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BUCKNACKT'S SORDID TAWDRY BLOG We should not be a journey to the grave with the intention of arriving safely in an attractive & well preserved body, but rather to skid in sideways, chocolate, bier or wein in hand, body thoroughly used up, totally worn out and screaming "WHOO-HOO, WHAT A RIDE!!!!!!"
Showing posts with label justice department. Show all posts
Showing posts with label justice department. Show all posts
04 April 2026
MOTHER JONES DAILY: King Charles or King Trump?, A MAGA Crack-up?, Meet the Moms Fighting Toxic Air Pollution (You Could Be Next), Pam Bondi traded her department’s independence for loyalty to Trump, Texas leads the nation in wind energy, so why are there no turbines offshore?, The political world of caregiving, What being a billionaire scion taught JB Pritzker about standing up to one 3APR26
05 April 2011
Eric Holder Lashes Out At Congress Over Decision To Try KSM In Military Tribunal 4APR11
THIS is supposed to be the land of the free and the home of the brave, but the cowards in Congress don't have the backbone or the moral courage to live up to that reputation, choosing to use fear mongering to justify their violations of civil rights and civil liberties. Too bad they are too self-righteous to be ashamed. From HuffPost.....
WASHINGTON -- After announcing it would try 9/11 mastermind Khalid Sheikh Mohammed and four alleged conspirators by military commission rather than in a civilian trial, the Obama administration quickly scapegoated Congress to explain the decision.
Attorney General Eric Holder announced Monday that his department was scrapping its November 2009 decision to hold Mohammed’s high-profile trial just blocks from the World Trade Center. Instead, they were moving the venue to Guantanamo Bay. Holder and other administration officials said the policy reversal was due to congressional interference in executive counterterrorism efforts and “needless” drumming-up of controversy.
“The reality is, I know this case in ways that members of Congress do not,” Attorney General Eric Holder said during a press conference. “I have looked at the files. I have spoken to the prosecutors. I know the tactical concerns that have to go into this decision. So do I know better than them? Yes.”
The attorney general said had not arrived at the decision comfortably. Had he had his druthers, Holder claimed, he would have kept the trial in its original setting, but the legislative branch controls the money for transferring the prisoners and securing the site.
The Ike Skelton National Defense Authorization Act for Fiscal Year 2011 prohibits use of funds to transfer defendants from Guantanamo Bay to the United States. In a file dismissing the indictment of Mohammed and the four alleged conspirators sent to the Southern District of New York on Monday morning, members of the U.S. Attorney’s Office pointed to the act as the prohibitive restriction preventing a federal trial.
Before Holder’s announcement, a Department of Justice official said that a military commission trial had become the “only option available given congressional restrictions.” If the message wasn’t clear enough, White House Press Secretary Jay Carney cited “congressional reaction to some of the goals that were laid out” as one of the reasons for the reversal. Asked whether blaming Congress was going to be the simple pushback, another official replied, “We're just explaining the facts.”
“[Congress has] taken one of the nation’s most tested counterterrorism tools off the table and tied our hands in a way that would have serious ramifications,” Holder said. “We will continue to seek to repeal those restrictions.”
If the Obama administration were seeking to make a villain out of the legislative branch, they had willing partners in some congressional lawmakers. Senate Minority Leader Mitch McConnell (R-Ky.) took a break from budget negotiations to praise the administration for following the will of an “overwhelming bipartisan opposition from the American people and their elected representatives here in Congress.” Senator Chuck Schumer (D-N.Y.) called Holder’s announcement the “final nail in the coffin of that wrong-headed idea,” referring to the possibility of a civilian trial. Rep. Peter King (R-N.Y.), chair of the Homeland Security Committee, described the change as “a long-awaited step in the right direction.”
Others in Washington seemed to agree with Holder that Congress had played a guiding role in the reversal of course. “I believe that the Congress forced the president into this decision,” Col. Lawrence Wilkerson said, “first, by their abject lack of courage in not wanting [Mohammed] tried ‘in their city, in their courtroom,’ and, second, by their inability to present the president with an alternative other than the military system.”
