Earlier this week, Attorney General Holder testified to Congress that:
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.”
1) If the DOJ were indicting individual bankers for fraud, then this explanation might explain why banks themselves are never indicted. It does not explain at all the absence of indictments against bankers. In fact, we know that high-level bankers can be incarcerated with zero impact on the economy. This is proven by the case of Raj Gupta, the Goldman board member indicted for insider trading. So, Attorney General Holder’s explanation of the lack of criminal prosecution at big banks explains nothing about why no individual or senior manager of any Wall Street bank has been indicted for any crime at all. In short, in announcing a new DOJ policy of “too-big-to-jail,” Holder completely failed to justify its most important element–immunity for individual bankers for financial crime.
2) Giving TBTF banks even more in government indulgences is not going to help the economy it is going to drag the economy to the gates of hell. As Bloomberg recently reported the megabanks make little or no money; instead, all of their profits are attributable to the implicit subsidy provided by the perception of government backing which lowers their cost of funds by .80 percentage points. So instead of giving the banks the ability to skirt financial fraud laws, we should be breaking them up, like we did under the New Deal. Perhaps the one silver lining to Holder’s comment is that “too-big-to-jail” creates one more reason to break up the megabanks ASAP.
3) Holder is clearly allowing political connections to play a role in prosecutorial discretion and this comment proves it. We know that criminality occurred at MF Global. Yet, no prosecutions occurred. They failed, and no economic dislocation ensued. So clearly no TBTF issue is at play with MF Global. The only issue at play with MF Global was the patent political power of major Obama fundraiser and former Senator and former Governor Jon Corzine. So how does Holder explain MF Global?
4) A key point of my recent book, Lawless Capitalism, is that “investment and financial markets can only be built upon trust.” How can any investor trust a financial system dominated by megabanks that are above the law? Capitalism requires trust and trust can only be inspired by a rational rule of law applicable to all. Exemptions for the most economically powerful are likely to be the most economically damaging as they control the most concentrated resources. In other words, giving legal indulgences to those with trillions under their control means that trillions will be deployed with no care towards illegality. Only profit, no matter how cravenly grabbed, will matter. The American people are already rapidly losing trust in the system. In a recent Northwestern/Univ. of Chicago survey, only 22% of Americans trust the financial system. Holder’s bold power-grab on behalf of the banks is sure to accelerate this unraveling of trust. That means severe economic pain.
5) Another key point of Lawless Capitalism (as well as Daron Acemoglu and James Robinson’s instant classic Why Nations Fail) is that laws and regulations must tether elite interests to macroeconomic growth and under conditions of high inequality that challenge intensifies. Holder’s statement is simply further proof that elites will eschew the law and seek to operate outside legal constraints once too much economic wealth is concentrated in too few hands. We learned that in the run up to the subprime collapse and Holder seems intent on repeating that painful lesson. This can be termed the injustice of inequality.
Trust and alignment of elite interests are simply two sides of the economic rule of law. A sound economic rule of law must inveigh against elite privilege, mitigate disempowerment and secure rationalized law and regulation. Allowing some to operate above the law is inimical to these goals. Indeed, giving the most powerful in your society a green light for lawlessness tempts the creation of a kleptocracy.
According to Webster’s a kleptcoracy is “government by those who seek chiefly status and personal gain at the expense of the governed.” In a kleptocracy, the politically connected can pilfer the investments of others with criminal impunity. This past week, the Attorney General of the United States’ testimony to Congress signals that those holding the most economic power are indeed above the law–this creates the most perverse incentives.
I graduated law school in 1986. I practiced for 10 years, almost exclusively focused on financial regulation–at the SEC as well as the FDIC. In all that time, I have never heard more nonsense about the law than that spouted by the Attorney General of the United States before the United States Congress earlier this week.
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