Friday, December 28, 2012

sytematically dangerous institutions (SDI)

neweconomicperspectives | One of the “tells” that reveals how embarrassed Lanny Breuer (head of the Criminal Division) and Eric Holder (AG) are by the disgraceful refusal to prosecute HSBC and its officers for their tens of thousands of felonies are the false and misleading statements made by the Department of Justice (DOJ) about the settlement.  The same pattern has been demonstrated by other writers in the case of the false and disingenuous statistics DOJ has trumpeted to attempt to disguise the abject failure of their efforts to prosecute the elite officers who directed the “epidemic” (FBI 2004) of mortgage fraud.

HSBC was one of the largest originators of fraudulent mortgage loans through its acquisition of Household Finance.

Three recent books by “insiders” have confirmed earlier articles revealing the decisive role that Treasury Secretary Geithner has played in opposing criminal prosecutions of the elite banksters and banks whose frauds drove the financial crisis and the Great Recession.

Bair, Sheila, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself” (2012); Barofsky, Neil, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street (2012); Connaughton, Jeff, The Payoff: Why Wall Street Always Wins (2012).

Geithner’s fear is that the vigorous enforcement of the law against the systemically dangerous institutions (SDIs) that caused the crisis could destabilize the system and cause a renewed global crisis.  I have often expressed my view that the theory that leaving felons in power over our largest financial institutions is essential to producing financial stability is insane.  Geithner, it turns out, is very sensitive to that criticism.
To sum it up: the regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes.  They warned that such a guilty plea could cause a systemic crisis because HSBC was an SDI.  When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative.  That is why line prosecutors urged Holder to meet personally with Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting.  Instead, Breuer emphasized that DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.
Note the disingenuous statement made by the Treasury to the press.  Yes, DOJ makes the “decision” whether to prosecute, but if DOJ were to prosecute in a case where Treasury had warned that the sky would fall if there were a prosecution – and the sky did fall – then the DOJ’s leaders would be the idiots who ignored Treasury and blew up the world’s economy.

The Treasury statement completes setting the stage for the tale I promised to complete about Geithner’s sensitivity to his role in blocking prosecutions becoming better known.  Breuer and I were interviewed by NPR about the HSBC settlement.  I criticized it and I explained why settlement negotiations were unique in such circumstances because the government’s overriding priority was in reducing its fine to a level that it was sure would not pose any meaningful risk to the health of the SDI.  When the government fears that any SDI failure will cause a global systemic crisis the government’s paramount priority in negotiating a recovery is to restrict rather than maximize its recovery in order to ensure there is no meaningful risk of the settlement leading to the SDI’s failure.  The government’s press flacks find it easy to “spin” settlements with profitable SDIs because their capital and profits are so enormous that the government can negotiate a fine that sounds very large to the public but is relatively minor from the SDI’s perspective.  The settlement is both a “record” amount and a modest cost of doing (fraudulent) business for HSBC.

When the NPR story ran originally it contained a quotation from me noting Geithner’s long-standing opposition to prosecuting SDIs and the government’s incentive to reduce greatly the penalties on HSBC because it was an SDI.  My quotation mentioning Geithner was removed from the NPR story at the request of Treasury and replaced with this “Clarification.”

Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department that made the decision to defer prosecution of HSBC. 

I was not “speculating” that “Geithner did not want to put HSBC out of business.”  My statement was not only factual; it wasn’t controversial given the many insider exposes that have confirmed Geithner’s position on SDIs.  (A position now parroted by Breuer.)  The statement that Treasury got placed in the “clarification” is the same carefully crafted disingenuous statement that Treasury is using to obscure the continuing success of Geithner’s efforts to prevent prosecutions of the SDIs.  What we now know definitively is how hyper-sensitive Geithner is to anything that brings to greater public attention his pusillanimous role in ensuring that fraudulent SDIs and the banksters that control them can commit their crimes with impunity from the criminal laws.  As always, I emphasize the ultimate culpability for the shameful “too big to prosecute” indulgence granted to the criminal enterprise known as HSBC rests with President Obama and Prime Minister Cameron.  It is also worth noting that the Republican Party and Governor Romney never protested this failure to prosecute and that Obama is largely continuing President Bush’s failure to even investigate seriously the banksters.  Welcome to crony capitalism.


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