NOTE: The piece below was emailed to by Rich Hartmann. It is a great piece that ran in 2008 on Roubini's site - RGE Monitor.
By Rich Hartmann - Miss America Dec 4, 2008
Over the next few days, I plan to post 3 additional pieces on the following topics: 401k’s unleveled playing field The Financial Industry’s overgrowth Principal Reduction Now! Credit Expansion (Quantitative Easing) or Debt Destruction?
Today’s piece focuses in on the reckless endangerment that the Financial Elite and Policy Makers have partaken in and what sort of accountability / punishment is or should be taking place. As you all know, Sarbanes Oxley was created a few years ago to help prevent corporate crime. What you may not realize is that since its inception, over 1,000 cases have been brought up under the “Whistle Blowers Act”. Of those cases, can someone please answer this simple question…?
How many convictions have there been?
With that said, it’s time for the American legal system to wake up. Hell, it’s time for American citizens to wake up. I have begun to do my part with the article below, but now it’s your turn to spread the word and demand action. I ask that readers who feel this article has merit, please grass root it throughout the internet. Maybe we can reach critical mass of popular support? With your help, let’s make the pen mightier then the sword!
Criminal Negligence Finance???: In the criminal law, criminal negligence can be defined as:
The failure to use reasonable care to avoid consequences that threaten or harm the safety of the public and that are the foreseeable outcome of acting in a particular manner. (Unlike the TORT of Negligence, a person who is convicted of criminal negligence is subject to a fine, imprisonment, or both, because of the status of the conduct as a crime.)
Where do you draw the line when it comes to industry leaders and policy makers?
In May 2006, a jury sent an unmistakable message to CFOs and CEOs around the world: “You can’t lie to shareholders. No matter how rich and powerful, you must play by the rules.” Enron’s Ken Lay and Jeff Skilling were accused and found guilty of: knowingly overstating the health of the former energy giant shortly before it plunged into bankruptcy in December 2001. Skilling and Lay countered that the company was in pretty good financial shape, and blamed bad press, short sellers and a run on the bank for the company's failure. (4 years of investigations provided details of more sinister affairs!) Skilling and Lay were convicted for defrauding their stockholders. When do we see the same accountability placed on today’s CEO’s. Who goes to jail for not only defrauding the stockholder… but for defrauding the general public, whom has been caught in this tidal wave of losses regardless of where they work sleep or invest! How does the Enron case differ from the current CEOs/CFOs who make the same pledge of financial stability, while at the same time, not disclose overall debt and risk? To loosely use a pun, we are looking a “Murderers Row” of corporate elite and policy makers that are obfuscating the economic truths from the people. Let me draw up a “ridiculous” comparison. Let’s say, I don’t like my neighbors. I devise a plot to buy tons of bottled water. (And stock in their companies) I then go out and throw a diuretic into the local water supply. Although, my intention was to make my neighbors sick and profit hugely off of it… my plan goes horribly wrong. The diarrhea causes mass dehydration. That in turn causes mass panic. Bottled water riots. Death through dehydration related illness, due to the inability to now afford the ultra-expensive bottles that I have bought. Should I be arrested for “Criminal Negligence”? Is this scenario really that “ridiculous”? Last time I checked, the Financial Elite and Policy Makers are the ones who threw this diuretic into our economy… and yet they all still have plenty of bottles of water in their private bank accounts!!!
Just as sure as I saw the downstream affects of this crisis coming, I believe it is reasonable to believe that the next steps down will likely lead to more grave consequences. The reality of financial hardship is; it brings about a downward spiral of macro economic affects. Employment will be cut. Crime will rise. People will go hungry. Eventually, social damages will result in loss of life due to the direct and indirect consequences that have been allowed to take place, with the financial elite using loopholes and financial/mathematic engineering to rob a financial system that wasn’t designed to outpace the innumerous variables of economic innovation.
The concept of “Corporate Manslaughter” has been criticized, with respect to law and economics. It argues that civil damages are a more appropriate means of compensation and recognized losses apply the appropriate level of deterrence. Clearly, through privatization of profits and socialization of losses, the government has now become complicit in eliminating that deterrence!
Reasonable Person Standard: In order to hold the Financial Elite and Policy Makers criminally negligent, a level of culpability for their recklessness has to be established. Whether they were malfeasant (where the defendant knowingly exposed the public and was still willing to run the risk.), nonfeasant (where the fault lies in the failure to foresee and so allow otherwise avoidable dangers to manifest.) or willfully blind (where the individual intentionally avoids adverting to the reality of a situation), the culpability is determined by applying a “reasonable person standard”.
