Thursday, August 11, 2011

Looting -- history does repeat itself

Writing at, Yves Smith of Naked Capitalism offers a rather depressing but illuminating wrap up of the utter failure of the SEC or the US Justice Department to do almost anything to punish the perpetrators of massive fraud in the run up (and after) the financial crisis. It's a sobering analysis of the world we live in, which isn't (for most of us) the world we thought we lived in until a few years ago:
For most citizens, one of the mysteries of life after the crisis is why such a massive act of looting has gone unpunished. We've had hearings, investigations, and numerous journalistic and academic post mortems. We've also had promises to put people in jail by prosecutors like Iowa's attorney general Tom Miller walked back virtually as soon as they were made.

Yet there is undeniable evidence of institutionalized fraud, such as widespread document fabrication in foreclosures (mentioned in the motion filed by New York state attorney general Eric Schneiderman opposing the $8.5 billion Bank of America settlement with investors) and the embedding of impermissible charges (known as junk fees and pyramiding fees) in servicing software, so that someone who misses a mortgage payment or two is almost certain to see it escalate into a foreclosure. And these come on top of a long list of runup-to-the-crisis abuses, including mortgage bonds having more dodgy loans in them than they were supposed to, banks selling synthetic or largely synthetic collateralized debt obligations as being just the same as ones made of real bonds when the synthetics were created for the purpose of making bets against the subprime market and selling BBB risk at largely AAA prices, and of course, phony accounting at the banks themselves.
The article goes on to document how what is happening now isn't actually too different from what happened following the Crash of 1929, and how much of the problem has been engineered by the increasing influence of economics in law, specially through efforts to limit regulators' powers and the potential liabilities of corporate managers.

This is an old, familiar story. I think the best analysis is still in the brilliant 1993 paper (stimulated by the Savings and Loan Crisis in the US) by George Akerlof and colleagues entitled Looting: The Economic Underworld of Bankruptcy for Profit. Below, enjoy the final two paragraphs:
The S&L fiasco in the United States leaves us with the question, why did the government leave itself so exposed to abuse? Part of the answer, of course, is that actions taken by the government are the result of the political process. When regulators hid the extent of the true problem with artificial accounting devices, when congressmen pressured regulators to go easy on favored constituents and political donors, when the largest brokerage firms lobbied to protect their ability to funnel brokered deposits to any thrift in the country, when the lobbyists for the savings and loan industry adopted the strategy of postponing action until industry difficulties were so large that general tax revenue would have to be used to address problems instead of revenue raised from taxes on successful firms in the industry-when these and many other actions were
taken, people responded rationally to the incentives they faced within the political process.

The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself.
That was 1993. Alas, history has repeated itself and didn't take too long to do so.

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