150 Years

One hundred and fifty years jail time for Bernard Madoff is a good thing.

To listen to the victims of his swindle, or read their words, is to appreciate the very far-reaching ways in which Madoff’s quiet crime has wreaked havoc on the lives of thousands of families.

Federal District Judge Denny Chin was absolutely right in denouncing Madoff’s crimes as “extraordinarily evil,” and giving him the maximum sentence. Punishment is no substitute for prevention, but the sentence provides a modicum of justice to the victims and will exert some modest deterrent effect against future potential swindlers.

The 150-year sentence is headline grabbing, but what should surprise us is not that Madoff got such a long sentence, but that other corporate criminals escape with light sentences or no criminal prosecution at all.

In August 2006, U.S. Federal District Court Judge Judith Kessler adjudged the leading tobacco companies to have engaged in a 50-year long conspiracy to deceive the public about the health risks of smoking and to addict children to tobacco. Millions in the United States — and many more around the world — have died as a result of this conspiracy. But you won’t find any tobacco executives in jail for this “extraordinary evil.”

Twenty-five years ago, poisonous gas escaped from a factory run by the chemical company Union Carbide in Bhopal, India. Many thousands died, many more were debilitated or badly injured, and the plant site remains polluted. Despite charges of culpable homicide, executives from Union Carbide (now merged into Dow Chemical) were never tried or sent to jail.*

In 1989, the Exxon Valdez hit a reef in Prince William Sound Alaska. Eleven million gallons of crude oil spilled onto 1,500 miles of Alaskan shoreline, killing birds and fish. The spill ruined the livelihoods of thousands of Native Americans, fishermen and others. The captain was convicted of a misdemeanor and sentenced to community service. Exxon pled guilty to misdemeanor violations of federal environmental laws. No executives went to jail.

Victims of horrendous human rights abuses and environmental destruction caused and abetted by oil companies operating in Burma (Unocal/Chevron), Nigeria (Shell and Chevron), Ecuador (Texaco/Chevron) and Indonesia (Exxon), among other places, have — with lawyers and international solidarity campaigns — waged heroic and increasingly successful efforts to obtain monetary compensation for the wrongs they have suffered. But there’s no prospect of CEO and executive perpetrators of those wrongs being criminally prosecuted.

For two decades, the multinational oil companies and the giant coal producers have engaged — and continue to engage — in a prolonged campaign to deny and discredit climate change science. In doing so, they have imperiled the planet and its people. Paul Krugman, properly, calls this treason against the planet. But while execution is the highest penalty for treason against country, treason against the planet won’t even get you the equivalent of a parking ticket.

What to make of the disparity between the appropriate sentencing for Bernard Madoff and the get-out-of-jail free approach for other leading corporate criminals and malefactors? There are a few lessons and conclusions.

First, the Madoff case differs from many of these other examples of corporate wrongdoing in that the individual perpetrator is so closely related to the victims. Although he was handling billions of dollars, Madoff had a skeleton staff, and he had personal connections with many of those he swindled. As a result, the victims and the public’s anger is visceral and very targeted — not directed at an amorphous giant corporation.

Second, Madoff’s victims have power. They have the ability to hire lawyers, and to organize for redress and retribution. Corporate crime victims in poor communities, or in poor countries, generally do not have this kind of power. Nor do those who will fall victim in the future to consequences of actions carried out today.

Third, and relatedly, the penalties for financial crimes are generally much stiffer than for other corporate crimes. The New York Times has an interesting feature comparing Madoff’s sentence to other white-collar, financial criminals, many of them convicted of Enron-era crimes; Madoff’s sentence is much longer, but the others received stiff penalties as well. By contrast, it is very rare to see a felony prosecution for corporate killings.

Finally, and most important, one of the signal powers of corporations is their ability to influence the law and culture so that their most heinous acts are not considered criminal. Knowingly addict millions of children to a deadly habit? Not a crime. Collaborate with military regimes and destroy lives and livelihoods in poor countries? Not a crime. Endanger the planet with greenhouse gas pollution — and then mobilize politically to block emergency efforts to save the earth? Not a crime.

The world is a little bit more just today, after the sentencing of Bernie Madoff. When other corporate culprits are sentenced comparably, the world will be a lot more just.

*Clarification: Executives from the U.S. parent company were charged in India, but never appeared, and are officially “absconders” from justice. Executives in India have been charged; their trial, which began in 1992, is ongoing.