But Wilkerson, a onetime chief of staff to Secretary of State Colin Powell, refused to absolve the Obama administration entirely. “Of course the president, in complying, demonstrated a decided lack of moral courage as well,” he said.
It appears debates over the legal parameters of national security law don’t break down perfectly either along party lines or between branches of government. And while the vast majority of lawmakers praised moving Mohammed’s trial back to Guantanamo, others expressed both disappointment with the development and with what they considered to be Obama’s willingness to let it happen.
"I felt that if the scene of the crime was New York, why not try him in New York?" Rep. Jose Serrano (D-N.Y.) said. “I don't think we should do anything that gives the terrorists the ability to say they've disrupted the normal way we do things. Normally, we would have tried [Mohammed] at the scene of the crime.”
Michael Ratner, president of the Center for Constitutional Rights, said, “Had [Obama] showed some courage to begin with on these national security issues, I think he could have made huge gains.” But, he added, “Obama backed down every time there was a whiff of an oppositional problem on national security.”
Michael McAuliff and Jon Ward contributed to this report.
WASHINGTON -- After announcing it would try 9/11 mastermind Khalid Sheikh Mohammed and four alleged conspirators by military commission rather than in a civilian trial, the Obama administration quickly scapegoated Congress to explain the decision.
Attorney General Eric Holder announced Monday that his department was scrapping its November 2009 decision to hold Mohammed’s high-profile trial just blocks from the World Trade Center. Instead, they were moving the venue to Guantanamo Bay. Holder and other administration officials said the policy reversal was due to congressional interference in executive counterterrorism efforts and “needless” drumming-up of controversy.
“The reality is, I know this case in ways that members of Congress do not,” Attorney General Eric Holder said during a press conference. “I have looked at the files. I have spoken to the prosecutors. I know the tactical concerns that have to go into this decision. So do I know better than them? Yes.”
The attorney general said had not arrived at the decision comfortably. Had he had his druthers, Holder claimed, he would have kept the trial in its original setting, but the legislative branch controls the money for transferring the prisoners and securing the site.
The Ike Skelton National Defense Authorization Act for Fiscal Year 2011 prohibits use of funds to transfer defendants from Guantanamo Bay to the United States. In a file dismissing the indictment of Mohammed and the four alleged conspirators sent to the Southern District of New York on Monday morning, members of the U.S. Attorney’s Office pointed to the act as the prohibitive restriction preventing a federal trial.
Before Holder’s announcement, a Department of Justice official said that a military commission trial had become the “only option available given congressional restrictions.” If the message wasn’t clear enough, White House Press Secretary Jay Carney cited “congressional reaction to some of the goals that were laid out” as one of the reasons for the reversal. Asked whether blaming Congress was going to be the simple pushback, another official replied, “We're just explaining the facts.”
“[Congress has] taken one of the nation’s most tested counterterrorism tools off the table and tied our hands in a way that would have serious ramifications,” Holder said. “We will continue to seek to repeal those restrictions.”
If the Obama administration were seeking to make a villain out of the legislative branch, they had willing partners in some congressional lawmakers. Senate Minority Leader Mitch McConnell (R-Ky.) took a break from budget negotiations to praise the administration for following the will of an “overwhelming bipartisan opposition from the American people and their elected representatives here in Congress.” Senator Chuck Schumer (D-N.Y.) called Holder’s announcement the “final nail in the coffin of that wrong-headed idea,” referring to the possibility of a civilian trial. Rep. Peter King (R-N.Y.), chair of the Homeland Security Committee, described the change as “a long-awaited step in the right direction.”
Others in Washington seemed to agree with Holder that Congress had played a guiding role in the reversal of course. “I believe that the Congress forced the president into this decision,” Col. Lawrence Wilkerson said, “first, by their abject lack of courage in not wanting [Mohammed] tried ‘in their city, in their courtroom,’ and, second, by their inability to present the president with an alternative other than the military system.”
But Wilkerson, a onetime chief of staff to Secretary of State Colin Powell, refused to absolve the Obama administration entirely. “Of course the president, in complying, demonstrated a decided lack of moral courage as well,” he said.