A “reasonable person” is appropriately informed, capable, aware of the law (in this case regulations), and fair-minded. This standard can never go down, but it can go up to match the training and abilities of the particular accused. This objective yardstick, against which to measure the culpability, has directly relevant knowledge to the activities being undertaken by the accused. (Where a doctor is accused mistreatment, you would use similar doctor as your “reasonable person standards”.
In July of 2005, The Counterparty Risk Management Policy Group II sent a report to all industry heads that were involved in its creation, warning that operational risks from the use of credit derivatives and other financial innovations could, under the wrong circumstances, spiral out of control. THESE PEOPLE MEET THE “REASONABLE PERSON STANDARD!
Here’s the letter to Hank Paulson – CEO of Goldman Sachs http://www.crmpolicygroup.org/crmpg2/docs/CRMPG-II-Transmittal-Letter.pdf Here’s the Who’s Who of the Policy Group (so you can figure out the recipients) http://www.crmpolicygroup.org/crmpg2/docs/CRMPG-II-Ex-I-II.pdf
Regulatory Warnings and Inaction: In direct relationship to the Counterparty Risk Management Policy Group II Report, in May of 2006, Tim Geithner, the President of the Federal Reserve Bank of New York (while at the Third Credit Risk conference at the NYU Stern School of Business) stated that: The operational infrastructure and that backlog of unconfirmed trades is an ongoing source of concern. In addition, he encouraged banks to take "greater caution and conservativism” on their lending practices. He cited "very favorable credit conditions for hedge funds," due to "erosion in loan covenants" and "higher levels of transaction leverage" He went on to say that "regulators had some concern and unease" based in part on uncertainty.
In January on 2007 U.S. and European regulators conducted a joint probe into whether banks and securities firms set strict enough limits on loans to hedge funds. The NY Fed, SEC and FSA met some of the biggest lenders to the hedge-fund industry, “to discuss margin practices,’’ In examining this incestuous relationship, it revealed that this lending was the most profitable source of income. (For example, it was reported that Bear Stearns generated 30% profit catering to hedge funds.) The regulators were concerned that there had been a decline in lending standards because hedge funds were such lucrative customers. It was common for prime brokers to relax margin requirements because the bigger the loans, the more the banks make charging interest and holding securities as collateral.
Prior to leaving, the SEC’s Annette Nazareth said “it's not clear what steps, if any, the regulators may take.” In an earlier meeting regarding the same topic, Tim Geithner said: ``It's maybe as hard or harder to try to figure out whether you can bring about change that may be in the broader interests of all market participants.''
What and why were these people employed? If Tim Geithner’s intuition was correct, I found his strengths of conviction to be lacking. Without action, they were just words. In addition, as a “regulator”, shouldn’t the concerns of the overall economy and the public come before the “interests of market participants” and their profits! Conflicts of Interest: Much like banned substances in amateur athletics, financial innovation should have to receive approval PRIOR TO injecting itself into the financial system. If it exists within unregulated pools, then there has to be a separation between regulated and unregulated markets where they can NOT affect one another. Banks willingly increased margin to hedge funds (while knowing the downside risk) in order to chase profits and bring home larger bonuses, had become criminal and conspiratorial.
To me, this is no different then the tobacco industry (who knew they were selling cancer) selling financial cancer. Following the tobacco industry’s class action settlement, Big Tobacco securitized their debt with so called "tobacco bonds", and as a result, we now have a perverse incentive to support the tobacco industry, to which we are now dependent for future payments against this debt.
Is this just morally grey or is it CORPOATE BLACKMAIL!?!?!?
People… It’s time to ACT NOW! Corporate Elite were made aware of the Risks that existed by their own industry policy groups. They chose to recklessly endanger the public for the purpose of private gain. The only real “deterrence” that existed for this Gross-Reckless-Negligence has been removed if these people are not prosecuted. The conflict of interests that existed! Where profits multiplied by expanding that risk through loose lending practices, which was discussed by regulators and Corporate Elite is obvious and well documented.
At what point will something be done about this? Without culpability, we are officially in a financial lawless state. THIS IS NOT AN EXAGGERATION! What are people supposed to do if the people making decisions on their behalf are no longer doing what’s in the best interest of the people? This is the same question our forefathers asked and subsequently answered. As an American, it is the same question you must ask yourself and find an answer to.
Now it’s your turn to speak. Thank you reading, and may justice truly prevail! Miss America, Rich Hartmann
p.s. Not all corporate elite are criminals. I happen to be lucky enough to work for a CEO whose number one priority is the health and well being of his employees. On a weekly basis he emphasizes this.
p.p.s. If you are as bothered angered by our current system as I am… Take a minute more to read the following, and see if it once again should apply?
“When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.” …you should know the authors.
GoldmanSachs666 Message Board
According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage". In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia