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Prosecute Wall Street

October 20, 2011

They’re arresting Occupy Wall Streeters for trampling grass in public squares. But the financial titans who trampled the U.S. economy in the collapse of Wall Street have gone scot-free. This post is a nutshell extraction of an NPR “On Point” interview between host Tom Ashbrook and his guests: William Black, from the University of Missouri Kansas City School of Law. He was a senior federal financial regulator during the Savings and Loan crisis; and Lynn Stout, Professor of Law, University of California, Los Angeles. Click here to listen to the detailed explanation of the fraud that brought us to this point.

Not only have the largest banks in America become too big to fail, they’ve become too big to prosecute. You may remember the Savings and Loan scandal of the 1980s which was considered the largest fraud scheme in history at that time. Those crimes swindled investors out of $150-Billion and resulted in the convictions of 1,000 elite financial managers. Fast forward to 2008 when the mortgage meltdown brought the world to the edge of complete economic collapse. Just in terms of the loss of household wealth, this crisis cost investors and everyday consumers $11-Trillion and has resulted in ZERO felony convictions against the elite bankers who perpetrated the massive fraud. Wrap your head around this: The financial collapse of 2008 was 70 times more costly than the S&L crisis, yet not one crooked banker has been convicted of a felony.

In 2004, the FBI warned the House of Representatives that there was an epidemic of mortgage fraud that would cause a financial crisis. In 2006, the financial industry’s own fraud experts sent out to every major lender the following warning: “A particular kind of loan called ‘stated income’ is an open invitation to fraudsters.” The incidence of fraud in such loans (known behind closed doors as “Liars Loans”) was 90%. It was the lenders who put the lies in the Liars Loans. After the 2004 and 2006 warnings, the industry massively increased the number of Liars Loans so that by late 2006, 1 out of every 3 loans was a Liars Loan. Over a million cases a year of fraud were brought to you by the very largest lenders in the industry: Washington Mutual, Countrywide, Indy Mac, Lehman Brothers, Goldman-Sachs, Behr-Sterns, Merril-Lynch, Citicorp, etc. These were the massive originators who put in place the incentive structures that led to all these frauds.

So what did the Bush administration do? They allowed Lehman Brothers to fail and bailed out the rest through the TARP program. And what has the Obama administration done about it? Nothing.

The biggest problem is that the financial industry was de-regulated in 2000 when Congress passed the Commodities Futures Modernization Act that made it legal for banks to gamble with derivatives. Their favorite derivatives were those on the mortgage market. They lost their bets and we are suffering for it. So that while their actions certainly seem criminal and were definitely unethical, this deregulation has made it harder to bring criminal prosecutions. Republicans are always wanting to eliminate regulations while it was DE-regulation that caused the global recession. Another problem is that the financial industry is the largest contributor to political campaigns.

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