The Fourteenth Banker Blog

May 12, 2010

Must Read

Filed under: Uncategorized — thefourteenthbanker @ 2:07 PM

Today on Bloomberg Radio I heard Professor James K. Galbraith discussing the need to hire 1000 investigators with the FBI to address financial fraud.   Immediately I went to his website to discover that just a week ago he testified before Congress.    This compelling testimony is spot on.  Here’s an excerpt:

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool.

Dr. Galbraith’s focus is on inequality.  It is important that someone focusing on inequality also recognizes processes and systems that foster criminality also perpetuate inequality.  Liberal or Conservative, we must recognize that power corrupts and the axis of power between Wall Street and Washington is intact.  Freedom and opportunity are choked off in such an environment.   It is incumbent on all of us to demand that the strongest possible actions be taken to break the stranglehold of this corruption.

As a banker, I acknowledge that elements of systems that perpetuate fraud are alive and well in our internal systems.  Ofttimes internal fraud is not a crime.  Money earned according to incentive formulas, yet exploitative, which has the consent of management, is probably not a crime.  But a system that supports such activity, is also a system that will produce criminals.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.

I am one lone, marginalized voice.   Here is another.   This man, had his warnings been heeded, may have saved the catastrophe in the Gulf.  But his warnings were not heeded.   He was labeled a malcontent and forced out.  His managers probably believed there was not really any harm in cutting these corners on Blowout Preventer tests.  After all, the company really knows what’s best.  The risk is small. Who are we to question?  Who are we to not “drink the Kool Aid”?

We are the people.



  1. 2005, that’s how long ago people knew something was wrong. No wonder sometimes I think, “am I the only one who’s paranoid”? Nope, never again am I doubting my sanity!

    There were comments on the post from people talking about how executives always get away and the litte guy takes the fall. You speak and you get marginalized, ridiculed behind your back as an idealist, even fired. This has got to change and if it takes 5 years for people to wake up, I better be looking for something else to do.

    Sent a poor small business owner’s loan to be worked out by the vulture group. The guy started the business 20 years ago, been a customer of the bank for past 14 years, fell on some tough times, was begging to give him principal forbearance, but the bank doesn’t want me to waste my time on such matters. They want my superior talent to secure more business. More business, you morons, there is no business out there! People are hurting, their livelihoods are at stake here.

    We need criminal prosecutions, PLEASE or we’ll all perish!!!

    Comment by Vocalbanker — May 12, 2010 @ 11:09 PM | Reply

    • Just got off the phone – yet again – telling my senators exactly that – as well as that we haven’t had a “free market” for years, only a rigged one. I said I wanted to see perp walks down Wall St. NOW. I am tired of playing by the rules and then taking it in the neck so these arrogant SOB’s can fly off to Switzerland to visit their money. I also stressed transparency as well as re-instating some kind of Chinese wall between the gambling casino and commercial banks.

      This will sound far-fetched, but some of you will know what I’m referring to – and it’s not the Mayan Calendar – there are two well-known financial writers who happen to be not only technical analysts, but also astrologers. One in particular, Ray Merriman, has been writing for the past 5+ years about a very rare (and long lasting) – configuration we are now in – and the planets involved deal with debt, destruction of existing structures, the Fed (because of that entities “birth” chart) an the remaking of systems that deal with money and debt. He was preaching this long before even the dooms-dayers were talking about the housing bust. Well, he’s looking pretty prescient to me right now.

      I have had the feeling since 2000 that this is a period of severe testing for the US – a sort of “cosmic morality play”, if you will. I used to question my sanity, too, but no longer.

      Comment by Sandi — May 13, 2010 @ 10:21 AM | Reply

  2. CEOs in orange jumpsuits doing to perp walk. That’s what we need, unless we want to leave the same thieves in charge to crash the whole system in another four or five years.

    And in Washington DC both legacy parties seem entirely determined to leave the thieves in place; so far as I can tell, only one expendable underling has been been targeted by criminal charges.

    Comment by lambert strether — May 13, 2010 @ 7:42 AM | Reply

  3. In listening to a CD of college lectures today on the birth of the republic, the professor was talking about how learned the men were who founded this country, and how the Enlightenment was a rather rare point in time, as well. While all of the founders were educated men, some were more classically so than others, with Jefferson and ??(brain freeze), being fluent in not only Latin, but also Greek and Hebrew. He made the point to contrast that level of intellectual robustness with the very thin gruel we now have in its place.
    My point is that what was true then is doubly so now – an educated populace is VITAL to maintaining our freedoms and this republic. To the extent that we have dumbed down our schools and turned two generations into zombies who would rather watch “Dancing With the Stars” than try to understand why their 401k is in the toilet, we are in very dire straits. A dear friend of mine has said this was the plan all along – to keep us the metaphorical equivalent of “barefoot and pregnant”, so that they can ravage at will and no one will have sense enough to know they are being had.

    Comment by Sandi — May 13, 2010 @ 10:39 AM | Reply

  4. “the financiers must be made to feel, in their bones, the power of the law.”

    This may not be “the power of the law”, but there is to be a mabch on K Street tomorrow (Monday). Not wanting to turn this into a blatantly political commentary, I won’t name the organizers. (You can assume it’s not Fox News)

    So, maybe it will take “taking it to the streets” to get the senate’s attention. One thing is for sure; at the moment they are not willing to bite the hand that feeds them. We have to make them fear biting the hands that ELECT them! (And can turn them out of office.)

    Huff Post today, on the looming loopholes in the bill so far…………..

    Comment by Sandi — May 16, 2010 @ 1:56 PM | Reply

  5. I meant “march” of course…………………

    Huff Post today, on the looming loopholes in the bill so far…………..

    Comment by Sandi — May 16, 2010 @ 1:57 PM | Reply

  6. […] here.  Please see previous post, and post, and post and […]

    Pingback by No Criminal Charges Against AIG Execs « naked capitalism « The Fourteenth Banker Blog — May 22, 2010 @ 12:01 PM | Reply

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