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Intro: "Wall Street bankers could have averted the global financial crisis, so why didn't they? In this exclusive extract from his book Inside Job, Charles Ferguson argues that they should be prosecuted."

Charles Ferguson argues that Wall Street could have averted the financial crisis. (photo: Public Domain)
Charles Ferguson argues that Wall Street could have averted the financial crisis. (photo: Public Domain)

Heist of the Century: Wall Street's Role in the Financial Crisis

By Charles Ferguson, Guardian UK

22 May 12


Wall Street bankers could have averted the global financial crisis, so why didn't they? In this exclusive extract from his book Inside Job, Charles Ferguson argues that they should be prosecuted.

ernard L Madoff ran the biggest Ponzi scheme in history, operating it for 30 years and causing cash losses of $19.5bn. Shortly after the scheme collapsed and Madoff confessed in 2008, evidence began to surface that for years, major banks had suspected he was a fraud. None of them reported their suspicions to the authorities, and several banks decided to make money from him without, of course, risking any of their own funds. Theories about his fraud varied. Some thought he might have access to insider information. But quite a few thought he was running a Ponzi scheme. Goldman Sachs executives paid a visit to Madoff to see ifthey should recommend him to clients. A partner later recalled: "Madoff refused to let them do any due diligence on the funds and when asked about the firm's investment strategy they couldn't understand it. Goldman not only blacklisted Madoff in the asset management division but banned its brokerage from trading with the firm too."

The Obama government has rationalised its failure to prosecute anyone (literally, anyone at all) for bubble-related crimes by saying that while much of Wall Street's behaviour was unwise or unethical, it wasn't illegal. With apologies for my vulgarity, this is complete horseshit.

When the government is really serious about something - preventing another 9/11, or pursuing major organised crime figures - it has many tools at its disposal and often uses them. There are wiretaps and electronic eavesdropping. There are undercover agents who pretend to be criminals in order to entrap their targets. There are National Security Letters, an aggressive form of administrative subpoena that allows US authorities to secretly obtain almost any electronic record - complete with a gag order making it illegal for the target of the subpoena to tell anyone about it. There are special prosecutors, task forces and grand juries. When Patty Hearst was kidnapped in 1974, the FBI assigned hundreds of agents to the case.

In organised crime investigations, the FBI and government prosecutors often start at the bottom in order to get to the top. They use the well-established technique of nailing lower-level people and then offering them a deal if they inform on and/or testify about their superiors - whereupon the FBI nails their superiors, and does the same thing to them, until climbing to the top of the tree. There is also the technique of nailing people for what can be proven against them, even if it's not the main offence. Al Capone was never convicted of bootlegging, large-scale corruption or murder; he was convicted of tax evasion.

A reasonable list of prosecutable crimes committed during the bubble, the crisis, and the aftermath period by financial services firms includes: securities fraud, accounting fraud, honest services violations, bribery, perjury and making false statements to US government investigators, Sarbanes-Oxley violations (false accounting), Rico (Racketeer Influenced and Criminal Organisations Act) offences, federal aid disclosure regulations offences and personal conduct offences (drug use, tax evasion etc).

Let's take the example of securities fraud. Where to begin?

When did Wall Street insiders know there was a really serious sub-prime mortgage bubble, and that they could game it? Many of the clever ones knew by about 2004, when Howie Hubler at Morgan Stanley first started to bet against the worst securities with the approval of his management. But you can only make money betting against a bubble as it unravels. As long as there was room for the bubble to grow, Wall Street's overwhelming incentive was to keep it going. But when they saw that the bubble was ending, their incentives changed. And we therefore know that many on Wall Street realised there was a huge bubble by late 2006, because that's when they started massively betting on its collapse.

Here, I must briefly mention a problem with Michael Lewis's generally superb financial journalism. In his book The Big Short, Lewis leaves the impression that Wall Street was blindly running itself off a cliff, whereas a few wild and crazy, off-the-beaten-track, adorably weird loners figured out how to short the mortgage market and beat the system. With all due respect to Mr Lewis, it didn't happen like that. The Big Short was seriously big business, and much of Wall Street was ruthlessly good at it.

To begin with, a number of big hedge funds figured it out. Unlike investment banks, however, they couldn't make serious money by securitising loans and selling CDOs (collateralised debt obligations), so they had to wait until the bubble was about to burst and make their money from the collapse. And this they did. Major hedge funds including Magnetar, Tricadia, Harbinger Capital, George Soros, and John Paulson made billions of dollars each by betting against mortgage securities as the bubble ended, and all of them worked closely with Wall Street in order to do so.

In fairness to Mr Lewis, it is true that in several major cases - most notably Citigroup, Merrill Lynch, Lehman and Bear Stearns - senior management was indeed disconnected and thus clueless, allowed their employees to take advantage too long and therefore destroyed their own firms.

But cluelessness was most definitely not an issue with the senior management of Goldman Sachs, JPMorgan Chase and Morgan Stanley. As we saw, Morgan Stanley started betting against the bubble as early as 2004. Conversely, JPMorgan Chase mostly just remained prudently above the junk mortgage fray. Goldman Sachs, though, was in a class by itself. It made billions of dollars by betting against the very same stuff that it had been making billions selling only a year or two before.

Almost all the prospectuses and sales material on mortgage-backed bonds sold from 2005 until 2007 were a compound of falsehoods. And as the bubble peaked and started to collapse, executives repeatedly lied about their companies' financial condition. In some cases, they also concealed other material information, such as the extent to which executives were selling or hedging their own stock holdings because they knew their firms were about to collapse.

In some cases, we have evidence of senior executive knowledge of and involvement in misrepresentations. For example, quarterly presentations to investors are nearly always made by the CEO or chief financial officer of the firm; if lies were told in these presentations, or if material facts were omitted, the responsibility lies with senior management. In other cases, such as Bear Stearns, we have evidence from civil lawsuits that senior executives were directly involved in selling securities whose prospectuses allegedly contained lies and omissions.

The Rico Act provides for severe criminal (and civil) penalties for operating a criminal organisation. It specifically enables prosecution of the leaders of a criminal organisation for having ordered or assisted others to commit crimes. It also provides that racketeers must forfeit all ill-gotten gains obtained through a pattern of criminal activity, and allows government prosecutors to obtain pre-trial restraining orders to seize defendants' assets. Finally, it provides for criminal prosecution of corporations that employ Rico offenders.

Rico was explicitly intended to cover organised financial crime as well as violent criminal organisations such as the mafia and drug cartels. A great deal of the behaviour that occurred during the bubble would appear to fall under Rico statutes. Moreover, pre-trial asset seizure is a widely and successfully used technique in combating organised crime, and asset seizures now generate more tha $1bn a year for the US government. However, there has not been a single Rico prosecution related to the financial crisis, nor has a single Rico restraining order been issued to seize the assets of any individual banker or any firm.

It is important to note here that these asset seizures would not merely represent justice for offenders but for victims as well. US law allows seized assets to be used to compensate victims. In this case, the potential economic impact of seizures could be enormous.

Finally, personal conduct subject to criminal prosecution might range from possession and use of drugs, such as marijuana and cocaine, to hiring of prostitutes, employment of prostitutes for business purposes, fraudulent billing of personal or illegal services as business expenses (sexual services, strip club and nightclub patronage), fraudulent use or misappropriation of corporate assets or services for personal use (eg use of corporate jets), personal tax evasion and a variety of other offences.

I should perhaps make clear here that I'm not enthusiastic about prosecuting people for possession or use of marijuana, which I think should be legal. In general, I tend to think that anything done by two healthy consenting adults, including sex for pay, should be legal as well.

But the circumstances here are not ordinary. First, there is once again a vast disparity between the treatment of ordinary people and investment bankers. Every year, about 50,000 people are arrested in New York City for possession of marijuana - most of them ordinary people, not criminals, whose only offence was to accidentally end up within the orbit of a police officer. Not a single one of them is ever named Jimmy Cayne, despite the fact that the marijuana habit of the former CEO of Bear Stearns has been discussed multiple times in the national media (his predecessor in the job, Ace Greenberg, called him a "dope-smoking megalomaniac").

There is also a second, even more serious, point about this. If the supposed reason for failure to prosecute is the difficulty of making cases, then there is an awfully easy way to get a lot of bankers to talk. It is a technique used routinely in organised crime cases. What is this, if not organised?

As time passes, criminal prosecution of bubble-era frauds will become even more difficult, even impossible, because the statute of limitations for many of these crimes is short - three to five years. So an immense opportunity for both justice and public education will soon be lost. In some circumstances, cases can be opened or reopened after the statute of limitations has expired, if new evidence appears; but finding new evidence will grow more difficult with time as well. And there is no sign whatsoever that the Obama administration is interested. your social media marketing partner


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+26 # CoyoteMan50 2012-05-22 09:22
I have been saying it was widespread fraud for at least 3 years. Most people tell me I don't know enough about Wall St. to make that judgement.
It was and I will keep saying it, the largest fraud/bunko/RIC O series of acts EVER committed on the planet. They bankrupted Iceland for Christ's sake! What the frakk other evidence do you need?
Of course the FBI should investigate them and they did. FBI forecast the housing market crash years before.
We are in what I have consistently called the First Great Depression of the 21st Century. I also said it would be 1 of many. Why? Because I knew the Federal &/or state gov't will never prosecute them.
The next big scam is waiting in the wings. Hold on to your wallets.
+10 # paulrevere 2012-05-22 11:41
For your debate with system believers, just ask them how a gambler would behave if he/she had the backing of the largest bank account on planet earth...FDIC/US Treasury.