The Good, the Bad, the Ugly: Financial Sector Regulation

There are major gaps and shortcomings in the Obama administration’s financial regulatory proposals, formally released today, and the proposals alone leave the financial sector vulnerable to future crisis. Still, it’s nice to be able to say that the proposal does contain meaningful reforms.

Whether those meaningful reform proposals become law is no sure thing, and will depend on the administration’s willingness to stare down Wall Street — which still retains immense political power, despite its partial self-immolation — and on whether a mobilized public demands Congress act for consumers, not contributors.

The 85-page draft released today is qualitatively different than the bullet-point plans previously issued by the Treasury Department. It contains detailed proposals, spanning across the financial regulatory spectrum, not easily summarized. Here are only some key elements — first, the good, then the bad.

The Good

1. The administration supports creation of a strong Consumer Financial Regulatory Agency.

It proposes to give this new agency very strong powers, and jurisdiction over consumer protection rules — taking away authority from existing regulators (like the Federal Reserve) that have failed utterly to protect consumers. It favors simplicity and gives the new agency the authority to mandate financial firms offer “plain vanilla” loans along with the more complicated packages they prefer. It gives the agency authority to ban mandatory arbitration provisions that strip consumers’ right to go to court for redress of scams and rip-offs. And it establishes that the new agency’s rules will be a regulatory floor, with states permitted to adopt stronger protections.

2. The administration proposes to reduce speculative betting, through new standards on leverage.

One reason the financial crisis spun out of control was financial firms’ excessive use of “leverage” — borrowed money. Heavily leveraged, the top commercial banks and investment banks overreached with very risky loans and investments. The administration proposes that all systemically important financial firms be subjected to higher capital reserve standards (meaning they can rely less on borrowed money). The administration properly says these rules should apply to any systemically important firm, whether or not it is a bank. It defines systemically important as a firm “whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed.” There are still important details to be worked out here, including how much capital such firms must maintain. And there is the very worrisome element that it is the Federal Reserve that is given primary responsibility for overseeing these systemically important firms.

3. Through “skin-in-the-game” rules, the administration aims to prevent predatory and reckless lending.

One reason lenders were willing to make so many predatory and bad-quality mortgages — including but not limited to the class of “subprime” loans — was that mortgage originators did not hold on to the loans. Mortgage brokers cut deals on behalf of banks and non-bank originators, which in turn sold the resulting mortgages to other banks. These banks, in turn, sliced and diced the mortgages, combined them into packages of pieces of thousands of other mortgages, and sold them to all kinds of investors. Because the initial lender did not maintain an ongoing interest in the mortgage, they did not have any incentive to ensure they were making a quality loan.

The administration proposes that loan originators be required to keep, at minimum, a 5 percent exposure in loans.

4. The administration seeks power to take over failing, systemically important financial firms.

The government already has such “resolution” power for commercial banks. The Federal Deposit Insurance Corporation regularly takes control over failing banks and “resolves” them outside of the bankruptcy process. This typically means selling off the failing bank to another bank, often after separating its good assets from bad. FDIC is expert at this process, moves very quickly, and averts the harmful consequences from extended bankruptcy processes.

The government does not have the legal authority to undertake comparable measures for important non-bank firms. This includes investment banks (think Lehman Brothers) and insurance companies (think AIG). Giving the government resolution power for non-banks should help control financial panic.

The Bad

1. The administration does not propose to do anything serious about executive pay and top-level compensation for financial firms.

The administration does support “say-on-pay” proposals, which give shareholders the right to a *non-binding* vote on executive compensation. But a non-binding vote isn’t worth too much; and, more importantly, shareholders are often willing to support excessive compensation while risky bets are paying off.

In terms of financial stability, the imperative is to do away with the Wall Street bonus culture, where executives and traders are given extraordinary bonuses — often four or more times base salary — based on annual performance. This bonus culture gives traders and executives alike an incentive to take big bets — because they get massive payoff if things go well, and don’t suffer if they go bad, or go bad sometime in the future.

This is a structural problem, not a symbolic one. Anyone who thinks pay isn’t of overriding importance in financial regulation should have been set straight by the desperation of the bailed out Wall Street firms to pay back their loans from the government. That desperation is overwhelmingly tied to a desire to escape the extremely modest pay standards issued by the Obama administration.

Besides financial stability, there are important questions of economic justice and taxpayer rights related to executive compensation. The Wall Street hotshots — including the major hedge fund players — have paid themselves unfathomable amounts of money over the last decade. They have set an aspirational standard for other executives and professionals, and helped drive wealth and income inequality to outrageous and unhealthy levels. Ultra compensation should be taxed at very high rates; and, at a bare minimum, the loopholes that let hedge fund managers pay taxes at about half the rate of regular folks must be closed. The case for aggressive tax reform on ultra rich financiers was overwhelming last year; now, with the financial system completely dependent on taxpayer largesse, there shouldn’t be anything left to debate. No one in finance can say they made their money just by working hard or being clever — their system was saved by the government.

2. The administration does not propose structural reform of the financial sector.

Although it proposes some meaningful regulatory reform, and modest alteration of the structure of regulatory agencies, the administration does not propose to alter the structure of the financial sector itself.

There is no discussion of returning to Glass-Steagall principles, to separate commercial banking from other financial activities including the speculative world of investment banking. Glass-Steagall was adopted during the Great Depression, as a response to financial abuses that closely parallel those of the previous decade. Repeal of Glass Steagall — following a decades-long erosion — came in 1999, and helped pave the way for the present crisis.

Nor is there any discussion of shrinking the size of goliath financial firms. Everyone now recognizes the problem of too-big-to-fail and too-interconnected-to-fail financial firms. The administration proposes to deal with the problem through regulation alone; a more fundamental approach would break up giant firms (or at least commit to prevent further consolidation going forward).

Addressing structure and size is important not only because of the economic power accreted by the goliaths, but because of their political strength — about which, see below.

3. The administration’s approach to regulating financial derivatives is too timid.

To its credit, the administration proposes to repeal recent deregulatory statutes and establish regulation of financial derivatives. But its plan does not go far enough. It creates a regulatory exemption for customized derivatives — a loophole that will create lots of business for corporate lawyers ready to change terms in derivative contracts so that they differ somewhat from standardized terms.

Nor does the administration propose to ban classes of dangerous financial instruments that cannot be justified. A clear example of a product that should be banned is a credit default swap — a kind of insurance against a certain outcome, like the inability of a bondholder to make required payments — in which neither party has a stake in the underlying transaction. Such credit default swaps have no insurance component, and are nothing more than bets — but they are bets that can vastly exceed the value of the transaction being bet on, and can spread financial contagion, as AIG demonstrated. George Soros argues that all credit default swaps basically share this feature, and should be banned altogether.

The administration proposal also fails to require that exotic financial instruments be subjected to pre-approval requirements. Under such an approach, financial firms would be required to show that new instruments offer some social benefit, and do not pose excessive risk.

4. The administration does not propose to empower consumers.

There is enormous merit to the proposal for a Consumer Financial Products Agency. But it is not a substitute for giving consumers the power to organize themselves to advance their own interests. Simply mandating that financial firms include in bills and statements (whether mailed or e-mailed) an invitation to join an independent consumer organization would facilitate tens of thousands of consumers — and likely many more — banding together to make sure the regulators do their job, and to prevent Wall Street from “innovating” the next trick to scam borrowers and investors.

The Ugly

Identifying the merits and gaps in the administration’s proposal is important. But the proposal does not exist in a vacuum, and it doesn’t become law just because the administration has proposed it.

The Wall Street types don’t know shame. Having benefited from literally trillions of dollars of taxpayer largesse, one might expect that they would be embarrassed to lobby on Capitol Hill. Or, that Members of Congress would be unsympathetic to their pleas.

But that’s not how Washington works. Having spent $5 billion on political investments over the last decade, Wall Street continues to pour cash into the political process — and those investments continue to pay handsomely.

To understand how things work, consider the fate of the proposal to give bankruptcy judges the power to adjust mortgages, so that they could reduce the principal owed on loans on homes now worth less than value of the loan. Then-candidate Barack Obama campaigned in favor of such “cram-down” provisions. In a rational world, banks would agree to these adjustments to principal on their own, because they do better if people stay in their homes and continue paying on the loan, rather than by forcing foreclosure. Not long ago, it was widely expected that cram-down would quickly become law. But the banks deployed their lobbyists, and this vital though totally inadequate measure was defeated in May. The Obama administration sat quietly by.

Now, Wall Street is already trashing the good parts of the administration’s proposals.

“Congress is not going to impose a ‘skin-in-the-game’ requirement on all loans,” Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital, flatly tells American Banker.

The Chamber of Commerce and other industry groupings are attacking the idea of a Consumer Financial Product Agency, including with the extraordinary claim that it will improperly relieve consumers of their duty to do “due diligence” on financial products.

Hedge funds are hiring ever more lobbyists and floating the claim that the administration’s requirements for some modest disclosure requirements for secretive hedge funds could do more damage than good. One purported reason: the disclosures may be too complicated for regular people to understand.