It appears debates over the legal parameters of national security law don’t break down perfectly either along party lines or between branches of government. And while the vast majority of lawmakers praised moving Mohammed’s trial back to Guantanamo, others expressed both disappointment with the development and with what they considered to be Obama’s willingness to let it happen.
"I felt that if the scene of the crime was New York, why not try him in New York?" Rep. Jose Serrano (D-N.Y.) said. “I don't think we should do anything that gives the terrorists the ability to say they've disrupted the normal way we do things. Normally, we would have tried [Mohammed] at the scene of the crime.”
Michael Ratner, president of the Center for Constitutional Rights, said, “Had [Obama] showed some courage to begin with on these national security issues, I think he could have made huge gains.” But, he added, “Obama backed down every time there was a whiff of an oppositional problem on national security.”
Michael McAuliff and Jon Ward contributed to this report.
15 January 2011
US, Kuwait, and United Airlines Heading for Anti-Terrorism Clash? from MOTHER JONES 15JAN11
THE American government can not continue to ignore the civil rights of American citizens, can not continue to permit the mistreatment of American citizens held by foreign governments, and then plan on lecturing prc pres hu on human rights when he meets with Pres Obama next week. If this person is suspected of supporting terrorism then he should have been extradited from Kuwait and charged here. If the government doesn't have enough evidence to bring charges then as an American citizen he deserved to have his imprisonment in Kuwait challenged by the U.S. Ambassador. The FBI and Justice Department have done a great job of creating another poster boy for islamic extremist to use in their recruiting campaigns. This from Mother Jones......
There's a looming confrontation between the United States, Kuwait, and United Airlines over a Kuwaiti attempt to deport to the US an American teenager, Gulet Mohammed, who has been detained in the Arab nation for several weeks and reportedly questioned by the FBI about terrorism. (His relatives and lawyer in the United States say he was beaten while in Kuwaiti custody.) Kuwaiti authorities plan to deport Mohamed, whom they have detained for several weeks, on Monday morning, they told Mohamed's family on Saturday.
Kuwaiti officials hope to force Mohamed onto United Airlines Flight 981, a direct flight from Kuwait to Dulles International Airport near Washington, DC, despite the fact that US authorities have reportedly placed Mohamed on the federal no-fly list. (Mother Jones has obtained a copy of Mohamed's receipt that confirms he is booked on the flight.) The key flash points will be around midnight Kuwaiti time (4:00 p.m. EST) on Sunday, when Kuwaiti authorities try to place Mohamed on the flight, and around 6:00 a.m. EST on Monday, when the flight is expected to approach US airspace. "We have high hopes that Gulet will be back in Washington soon, God willing," Gulet's older brother Mohed told Mother Jones in a phone interview from Kuwait on Saturday.
Mother Jones placed requests for comment with the State Department, the Department of Homeland Security (which manages the no-fly list), and the White House. The State Department declined to comment, and DHS and the White House said they would first have to check on the matter. A United Airlines media representative also said the airline would have to review the situation before saying anything. A call to the Kuwaiti embassy in Washington was not returned. (You can follow the latest developments in this story by following me on Twitter: @nickbaumann. This post will be updated with any major developments.)
Mohamed, a 19-year-old from Alexandria, Virginia, was first arrested and detained by Kuwaiti authorities last month. He says he was beaten and otherwise abused in custody, and asked questions about Anwar al-Awlaki, the American-born Al Qaeda propagandist who is supposedly hiding out in Yemen. Mohamed did visit Yemen and Somalia in 2009, but his lawyer and family maintain he was getting in touch with his roots and learning Arabic, and he told the New York Times, "I despise terrorism."
Mohamed is just the latest in a series of Muslim Americans who have been detained by foreign authorities while abroad, interrogated by the FBI, and denied the chance to return home because of their presence on the no-fly list. On Wednesday, Mohamed's lawyer, Gadeir Abbas, filed a complaint with the Justice Department, asking the agency to investigate Mohamed's charges that the FBI has repeatedly questioned him in Kuwaiti custody despite his continued requests for counsel and his invocation of his right to remain silent. Mohamed also says he was beaten by Kuwaiti authorities. Mohamed, his lawyer, and his family have suggested that Mohamed was originally detained at the behest of the United States—a charge the State Department has denied.
