why we've been doing all these bailouts. I do think we've reached a point where we need to move from bailouts to workouts. But even those will still probably end up costing taxpayers a lot. And in most cases the people most to blame for the mess are already gone from the banks/insurance firms/etc. in question.

5. Wait for the historians, or at the very least for Bethany McLean and Joe Nocera's book. (Or Roger Lowenstein's or Andrew Ross Sorkin's or Barry Ritholtz's or somebody else's—I've got a book of my own coming out soon so I'd better not tick these people off. And while I really don't think Dan Gross's new ebook makes any pretense of being the definitive account of the crisis, I feel strangely compelled to inform you that it's available now on Kindle and the Sony Digital Book) The best post-crisis chronicles usually tarnish their chosen villains for decades to come, meting out justice in a way that the judicial system cannot. Until of course the revisionist histories come along decades later and turn everything upside down.

6. Something else. Tarring and feathering? Humanely administered flogging? Maoist self-criticism? If you have better ideas, let's hear them."

Me:

1. donthelibertariandemocrat Says:
   Friday, March 6, 2009 at 2:34 pm

   Through this crisis, I have been remembering this book:

   "Inside Job: The Looting of America's Savings and Loans (Paperback)
   by Stephen Pizzo (Author), Mary Fricker (Author), Paul Muolo (Author)

   From Publishers Weekly
   Bound to be controversial, this impressive expose by three journalists charges that the S & L industry was taken over by a national network of Mafiosi, corrupt thrift officers, appraisers, auditors and arms- and drug-dealers laundering money, all of whom exploited opportunities provided by the 1982 deregulation. Fortified with unlimited broker deposits, the network plundered hundreds of federally insured thrifts. The authors discount the role of high oil prices, the Sunbelt recession and other factors as catalysts in the S & L disaster. Excepting Federal Home Loan Bank Board chairman Erwin Gray, who fought to limit deposit brokerage, Pizzo, Fricker and Muolo accuse the Justice Department, the courts and other federal and state agencies for ignoring or covering up four years of fraud. They also maintain that the guilty have not been punished and little of the loot has been recovered out of official fear of revelation.
   Copyright 1989 Reed Business Information, Inc. --This text refers to an out of print or unavailable edition of this title. "

   I draw a pretty direct line from the S and L Crisis to where we find ourselves today. Even if it's hard and it doesn't always work, we need to have criminal and civil investigations, as well as congressional investigations, into these businesses. If we don't, I expect to be thinking about this book again in the not to distant future.