There’s no question that Wall Street is going to mobilize — is already mobilized — to defeat the administration’s positive proposals.

What remains very much in question is the administration’s willingness to engage in bare-knuckled political fighting to defend these proposals, as well as whether the public will be mobilized to support these and other moves to control Wall Street.

A new public interest coalition — Americans for Financial Reform — aims to do just that, but they are fighting on occupied territory. As Senator Majority Whip Richard Durbin says, “the banks are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

[Disclosure: My organization, Essential Action, is a member of Americans for Financial Reform.]

The IMF Accountability Moment

The Obama administration’s budgetary Machiavellianism has backfired.

Seeking to avoid a direct up-or-down vote on a proposal to send $108 billion to the International Monetary Fund, the administration, at the last moment, had the money stuck into a supplemental appropriations bill to fund the wars in Iraq and Afghanistan.

That maneuver turned out to be too clever by a turn.

Republicans in the House of Representatives — opposed to the process by which the IMF money was added, frustrated with the IMF unaccountability and critical of international institutions in general — have announced they will oppose the appropriations bill.

Meanwhile, 51 antiwar Democrats in the House voted against the appropriations bill when it was first under consideration, and 41 Democrats (overlapping substantially but not entirely with the 51 antiwar Democrats) have raised concerns about funding the IMF without attaching meaningful conditions.

This unlikely coalition is poised to defeat the supplemental, unless the administration can peel off 18 of the antiwar Democrats to support the bill. The administration may need more than 18 if other Democrats vote against the bill because of the IMF money (this might include Blue Dog Democrats who object to the budgetary impact of the IMF funding and the ways in which the IMF money will aid European banks, as well as progressives).

Defeating the bill will be a meaningful statement against the wars, and against unconditional money for the IMF.

The White House and Congressional leadership are pressuring Progressive Dems to support the supplemental, warning of the cost of dealing a legislative defeat to President Obama. Whether they can stand up to the pressure — and thus the outcome of the supplemental — will depend in significant part on how much the public mobilizes to urge a vote against the wars and the IMF. You can take action through this “Citizen Whip” site maintained by firedoglake.com.

Emanuel of course wields enormous power, but his arguments are misplaced. A defeat on the supplemental will be self-inflicted, not the work of progressives unsympathetic to the president.

If the administration and House leadership are unable to garner sufficient votes to pass the supplemental, they can pull the IMF funding. Republicans will support a war-only bill. But antiwar forces will have shown their seriousness and power.

And, the administration can seek funding for the IMF later this year, hopefully moving through normal legislative procedures. That would enable a legitimate debate over the merits of IMF funding. Critics would raise concerns that the money will be used to bail out European banks that lent recklessly in Eastern Europe. Appropriations Committee Chair David Obey has highlighted this issue, and noted the incongruity of aiding the European banks while Europe refuses to employ the stimulative measures adopted by the United States and China, among others.

Critics would also focus on the contractionary policies — primarily reduced government spending and higher interest rates — that the IMF is imposing on borrowing countries hit by a global financial crisis not of their making. These policies are the opposite of the stimulative policies that the IMF recommends for rich countries, and directly contrary to the global stimulus that was the rationale for the decision of the G-20 (the world’s most economically powerful countries) to increase IMF resources by $750 billion.

On the ground in borrowing countries, these policies deepen the harmful impact of the economic crisis, and translate into serious human depredations. Less money is available for health, education and other key government programs; unemployment skyrockets; and families struggle to subsist.

The IMF’s favored contractionary policies also conflict with the economic logic of providing loans in the context of an economic crisis. “The main purpose of providing balance of payments support to a developing country in a time of recession or approaching recession is to enable the government to pursue the expansionary fiscal and monetary policies necessary to stabilize the economy,” explains the Center for Economic and Policy Research in a recent paper.

To be clear, the IMF has a response to these arguments: It says it has changed, and is much more reticent about demanding borrowing countries adopt contractionary policies than it once was. And, it says it aims to protect social spending in crisis-affected countries.

Putting it mildly, the evidence does not exactly comport with this story. But in any case, it is a claim that should be examined through a proper legislative process.

And, if the IMF takes the position that it only imposes contractionary policies when absolutely necessary, then it should be receptive to the top-line requests from IMF campaigners. These include demands that no contractionary conditions be included in IMF programs absent a quantitative showing that such conditions are necessary and cannot be delayed, and that health and education spending be exempted from IMF-mandated budget restraints.