Kuwaiti officials hope to force Mohamed onto United Airlines Flight 981, a direct flight from Kuwait to Dulles International Airport near Washington, DC, despite the fact that US authorities have reportedly placed Mohamed on the federal no-fly list. (Mother Jones has obtained a copy of Mohamed's receipt that confirms he is booked on the flight.) The key flash points will be around midnight Kuwaiti time (4:00 p.m. EST) on Sunday, when Kuwaiti authorities try to place Mohamed on the flight, and around 6:00 a.m. EST on Monday, when the flight is expected to approach US airspace. "We have high hopes that Gulet will be back in Washington soon, God willing," Gulet's older brother Mohed told Mother Jones in a phone interview from Kuwait on Saturday.
Mother Jones placed requests for comment with the State Department, the Department of Homeland Security (which manages the no-fly list), and the White House. The State Department declined to comment, and DHS and the White House said they would first have to check on the matter. A United Airlines media representative also said the airline would have to review the situation before saying anything. A call to the Kuwaiti embassy in Washington was not returned. (You can follow the latest developments in this story by following me on Twitter: @nickbaumann. This post will be updated with any major developments.)
Mohamed, a 19-year-old from Alexandria, Virginia, was first arrested and detained by Kuwaiti authorities last month. He says he was beaten and otherwise abused in custody, and asked questions about Anwar al-Awlaki, the American-born Al Qaeda propagandist who is supposedly hiding out in Yemen. Mohamed did visit Yemen and Somalia in 2009, but his lawyer and family maintain he was getting in touch with his roots and learning Arabic, and he told the New York Times, "I despise terrorism."
Mohamed is just the latest in a series of Muslim Americans who have been detained by foreign authorities while abroad, interrogated by the FBI, and denied the chance to return home because of their presence on the no-fly list. On Wednesday, Mohamed's lawyer, Gadeir Abbas, filed a complaint with the Justice Department, asking the agency to investigate Mohamed's charges that the FBI has repeatedly questioned him in Kuwaiti custody despite his continued requests for counsel and his invocation of his right to remain silent. Mohamed also says he was beaten by Kuwaiti authorities. Mohamed, his lawyer, and his family have suggested that Mohamed was originally detained at the behest of the United States—a charge the State Department has denied.
30 December 2010
Are We Going to Let the Biggest Financial Fraudsters Keep Their Money and Avoid Jail Time? 30DEZ10
I am afraid the wall street bankers and financiers that brought our economy to it's knees will get away with their crimes and will keep on laughing all the way to their off shore bank accounts....this from AlterNet.....
The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade — de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI’s and the Department of Justice’s (DOJ) focus.
The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications.
The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.
What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals. On Huffington Post, David Heath writes:
Here is the four-part recipe for maximizing fraudulent accounting income in the short-term:
Note that the same recipe that maximizes short-term fictional income in the near term maximizes real losses in the longer term. Mr. Wagner is unable to understand that accounting control fraud represents the ultimate “agency” problem — the unfaithful agent (the CEO) enriches himself at the expense of the principals he is supposed to serve and the firm’s creditors. Agency problems are well known to white-collar criminologists, economists, lawyers that practice corporate, securities, or criminal law, and financial regulators. Yes, accounting control fraud causes the bank to suffer huge losses. The loans don’t “turn out to be fraudulent” — they are fraudulent when made. The recognition of the losses is delayed when an epidemic of accounting control fraud hyper-inflates a bubble, but the bubble will increase the ultimate losses. Sacramento, California is one of the epicenters of the mortgage fraud that drove the financial crisis, so Mr. Wagner’s lack of understanding of fraud mechanisms is particularly harmful.
