The Death of Outrage

by Frank Pasquale

In his fifth appearance on Doug Henwood’s program “Behind the News,” Matt Taibbi described two of his recent articles on law enforcement and government subsidies for the banking industry. Someone writing about modern finance is always on the horns of a dilemma: write too bluntly, and you’ll be dismissed as an ignorant outsider; make it too complex, and you’ll be ignored as a bore. As Taibbi shows in his book Griftopia, corporatist efforts to paint him as uninformed have repeatedly missed the mark. So let’s consider some of the items he reports on.

Taibbi argues that law enforcement agencies have “actually evolved into a highly effective mechanism for protecting financial criminals:”

The systematic lack of regulation has left even the country’s top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. “I think you’ve got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street,” he says. . . .

[For example, the SEC] knew that appliance-maker Sunbeam was . . . systematically hid[ing] losses from its investors. But in the end, the SEC’s punishment for Sunbeam’s CEO . . . was a fine of $500,000. [The CEO’s] net worth at the time was an estimated $100 million. The SEC also barred [him] from ever running a public company again — forcing him to retire with a mere $99.5 million. [The CEO] passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.

Taibbi also explains how the Fed’s new alphabet soup of bank subsidies turns out to be a far cry from FDR’s acronymed agencies:

[C]reated just after Barack Obama’s election in November 2008, the Term Asset-Backed Securities Loan Facility [TALF]’s ostensible justification was to spur more consumer lending, which had dried up in the midst of the financial crisis. But instead of lending directly to car buyers and credit-card holders and students — that would have been socialism! — the Fed handed out a trillion dollars to banks and hedge funds, almost interest-free. In other words, the government lent taxpayer money to the same [people] who caused the crisis, so that they could then lend that money back out on the market virtually risk-free, at an enormous profit. . . .

A key aspect of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don’t pay the Fed back, it’s no big deal. This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed’s books. If the securities lose money, you leave them on the Fed’s lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed.

I have earlier noted the DOJ’s failures in the crisis, and the fact that we don’t even have a “revolving door” any more—there has been a fusion of state and corporate authority in the banking sector. It is a pattern that Taibbi watched congeal in Russia, and he warns that its most toxic cultural aspects are taking hold in the US, as a growing number of Americans (like many Russians) simply assume the inevitability of crony capitalism. Another close observer of Russia, Jeffrey D. Sachs (Professor of Economics and Director of the Earth Institute at Columbia University) calls US developments part of a global corporate crime wave:

Two years after the biggest financial crisis in history, which was fueled by unscrupulous behavior by the biggest banks on Wall Street, not a single financial leader has faced jail. When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price. The fines are always a tiny fraction of the ill-gotten gains, implying to Wall Street that corrupt practices have a solid rate of return. Even today, the banking lobby runs roughshod over regulators and politicians.

Corruption pays in American politics as well. The current governor of Florida, Rick Scott, was CEO of a major health-care company known as Columbia/HCA. The company was charged with defrauding the United States government by overbilling for reimbursement, and eventually pled guilty to 14 felonies, paying a fine of $1.7 billion. The FBI’s investigation forced Scott out of his job. But, a decade after the company’s guilty pleas, Scott is back, this time as a “free-market” Republican politician.

The case of Scott is perhaps the most chilling for contemporary America. It starkly demonstrates that if the state does not tightly regulate exploitive aspects of the economy, those aspects of the economy will capture the state. Sachs makes the case:

Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on. Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress.

Sadly, things are likely to get worse before they get better. As andré douglas pond cummings has noted, we have Inspector Javerts pursuing the little guys and Inspector Clouseaus investigating the largest financial frauds in history.

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