Recently the Justice Department announced legal settlements in cases involving widespread illegal activity by cornerstone banking institution JP Morgan Chase and hedge fund SAC Capital. The billion dollar settlements have produced bold headlines in media outlets around the country, outrage from Wall Street sycophants and self-congratulatory nostrums from the Obama administration and its supporters for “getting tough” on big bankers.
Underneath the hype, however, it is clear that these prosecutions represent an attempt by the Obama administration to do the bare minimum in policing Wall St., allowing the bulk of crimes associated with the economic crisis to go unpunished while doing little or nothing to contain future risky behavior at the systemic level. This task is complicated by the fact that even minimal investigations have opened the door on a worldwide financial sector—centered in New York and London—totally awash in criminal behavior.
JP Morgan settlement
Currently the Justice Department and JP Morgan Chase are negotiating the specifics of a $13 billion settlement to resolve a number of different investigations into its sales of mortgage-backed securities. The investigations focused on whether or not they sold extremely risky assets in a fraudulent way, in other words lying about what they sold to make huge profits.
This was a deal that was essentially forced on the Obama administration by a handful of state Attorneys General who sought deeper investigations into Wall St. malfeasance during the crisis as a quid-pro-quo for signing off on a deal more or less absolving banks of responsibility for the massively fraudulent “robo-signing” scandal.
The headline of $13 billion is however misleading in a number of ways. First and foremost it is far below Chase’s potential liability in the case. Financial reform organization Better Markets has estimated that JP Morgan Chase has liability on this issue in the range of between $100-200 billion. So the administration would allow Chase to settle this issue for roughly 10 cents on the dollar!
Second, it is not even really a deal for $13 billion, but $9 billion in cash and $4 billion towards “mortgage relief.” Previous experience shows that banks tasked with using large amounts of money on “mortgage relief” were able to mostly weasel out of their alleged obligations. Mostly banks seek to “meet their obligation” by allowing short sales, where homeowners can sell their homes for less than their value without having to make up the difference. Small relief perhaps, but it is a violation of the spirit of these agreements which is to keep more people in their homes.
Finally the JP Morgan deal may not happen at all, as the government and the bank are at loggerheads over several issues, one being whether or not the bank can deduct money from a previous settlement, and another being whether or not they have to assume full liability for actions of Washington Mutual and Bear Stearns which committed Madoff-like fraud and then were sold to JP Morgan Chase at bargain basement prices with a liberal helping of free money from the government. Finally there is also the issue as to whether or the $9 billion fine will be considered tax-deductible!
While JP Morgan Chase has not been given assurances that executives will avoid jail time in criminal cases, it is considered highly unlikely to ever happen. So, for now at least, it seems JP Morgan Chase has bought itself out of a prison cell and avoided paying anything close to what they are truly liable for.
The insider
In the other big news in Wall St. prosecutions, major hedge fund SAC Capital, headed by Steve Cohen, agreed to pay $1.2 billion to settle a major case of insider trading. SAC is well known for its outsize fees, which clients willingly pay due to the company’s outsized returns. Unsurprisingly such large-scale success was based on illegal stock information gained by its traders. Cohen for his part employed a decentralized structure designed to insulate himself and the company from accusations of insider trading, making it solely the fault of individual traders.
However it quickly became clear that insider trading was a key part of SAC’s corporate culture, where its entire business model of sky-high returns could only be sustained by gaming the system. The settlement will most likely reduce SAC to a firm that manages just Cohen’s billions, allowing it to continue to play an outsize role in the market. While it is possible Cohen himself could face more substantial charges, it seems likely that at most he will be allowed to walk away free after admitting to presiding over a massive criminal operation.
Calm before the storm?
The backdrop to both these cases has been the existence of a wide range of lawsuits and criminal probes that are revealing truly massive levels of criminal wrongdoing in the financial sector. There are now significant rumblings that the world’s largest financial market, the financial exchange market, on which around $5 trillion a day changes hands, could in fact be rigged. There also investigations into price manipulation in oil and precious metal markets and interest rate swaps.
As one commentator puts it: “For those keeping score: That means the world’s key price benchmarks for interest rates, energy and currencies may now all be compromised.”
On top of this a number of lawsuits are taking place in both the UK and United States related to Libor manipulation could cancel billions of dollars in contracts based on assets whose value was determined by the rigged Libor benchmark. Not surprisingly JP Morgan Chase has also announced that it is a focus of eight probes, including bribing government officials in China.
Herein lies the difficulty for capitalist officials, particularly in the U.S. Popular anger at the wanton destruction caused by the big banks requires some sort of response, and for the Obama administration this has consisted of primarily tinkering around the edges trying to rack up victories that amount to little but seem as if they are the result of due diligence. The issue is that every probe, no matter how half-hearted, reveals that the criminality on Wall St. and in the financial sector is much deeper and pervasive than many had thought.
This has in effect made the big banks “too-big-to-jail.” To prosecute these firms to the fullest extent, even under capitalist laws, would not only result in the jailing of large sections of the financial elite, but perhaps more importantly, would expose the multi-trillion dollars financial service industry at the heart of the world capitalist economy for what it is: a giant house of cards held together by lying and cheating.
Capitalists depend on the illusion that their system is the best, a meritocracy that is only occasionally flawed. To reveal this level of massive criminality, not only from the standpoint of human decency, but even in consideration of capitalist law, would be irreparably damaging to the system. This is why bankers walk free for massive crimes while the poor and oppressed are swept into prison by the millions for minor offences.
