Watching America's Decline And Fall

Source: Decline of the Empire

In the “happy days” before its debt-based ponzi scheme fell apart in 2007-2008, the American Empire was already in decline. That decline was not apparent to all but a few observers. Most people are focused on the here and now. As long as things seem to be holding together, the longer-term trend is effectively invisible.

Even now, with the fact and consequences of the decline on display all around us, most observers do not see what is happening now as part of a longer-term trend. Everything must be seen in an historical context. I will illustrate this blindness by focusing on the failures of Federal regulators since the financial meltdown and the recent MF Global fiasco.

Perhaps you are know that U.S. District Judge Jed S. Rakoff opposed the proposed Securities and Exchange Commission (SEC) settlement with Citigroup.

The Securities and Exchange Commission is heading on a collision course with the federal judge who thinks the agency has been too lenient on big banks accused of misdeeds.

The SEC’s enforcement staff is expected to recommend to the five-person commission leading the agency that it vote to appeal last month’s rejection by U.S. District Judge Jed S. Rakoff of a proposed $285 million settlement between the SEC and Citigroup Inc., according to people familiar with the situation.

In his ruling, the New York judge denounced as “pocket change” a penalty agreed to by Citigroup as part of the settlement, claiming it was paltry compared with losses of more than $700 million suffered by investors in a $1 billion deal called Class V Funding III.

Judge Rakoff also attacked the boilerplate language used in many SEC settlements, where defendants neither admit nor deny wrongdoing.

If the allegations were correct, he wrote, “this is a very good deal for Citigroup,” saying that it was hard to tell what the SEC got out of the agreement “other than a quick headline.”

Last week, Robert Khuzami, director of the SEC’s enforcement division, announced the SEC’s push-back again Rakoff.

Robert Khuzami [left] … announced [last] Thursday afternoon that the agency has asked the U.S. Court of Appeals for the Second Circuit to review U.S. District Judge Jed Rakoff’s rejection of the agency’s proposed $285 million settlement with Citigroup over a mortgage-bond deal. He issued the following statement:

… We believe the court was incorrect in requiring an admission of facts — or a trial — as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions.  Indeed, in the case against Citigroup, the SEC filed suit after a thorough investigation, the findings of which were described in extensive detail in a 21-page complaint.

The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country.  In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.

Let us stand back a bit and think about this. A renegade Federal judge is trying to protect the public interest against predators like Citigroup, and Federal regulators at the SEC, whose mandate is to protect the public interest, is opposing the judge. If you read Khuzami’s statement carefully, you’ll see that he is saying, in effect, that regulators like him have whitewashed these financial fraud cases for decades, and now this foolish judge is saying that the SEC shouldn’t be allowed to whitewash this one.  

Khuzami said courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability exactly because of the benefits that settlements provide. Judge Rakoff is keenly aware that the “benefits provided” in this case all go to Citigroup, not the public—this is a very good deal for Citigroup.

The willingness of Federal regulators to regulate and prosecute fraud was also the subject of Aaron Task’s interview with Nomi Prins. The story is called How Many Regulators Does It Take to Screw Investors Out of $1.2B? (video below).

Three-plus years since the subprime mortgage crisis — aided and abetted by Fannie Mae and Freddie Mac — triggered the collapse of Lehman and bailouts of the big banks and AIG, scant little progress has been made to safeguard the markets, investors or the economy.

To add insult to injury, the big banks are bigger and more profitable than ever, but still not a single person has been held accountable for causing the worst recession since the Great Depression.

“Nothing has changed since AIG,” says Nomi Prins, author of Black Tuesday. “These companies are too complex [and] the regulators too inept.”

The most recent fallout from lack of regulatory oversight of the banking and investing industry is the collapse of MF Global, run by former Goldman Sachs CEO Jon Corzine.

A stunning $1.2 billion in client funds are still missing more than month after the company buckled on fears of its leveraged bets on European debt…

The SEC case against Citigroup involves the bank misleading investors on risky mortgages. The regulatory body has appealed Judge Rakoff’s decision. See “Risky” for Citi to Defend Itself Against SEC in Court — FT’s John Gapper.

It must be noted, however, that the SEC on Friday did bring the first big civil charges against six former executives of Fannie Mae and Freddie Mac.

[My note: civil charges were brought, not criminal charges.]

But according to Prins, more civil charges are just par for the course and Americans can only expect more of the same until regulators start doing a better job, stop “punting” on the penalties for unlawful behavior and make way for some real financial reform.

Until that time, don’t be surprised when, not if, another MF Global hits.

You can get the details from the video, but we’ve got bigger fish to fry. Each fraud is usually viewed in isolation. There is no sense of a systematic, decades-long pattern of failure of regulatory oversight. Whether this is due to “incompetence” and “complexity” as Prins maintains, and which sounds like an elaborate rationalization, or plain-vanilla corruption, which is often called regulatory capture, is not my subject today. (There is a revolving door between the regulators and the law firms representing the financial industry.)

Plainly, we are looking at yet another manifestation of the American Empire’s decline. Nothing has changed since AIG, Prins said. Nor will anything change in the future.

Such disregard for the pain and suffering caused over the last few years has many wondering: Where are the regulators? Where are the perp walks?

Well, the Securities and Exchange Commission, the regulatory body in charge of overseeing the securities industry and markets, has been busy — but only in allowing banks to settle charges of wrongdoing with nothing more than a slap on the wrist. By neither admitting nor denying wrongdoing, the SEC has allowed banks from JPMorgan to Citigroup “get off” on a wide range of issues with just financial penalties and settlements. See Taken to Task: Jamie Dimon’s House of Ill Repute.

Many may be wondering where are the regulators, where are the perp walks? but I’ve got news for them: the regulators are out to lunch, and have been for about 30 years now. There will be no perp walks. The rip-off by former Vampire Squid CEO Jon Corzine will become the latest in a long string of frauds whitewashed by regulators seeking to maintain the appearance of propriety by imposing meager fines without an admission of guilt (liability).

I can certainly understand why Americans, especially those who are relatively successful and benefit from the status quo, are loathe to acknowledge the Empire’s decline. But seriously, folks, the blindness to our predicament in the face of recent frauds like MF Global has become truly ridiculous. This kind of thing has been going on for a long time now. One can not avoid the conclusion that the show is over. The fat lady has sung. There is no other reasonable interpretation of our socioeconomic condition.

At the very least, if Americans want to change their fate, which I think is impossible at this point, they must first acknowledge the truth of their situation. Even if those who exemplify America’s decline, people like SEC chief Robert Khuzami, will never fess up to their role in our downfall, surely the rest of us can make some effort to see the truth of our situation. Unfortunately, this effort will not be forthcoming. That is not who we are.

Read more at Decline of the Empire