By now, it has been well established that Corzine’s former firm, MF Global, committed the sin of sins for a broker-dealer. In late October, during the final, desperate days before it entered bankruptcy proceedings, its executives took money from segregated customer accounts — money that belonged not to MF Global but to the farmers and commodities traders that were its clients — and used it to prop up its rapidly collapsing business. Nor was this petty cash: of the $6.9 billion in customer assets that MF Global held, a stunning $1.6 billion is missing. There is virtually no chance that the full amount will ever be recovered.
Let’s not mince words here. These executives committed a crime. Virtually every knowing violation of the Commodities Exchange Act is a crime, but taking money from segregated customer accounts is at the top of the list. And for good reason. Customer money is supposed to be sacrosanct. If a broker-dealer goes bankrupt, the segregated accounts are supposed to remain safe, a little like the way bank deposits remain protected if a bank goes under. Indeed, customers need to be able to trust the fact that their money is segregated and protected at all times. Otherwise, the markets can’t function.
The NY Times Op-Ed goes on to explain:
“a number of federal prosecutors have expressed doubts” that MF Global “intentionally misused customer money.” Apparently, the current theory is that it was all just a big accident, the chaos of those final days causing the firm’s executives to tap into customer funds without realizing it.What could explain this treatment? I offer only two possibilities: 1) either the government is incompetent in prosecuting these cases or 2) favors are being granted to protect political donors; a third option is some combination of both 1 and 2.
As the NY Times points out, treating MF Global and Corzine with kid gloves "only deepen(s) the cynicism so many people feel about government. I’ve heard it suggested, for instance, that the Justice Department won’t prosecute Corzine because it would hurt President Obama. (Corzine, the former governor of New Jersey, had been a big fund-raiser for the president.)"
Regardless of the reason MF Global may get a free pass, I believe we are setting up the economy for another massive economic meltdown within the next ten years. About every ten years since the late 1980s we have experienced a significant economic earthquake with our financial system at the epicenter. The S&L crisis was the first. People thought that was horrific and it was. However, at least many executives were held accountable during that crisis with Charles Keating being the poster boy of the government's prosecution efforts.
According to Bill Black who has played a significant role in prosecuting white collar crime for several decades, the government had a 90% conviction rate in the S&L crisis that resulted in over 1,000 felony prosecutions. Black says that these convictions were the result of focusing on the major financial institutions and the most elite criminals. In other words, the big fish were held accountable and only the small fries got a free pass.
Then, about ten years later, we had the Enron-Worldcom-Tyco disaster. In this case it wasn't S&Ls but rampant fraud that led straight to Wall Street. The investment banks were at center stage helping both Enron and WorldCom and many other firms defraud investors. Analysts became sales people to get investment banking business and the investors were left to fend for themselves. This time, a few top level people (e.g., Ken Lay, Jeffrey Skilling, Bernie Ebbers) went to jail and a message was again sent to the big corporate executives. However, a lot of the players--especially the investment banks--seemed to get off easy.
As we look at the latest financial crisis involving Wall Street--the mortgage meltdown-- we find virtually no prosecution. In addition, cases like MF Global are also slipping by the Justice Department.
The lack of prosecution can be seen in many ways. For starters, Bill Black explained that in the current crisis there has been a total of ten felony convictions of Senior bank insiders--all of them from Taylor Bean (see our previous posts on Taylor Bean here). In other words, none of the Wall Street titans have had any convictions even though there is ample evidence that the major financial firms were ripe with fraud and abuse as liar loans were encouraged, packaged and sold to unsuspecting investors.
Black goes on to say that in the S&L crisis the Office of Thrift Supervision made over 10,000 criminal referrals whereas in the current crisis, the same agency made zero referrals. What a message to send to Wall Street!
I predict that before 2020 we will have another serious economic crisis that will have, at the epicenter, the largest Wall Street banks. The next crisis will bring the country to its knees again and this time it is likely to be the worst of all. Each crisis has progressively become larger and larger with the last one affecting the world at large. The next one will come at a time when the federal deficit is threatening to bankrupt the nation even if the economy is stable. I hate to be a doomsayer but I'm having a hard time being optimistic.
The bottom line is that the Wall Street firms have lost their bearings and our federal government is not helping them find them. Today's highly publicized resignation letter by the executive director of Goldman Sach's U.S. equity derivatives business in Europe, the Middle East and Africa, Greg Smith, is another case in point. Smith says the following about Goldman's culture of exploitation:
I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it...
What are three quick ways to become a leader (at Goldman)? a) ... persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) ... get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. ... c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym...
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. ... No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.Combine this culture at the "too big to fail" and "too big to prosecute" investment banks, with the federal government sending the message that if the banks exploit the economy they will have little or no consequences, and it's only a matter of time that a massive financial system meltdown engulfs our economy.
I believe it's time for some serious accountability before the next crisis brings the economy down for the count.