Financial regulators are essential to prevent this kind of error by senior prosecutors. The regulators have to serve as the Sherpas for the criminal justice system to succeed against epidemics of control fraud. The FBI cannot have hundreds of agents expert in many hundreds of industries. The regulators have to do the heavy investigative lifting. They have the expertise and greater staff resources. The regulators also have to serve as the guides. Their criminal referrals have to provide the roadmaps that allow the FBI to conduct successful investigations. The regulators played this role successfully at key times during the S&L debacle, filing thousands of criminal referrals that led to over 1000 priority felony convictions. During the current crisis the OCC and the OTS - combined - made zero criminal referrals. None of the federal regulatory agencies appear to have enforced the regulatory mandate that federally insured depositories file criminal referrals - and noncompliance with that requirement was and is the norm. There is no indication that the FBI has demanded that the regulators enforce their rules.
Absent guidance and support from the regulators, the FBI turned to the worst conceivable source of guidance and support - the trade association of the “perps” — the Mortgage Bankers Association (MBA). The MBA, predictably, defined its members as the victims of mortgage fraud. The MBA invented a nonsensical definition of mortgage fraud which made accounting control fraud impossible. All fraud supposedly fell into one of two categories: “fraud for housing” or “fraud for profit.” The MBA members are, in fact, victims of accounting control fraud. The mortgage banks, however, do not set MBA policy. The CEOs of the mortgage banks determine MBA policy and they are not about to tell the FBI that they are the primary source of the epidemic of mortgage fraud. Similarly, they are not about to make criminal referrals, which might cause the FBI to investigate why some lenders made loans that were overwhelmingly fraudulent. MBA members virtually never made criminal referrals even though they made millions of fraudulent loans. Why don’t the victims make criminal referrals and help the FBI protect them from the frauds?
Why did an industry, home mortgage lending, which had traditionally been able to keep losses from all sources to roughly one percent suddenly begin to suffer 80-100 percent fraud incidence on “liar’s” loans? Why would an honest mortgage lender make “liar’s” loans knowing that doing so would produce intense “adverse selection” and a “negative expected value”? They would not do so. They were not mandated to do so by federal regulation or law. They were not encouraged to do so by federal regulation or law. They did so because their CEOs decided they would do so in order to maximize fictional income and real bonuses. The CEOs increased the number of liar’s loans they made after they were warned by the FBI that there was an “epidemic” of mortgage fraud and the FBI predicted it would cause an “economic crisis” were it not contained. The CEOs increased their liar’s loans after the MBA’s own anti-fraud experts stated that they deserved the name “liar’s” loans because they were pervasively fraudulent and after those experts said that “liar’s” loans were “an open invitation to fraudsters.” The industry’s formal euphemisms for liar’s loans were “alt-a” and “stated income” loans. None of this makes sense for honest CEOs.
The federal regulators have not made any public study of liar’s loans. The FDIC and OTS’ joint data system on mortgages is an anti-study — it uses a categorization system that ignores whether the loans were underwritten. This makes the data base useless for studying loans made without full underwriting — the loans that were overwhelmingly fraudulent and drove the crisis. Credit Suisse reported that mortgage loans without full underwriting constituted 49% of all new originations in 2006. If that percentage is even in the ballpark it indicates that that there were millions of fraudulent loans originated in 2005-2007. It is appalling that the regulators are not studying the facts necessary to understand the crisis and hold the perpetrator accountable.
Fortunately, the state attorneys general have studied these mechanisms and they have found that it was the lenders and their agents that overwhelmingly (1) prompted the false loan application data and (2) coerced appraisers to inflate market values. An honest lender would never engage in either practice or permit its agents to do so. The federal regulators, however, have spent their passion trying to preempt state efforts to protect borrowers. The federal regulators took no effective action in response to the State AGs’ findings.
The combined effect of these private sector, regulatory, and criminal justice failures has created a set of intellectual blinders that have caused DOJ to mischaracterize the nature of mortgage fraud. Attorney General Mukasey famously dismissed the epidemic of mortgage fraud as “white-collar street crime.” He did so in the context of refusing to establish a national task force against mortgage fraud. A national task force is essential in this crisis because of the national lending scope of many of the worst accounting control frauds. Attorney General Holder has maintained Mukasey’s passive approach to the elite frauds that drove the crisis.
The U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature — as well as the data on fraud and analytics are all readily available. The FBI must end its “partnership” with the MBA.
Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. The regulators need to make assisting prosecutions, and bringing civil and enforcement actions, against the senior officers that led the control frauds their top priority. The regulators need to make detailed criminal referrals, enforce vigorously the regulatory mandate that insured depositories file criminal referrals, and prioritize banks that made large numbers of nonprime loans but few criminal referrals. The regulators need to work with DOJ to prioritize the cases. In the S&L debacle we used a formal process to create our “Top 100″ priority cases. The regulators need to investigate rigorously every large nonprime lending specialist by creating a comprehensive national data base. We have unique opportunities given the massive holding of nonprime paper by the Fed and Fannie and Freddie to create a reliable data base and use it to conduct reliable studies and investigations.
Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs. The SEC needs to clean up accounting and the Big Four audit firms. The bank control frauds’ “weapon of choice” is accounting. The Big Four audit firms consistently gave clean opinions to even the most egregious frauds. Provisions for losses (ALLL) fell to farcical levels. Losses were not recognized. Clear evidence of endemic fraud was ignored.
What are the prospects for these three vital changes occurring in 2011? They are poor. There is no evidence that any of the three changes is in process. The new House committee chairs have championed even weaker regulation and have not championed the prosecution of Wall Street elites.
The media, however, has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud. Prominent economists, particularly Joseph Stiglitz and Alan Greenspan, have joined Akerlof, Romer, Galbraith,Wray, and Prasch in emphasizing the key role that elite fraud played in driving this crisis. Even Andrew Ross Sorkin, generally seen as an apologist for the Street’s elites, has decried the lack of prosecutions.
Our best bet is to continue to win the scholarly disputes and to continue to push media representatives to take fraud seriously. If the media demands for prosecution of the elite banking frauds expand there is a chance to create a bipartisan coalition in Congress and the administration supporting prosecutions. In the S&L debacle, Representative Annunzio was one of the leading opponents of reregulation and leading supporters of Charles Keating. After we brought several hundred successful prosecutions he began wearing a huge button: “Jail the S&L Crooks!” Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived. It makes tens of thousands of documents detailing the frauds public. It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds. All of this increases the saliency of fraud and increases demands for serious reforms, adequate resources for the regulators and criminal justice bodies, and makes clear that elite fraud poses a severe danger. Collectively, this creates the political space for real reform, vigorous regulators, and real prosecutors.
The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade — de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI’s and the Department of Justice’s (DOJ) focus.
The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications.
The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.
What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals. On Huffington Post, David Heath writes:
Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.”
Mr. Wagner is confused by his own pronouns: “It doesn’t make any sense to me that they would be deliberately defrauding themselves.” This direct quotation needs to be read in conjunction with the author’s description of his position: “banks lose money” when loans “turn out to be fraudulent.” Wagner was responding to a question about control fraud — frauds led by the person controlling the seemingly legitimate entity who uses it as a “weapon.” The relevant “they” is the person looting the bank — the CEO. The word “themselves” refers not to the CEO, but rather to the bank. The CEO is not looting the CEO; he is looting the bank’s creditors and shareholders. Two titles capture this well known fraud dynamic. The Nobel laureate in economics, George Akerlof, and Paul Romer co-authored Looting: the Economic Underworld of Bankruptcy for Profit in 1993 and I wrote The Best Way to Rob a Bank is to Own One (2005). The CEO becomes wealthy by looting the bank. He uses accounting as his ammunition because, to quote Akerlof & Romer, it is “a sure thing.” The firm fails (or in the modern era, is bailed out), but the CEO walks away wealthy.Here is the four-part recipe for maximizing fraudulent accounting income in the short-term:
1. Grow extremely rapidly
2. By making bad loans at high yields
3. While employing extreme leverage, and
4. Providing only minimal loss reserves
A bank that follows this recipe is mathematically guaranteed to report record income in the near term. The first two ingredients in the recipe are linked. A bank in a reasonably competitive, mature market such as home mortgage lending cannot decide to grow extremely rapidly by making good loans. A bank can, however, guarantee its ability to grow rapidly — and charge a premium yield — if it lends to the tens of millions of people who cannot afford to own a home. Equally importantly, if many lenders follow the same recipe they will cause a financial bubble to hyper-inflate. Financial bubbles extend the lives of accounting control frauds by making it simple to refinance loans to those who cannot afford to purchase the asset. The longer that delinquencies and defaults can be delayed the more the CEO can loot the bank.2. By making bad loans at high yields
3. While employing extreme leverage, and
4. Providing only minimal loss reserves
Note that the same recipe that maximizes short-term fictional income in the near term maximizes real losses in the longer term. Mr. Wagner is unable to understand that accounting control fraud represents the ultimate “agency” problem — the unfaithful agent (the CEO) enriches himself at the expense of the principals he is supposed to serve and the firm’s creditors. Agency problems are well known to white-collar criminologists, economists, lawyers that practice corporate, securities, or criminal law, and financial regulators. Yes, accounting control fraud causes the bank to suffer huge losses. The loans don’t “turn out to be fraudulent” — they are fraudulent when made. The recognition of the losses is delayed when an epidemic of accounting control fraud hyper-inflates a bubble, but the bubble will increase the ultimate losses. Sacramento, California is one of the epicenters of the mortgage fraud that drove the financial crisis, so Mr. Wagner’s lack of understanding of fraud mechanisms is particularly harmful.
Financial regulators are essential to prevent this kind of error by senior prosecutors. The regulators have to serve as the Sherpas for the criminal justice system to succeed against epidemics of control fraud. The FBI cannot have hundreds of agents expert in many hundreds of industries. The regulators have to do the heavy investigative lifting. They have the expertise and greater staff resources. The regulators also have to serve as the guides. Their criminal referrals have to provide the roadmaps that allow the FBI to conduct successful investigations. The regulators played this role successfully at key times during the S&L debacle, filing thousands of criminal referrals that led to over 1000 priority felony convictions. During the current crisis the OCC and the OTS - combined - made zero criminal referrals. None of the federal regulatory agencies appear to have enforced the regulatory mandate that federally insured depositories file criminal referrals - and noncompliance with that requirement was and is the norm. There is no indication that the FBI has demanded that the regulators enforce their rules.
Absent guidance and support from the regulators, the FBI turned to the worst conceivable source of guidance and support - the trade association of the “perps” — the Mortgage Bankers Association (MBA). The MBA, predictably, defined its members as the victims of mortgage fraud. The MBA invented a nonsensical definition of mortgage fraud which made accounting control fraud impossible. All fraud supposedly fell into one of two categories: “fraud for housing” or “fraud for profit.” The MBA members are, in fact, victims of accounting control fraud. The mortgage banks, however, do not set MBA policy. The CEOs of the mortgage banks determine MBA policy and they are not about to tell the FBI that they are the primary source of the epidemic of mortgage fraud. Similarly, they are not about to make criminal referrals, which might cause the FBI to investigate why some lenders made loans that were overwhelmingly fraudulent. MBA members virtually never made criminal referrals even though they made millions of fraudulent loans. Why don’t the victims make criminal referrals and help the FBI protect them from the frauds?
Why did an industry, home mortgage lending, which had traditionally been able to keep losses from all sources to roughly one percent suddenly begin to suffer 80-100 percent fraud incidence on “liar’s” loans? Why would an honest mortgage lender make “liar’s” loans knowing that doing so would produce intense “adverse selection” and a “negative expected value”? They would not do so. They were not mandated to do so by federal regulation or law. They were not encouraged to do so by federal regulation or law. They did so because their CEOs decided they would do so in order to maximize fictional income and real bonuses. The CEOs increased the number of liar’s loans they made after they were warned by the FBI that there was an “epidemic” of mortgage fraud and the FBI predicted it would cause an “economic crisis” were it not contained. The CEOs increased their liar’s loans after the MBA’s own anti-fraud experts stated that they deserved the name “liar’s” loans because they were pervasively fraudulent and after those experts said that “liar’s” loans were “an open invitation to fraudsters.” The industry’s formal euphemisms for liar’s loans were “alt-a” and “stated income” loans. None of this makes sense for honest CEOs.