I'd guess that gambler would be acting mighty wildly, with complete abandon and no idea of what is right or wrong.

Only seriously debilitated humans could willy-nilly train wreck the entire world economy...and then shrug with an 'it's just business' statement.

'Masters of the Universe' may give US an inkling of the psychologies and pathologies involved.
+5 # bluepilgrim 2012-05-22 13:10
I read the figure the other day -- globalresearch. ca I think, carried the story. Derivative overhang recently figured up to be $1,200 trillion (1.2 quadrillion) -- that's 20 years of world production.
+2 # John Locke 2012-05-22 18:45
Let’s look at the whole picture: Obama if he were a real leader would have ordered investigations and prosecutions, but well, I guess you don't want to antagonize your boss!
+1 # Granny Weatherwax 2012-05-25 08:19
Judicial poweer is supposed to be separate from the executive power.

Now of course, if it were it would have prosecuted.
+11 # CoyoteMan50 2012-05-22 09:23
"Absolute Power corrupts absolutely" - Lord Acton!
+10 # usedtobesupermom 2012-05-22 09:50
I warned of Wall Street crashing in about a decade- that was in the late 1990's. I warned that the housing was a bubble- there wasn't a good paying jobs boom & "creative financing", ARM's & the false increase in property values- were a clue.
+13 # dick 2012-05-22 10:26
Power has certainly corrupted Obama, who is engaged in full scale Obstruction of Justice re Wall St. Perhaps he tells himself that he & his re-election are more important than justice, AND DETERRENT, for the the most destructive crimes in our history. He has surely betrayed US. Support ONLY anti-Wall St. pols.
+6 # redjelly39 2012-05-22 10:35
There is a powerful force that's getting in the way of our thriving.
It's a select group of financial elite who are centralizing material wealth and power for their own benefit, while destroying the lives of billions of others. Their worldview is riddled with fear and ignorant of the abundance of nature and interconnectedn ess that is our essence.
Thrive - is a free online movie that explains why our Energy, Food, Health, Rights, Education & Financial system are controlled. You can follow the money to see how the same people are gaining financially in every sector of human life. You can also see how an agenda for global domination is being accomplished, and the kind of deceptive strategies and tactics that are being used to further our suppression.
It can be challenging to confront the cruelty of this global domination agenda, but it’s only by recognizing the true nature of the threats to our freedom that we can be empowered to act effectively. Its up to US to understand & take action - together...

Thrive Movie>
Bluffdale Spy Center -
+8 # AMLLLLL 2012-05-22 10:57
I'm left wondering if the dictionaries on Wall St. have omitted the entry,FIDUCIARY . Ditto for the government.
+14 # Vardoz 2012-05-22 11:01
It was clear when Standard and Poors and Moody's sold toxic assests knowing they were toxic.

The bottom line is we have a totally broken Govt. I just saw Olver Stone's JFK again and I have to say those who try to change the game when it comes to trillons could be placing themselves at huge risk. Wall St and corporations, energy companies, big oil behave like a Mafia. Anything goes. Bush paved the way, with the support of the corrupt Supreme Court, Bush and Chaney stole 2 elections,degre ulated the banks and everything else, pushed the ownership society and blocked states from banning preditory lenders. They were all in bed together and they all made more money then god.

Big money abuses just because they can and all those who conspired in the Wall street coup are just as brutal, corrupt and ruthless as any 3rd world dictator. Also Greenspan warned us over and over that the housing bubble was dangerous. David Stockmen Director of the Office of Management and Budget was screaming that we were headed for a cliff but no one listened and no one cared.

We have a shadow govt and the movie IRAQ FOR SALE THE WAR PROFITEERS it shows you who they are.

