Why isn’t Wall Street in jail? Control fraud on a massive scale


A veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who’s in office or which party’s in power.

Karl Denniger

Some people call it “regulatory capture.” Others call it “control fraud” (William Black, primarily, along with me.) But I take it further; this is Control Fraud within the government, which is the most-pernicious form of all.

Control fraud is the delberate looting of a corporation or country by a few at the top. This is done primarily by rigging accounting rules, regulations, and laws (as well as by corruption, of course ) so that the few have no accountability and essentially are immune from the law. Don Corleone could only wish he had it so good. The crucial point here is, as William Black says, the failure of the entity is not a failure of the fraud. The plundering elite at the top does not care if their actions destroy the corporation (or country) because they’ve already stolen everything they could.

Bank elites and control fraud

William Black on the lack of criminal prosecutions by DOJ

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.

The feds confuse the bank with the banker. The bankers walk away with personal fortunes. They don’t care if their actions cratered the bank. That’s what control fraud is, the looting of a corporation by rigging accounting rules so elites can pay themselves huge amounts based on phony profits.

Another possibility would be that DOJ’s senior leadership has been corrupted, except that could never happen here, right?

China credit agency. Moody’s caused the crisis

Guan Jianzhong, chairman of Dagong Global Credit Rating to Financial Times

“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards.”

“The financial crisis was caused because rating agencies didn’t properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests.”

FT adds

In the aftermath of the financial crisis “rating shopping” has been one of the key complaints from western regulators , who have heavily criticised the big three agencies for handing top ratings to mortgage-linked securities that turned toxic when the US housing market collapsed in 2007

China may be talking their book here and of course has their own interests. However, what they are saying about our corrupt rating agencies is demonstrably true. The rating agencies time and time again rated toxic slop as triple-A as they made huge profits.

Here’s how the fraud worked. Under our compromised regulations and laws, any garbage they rated instantly assumed the triple-A rating of the rating agency. By any objective standard, this is a compromised, ethically challenged, and inevitably corrupt way of doing business.

This is known as control fraud, getting the rules changed so the players can make huge sums. William Black, an expert in the field says, the failure of the institution is not the failure of the control fraud. The players don’t care if they destroy companies, economies, or institutions, not if they’ve personally made millions (or billions.) Emphasis added.

Black asserted that the banking crisis in the United States that started in late 2008 is essentially a big Ponzi scheme; that the “liar loans” and other financial tricks were essentially illegal frauds; and that the triple-A ratings given to these loans was part of a criminal cover-up. He said that the “Prompt Corrective Action Law” passed after the Savings and Loan crisis mandated that ailing banks should be put into receivership. Black also stated that trying to hide how bad the situation is will simply prolong the problem, as happened in Japan’s lost decade. Black stated that Timothy Geithner is engaged in a cover-up, and that the administration does not want people to understand what went wrong or how bad the banking situation is today.

We have an extensive archive here on control fraud, including several videos interviewing Black.

William Black on Bill Moyers discussing corporate fraud

PBS has the video and a full transcript. Here’s an excerpt.

Bill Moyers: Bill, are you describing a political culture, that is criminogenic?

William K. Black: It’s deeply criminogenic. And this ideology that both parties are dominated by that says, “No, big corporations wouldn’t cheat. Fraud can’t happen. Market’s automatically excluded,” is insane. We now have the entitlement generation as CEOs. They just plain feel entitled to being wealthy as Croesus with no responsibility, no accountability. They have become literal sociopaths. So one of the things is, you clean up business schools, which right now are fraud factories at the senior levels, right?

They create the new monsters that take control and destroy massive enterprises and cause global economic crises, cause the great recession. And very, very close to causing the second Great Depression. We just barely missed that. And there’s no assurance that we’ve missed it five years out.

Bill Moyers: This brings us back to what the president said this week. He said the crisis was born of a failure of responsibility from Wall Street to Washington. You’ve just described that. That brought down many of the world’s largest financial firms and nearly dragged our economy into a second Great Depression. But he didn’t name names. He doesn’t say who specifically was responsible. You have. But the president doesn’t name names.

William K. Black: No, and one of the most important things a president has is the bully pulpit. We have not heard speeches by the president demanding that the frauds go to prison. We have not heard speeches from the attorney general of the United States of America, Eric Holder. Indeed, we haven’t heard anything. It’s like Sherlock Holmes, the dog that didn’t bark. And that’s the dog that is supposed to be our guard dog. It must bark. And it must have teeth, not just bark.

Obama doesn’t even bark.But then, lap dogs seldom do.

William Black. Fraud in financial system not being addressed

PBS. Emphasis added.

William K. Black thinks President Obama didn’t acknowledge a key component in the financial crisis that the bills before Congress won’t address — fraud. A former regulator who helped crack down on massive fraud during the savings and loan crisis in the 1980s, Black tells Bill Moyers on The Journal that, despite evidence of fraud at the top banks, prosecutions seem far away. “If you go back to the savings and loan debacle, we got more than a thousand felony convictions of the elite. These are not, you know, tellers or something. We today have zero convictions, zero indictments, zero arrests of any of the elite, non-prime lenders that, through their fraud, drove this crisis.”

Black developed the concept of “control fraud” — frauds in which the CEO or head of state uses the entity as a “weapon.” Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae’s former senior management.

Please, let’s not have any squeaking by liberals moaning about how the recession is solely the fault of Republicans. The Glass-Steagall Act was repealed during the Clinton Administration and directly led to the rise of the banksters. Clinton thought it was a swell idea and heartily endorsed the idea of destroying decades of sensible and effective bank regulation.

Now why do you suppose the Administration and Congress would be ignoring fraud?
Former Labor Secretary Robert Reich knows why. Congress is currently pretending to get tough on the financial sector but also needs its deep pockets to fund the upcoming mid-term elections. Make no mistake about it, this is bi-partisan corruption, both parties are equally culpable and compromised.

And of course, Sen. Dodd (D-Corrupticut) is right in the middle of it all, sliming the way to a pretend financial reform while keeping everything essentially the same for Wall Street.

Senator Dodd wants some financial reform – enough to declare victory – but not so much as to seriously undermine the prevalence of megabanks on Wall Street. You can take whatever view you like on his motivation – but Senator Dodd himself is quite open about his thinking and intentions.

Of course, he’s just one of the more odious and obviously comprised members of Congress. Folks, our system is rotten at the core. But change is happening. Outrage from the public continues to force Congress and the Obama Administration to make changes whether they want to or not. This is our strongest weapon. We need to keep the pressure on. Also, the head of SEC enforcement, and this has direct bearing on the Goldman fraud case, is the real deal.

Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor: This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.”

When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle.

The only way the system will change is by We The People making it change. It can not and will not willingly change itself. As far as I’m concerned, the more peasants with pitchforks in the streets, the better.