The federal regulators have not made any public study of liar’s loans. The FDIC and OTS’ joint data system on mortgages is an anti-study — it uses a categorization system that ignores whether the loans were underwritten. This makes the data base useless for studying loans made without full underwriting — the loans that were overwhelmingly fraudulent and drove the crisis. Credit Suisse reported that mortgage loans without full underwriting constituted 49% of all new originations in 2006. If that percentage is even in the ballpark it indicates that that there were millions of fraudulent loans originated in 2005-2007. It is appalling that the regulators are not studying the facts necessary to understand the crisis and hold the perpetrator accountable.
Fortunately, the state attorneys general have studied these mechanisms and they have found that it was the lenders and their agents that overwhelmingly (1) prompted the false loan application data and (2) coerced appraisers to inflate market values. An honest lender would never engage in either practice or permit its agents to do so. The federal regulators, however, have spent their passion trying to preempt state efforts to protect borrowers. The federal regulators took no effective action in response to the State AGs’ findings.
The combined effect of these private sector, regulatory, and criminal justice failures has created a set of intellectual blinders that have caused DOJ to mischaracterize the nature of mortgage fraud. Attorney General Mukasey famously dismissed the epidemic of mortgage fraud as “white-collar street crime.” He did so in the context of refusing to establish a national task force against mortgage fraud. A national task force is essential in this crisis because of the national lending scope of many of the worst accounting control frauds. Attorney General Holder has maintained Mukasey’s passive approach to the elite frauds that drove the crisis.
The U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature — as well as the data on fraud and analytics are all readily available. The FBI must end its “partnership” with the MBA.
Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. The regulators need to make assisting prosecutions, and bringing civil and enforcement actions, against the senior officers that led the control frauds their top priority. The regulators need to make detailed criminal referrals, enforce vigorously the regulatory mandate that insured depositories file criminal referrals, and prioritize banks that made large numbers of nonprime loans but few criminal referrals. The regulators need to work with DOJ to prioritize the cases. In the S&L debacle we used a formal process to create our “Top 100″ priority cases. The regulators need to investigate rigorously every large nonprime lending specialist by creating a comprehensive national data base. We have unique opportunities given the massive holding of nonprime paper by the Fed and Fannie and Freddie to create a reliable data base and use it to conduct reliable studies and investigations.
Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs. The SEC needs to clean up accounting and the Big Four audit firms. The bank control frauds’ “weapon of choice” is accounting. The Big Four audit firms consistently gave clean opinions to even the most egregious frauds. Provisions for losses (ALLL) fell to farcical levels. Losses were not recognized. Clear evidence of endemic fraud was ignored.
What are the prospects for these three vital changes occurring in 2011? They are poor. There is no evidence that any of the three changes is in process. The new House committee chairs have championed even weaker regulation and have not championed the prosecution of Wall Street elites.
The media, however, has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud. Prominent economists, particularly Joseph Stiglitz and Alan Greenspan, have joined Akerlof, Romer, Galbraith,Wray, and Prasch in emphasizing the key role that elite fraud played in driving this crisis. Even Andrew Ross Sorkin, generally seen as an apologist for the Street’s elites, has decried the lack of prosecutions.
Our best bet is to continue to win the scholarly disputes and to continue to push media representatives to take fraud seriously. If the media demands for prosecution of the elite banking frauds expand there is a chance to create a bipartisan coalition in Congress and the administration supporting prosecutions. In the S&L debacle, Representative Annunzio was one of the leading opponents of reregulation and leading supporters of Charles Keating. After we brought several hundred successful prosecutions he began wearing a huge button: “Jail the S&L Crooks!” Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived. It makes tens of thousands of documents detailing the frauds public. It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds. All of this increases the saliency of fraud and increases demands for serious reforms, adequate resources for the regulators and criminal justice bodies, and makes clear that elite fraud poses a severe danger. Collectively, this creates the political space for real reform, vigorous regulators, and real prosecutors.
Bill Black is a NewDeal2.0 braintruster, an associate professor of economics and law at the University of Missouri-Kansas City, a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One.
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