It's a big battle for the people and that saying "there are strength in numbers" is true. We must have the will to change things or crash and burn like we are, going down as those in power go for our economic jugular.
+6 # redjelly39 2012-05-22 11:55
You are correct Vardoz in that our Gov't is not calling the shots - there are a small handful of elite players that control our Energy, Food, Education, Health, Rights & the Financial system and our Gov't works for them, NOT We the People. 10 Things That Every American Should Know About The Federal Reserve:
#1 The Federal Reserve System Is A Privately Owned Banking Cartel
The Federal Reserve is not a government agency.
#2 The Federal Reserve System Is A Perpetual Debt Machine
As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up.
#3 The Federal Reserve Has Destroyed More Than 96% Of The Value Of The U.S. Dollar
#4 The Federal Reserve Can Bail Out Whoever It Wants To With No Accountability
#5 The Federal Reserve Is Paying Banks Not To Lend Money
#6 The Federal Reserve Creates Artificial Economic Bubbles That Are Extremely Damaging
#7 The Federal Reserve System Is Dominated By The Big Wall Street Banks
#8 It Is Not An Accident That We Saw The Personal Income Tax And The Federal Reserve System Both Come Into Existence In 1913
#9 The Current Federal Reserve Chairman, Ben Bernanke, Has A Nightmarish Track Record Of Incompetence
#10 The Federal Reserve is Way Too Powerful.
+3 # Vardoz 2012-05-22 14:16
I don't think people understand what Obama is up against. To think that one president can waltz into office and in one term change the game top to bottom is naive. We must vote for him over Mitt who is a complete corporate puppet. At this point we the people do not have a whole lot of choices. We can try to regain a majority in the house and senate. But Boehner's NO JOBS SO BE IT" Statement tells you what their priorities are. And their agenda to make Obama a one term president at any cost to anything makes one wonder why they are so desperate to get rid of him. Granted he is not a ball buster but he is also faced with a mafia style power structure that have no principles or ethics.
+2 # redjelly39 2012-05-22 15:31
Yes Vardoz,
Obama is very limited to what he can even do against the Financial Mafia who dictates everything to our elected officials. Watch the movie "Thrive"
It explains that this is not a Republican vs Democrat problem as the media encourages us to accept and play that game. While we point fingers & yell at each other, we are doing the (Banks/Corps/Go v't) job for them. They keep us occupied with petty arguments while they continue to squelch our rights and bankrupt the world. Our own Occupy is treated like we are a bunch of homeless hippies with nothing better to do when in fact Occupy may be our last best chance of creating a real change for all of us We the People. Please watch Thrive, it explains so much and we all need to be informed about how this will all shake out if we dont come together as a United force.
+3 # paulrevere 2012-05-22 16:12
I think you neglect, in your observations, that o got elected largely because he got his campaign money from those who you apparently think were merely contributors.

With the amount of world wide civilian slaughter and financial destruction o has allowed during his 3 plus years, the quid pro quo can only have his very soul.

He paid by allowing himself to be no more than, just like raygun, a voice for the elite...dats what Harvard breeds and dats what Wall Street demands.
+5 # Trueblue Democrat 2012-05-22 16:19
Obama waltzed into office with his eyes open and on the big prize. He left Bush's choice, Bernanke, in charge of the Fed; he replaced Bush's Goldman-Sachs boy Hank Paulson with bobsy-twin Goldman-Sachs' boy Tim Geithner.

So don't tell Obama couldn't have had an effect. He clearly had no intention of doing anything more that his predecessors -- grab the money and run.
+4 # paulrevere 2012-05-22 16:07
S&P and Moody's did not 'sell' anything. They are the guys who supposedly do due diligence in evaluating various investments like stocks, fed, state, county, city bonds etc.

They LIED LIED LIED over and over and over about all things investment grade overwhich they had grading responsibility. They gave triple A pluses to what should have been junk grade...over and over and over.

Those are two companies from which the entire staff should be in federal prison.
+2 # John Steinsvold 2012-05-22 20:01
An Alternative to Capitalism (if the people knew about it, they would demand it)

Several decades ago, Margaret Thatcher claimed: "There is no alternative".
She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:

John Steinsvold

“Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein
+2 # RMDC 2012-05-23 05:09
Someone should send this article to Paul Krugman. He keeps writing that the problem is how to build "investor confidence." He cannot see that the investor class are con-men. We are all forced to participate in the investment markets, and the banks use those markets to commit massive fraud. We have no confidence in the markets and never will as long as the Big Banks like Goldman Sachs are doing business there.

Krugman's voice is part of the publicity wing of the banking fraud empire. He wants us all to think that a lot more government spending will resolve the problem. But why dump more money into an empire of fraud. Why not just clean out the fraud.

Michael Hudson is right. All the big banks are insolvent. they could be shut down under US banking laws. That is the way to go. But of course it won't happen because the banks have bribe Obama and Eric Holder and everyone in the bank regulation regimes, including governors and state attorney generals. Bribery used to be a crime. Today is is business as usual -- like a hedge fund against prosecution. And it pays off better than most hedge funds.
0 # Firefox11 2012-05-25 11:07
I actually spoke to my bank (BOA) about this last week. Volatility is what makes people rich on Wall Street. They cannot make profits unless prices and values constantly change. However, we the people need stability in industries like Banking, Real Estate, Pension Plans and Insurance. So do our Main Street businesses. Rules need to be in place to keep volatility out of these industries. It is a consequence of Wall Street designing scams to include these formerly stable industries in its volatile casino that has brought down our economy in the USA, and the economy of the world. Elizabeth Warren is right and so was Brooksley Born. Preosecution of these crimes is essential or the criminality will persist.

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