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5 Years in: Too Big to Fail

by . (Posted in: Banking / Personal Finance News)


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In early October, this past year, New York’s Attorney General Eric Schneiderman vented his frustrations at the lack of any movement being made on the so-called “too big to fail banks”. After the announcement of another lawsuit being filed against one of those banks, it was clear Schneiderman was doing the best he could with what he had. And what he had wasn’t much as his hands were still tied in terms of making any significant dent from a criminal perspective. He said his frustrations continued over the absence of more being done to “hold accountable the Wall Street banks”. He went on to say that it was both unethical and irresponsible that these banks “brought down the U.S. economy”.

If he was hoping the FBI would step in, there was likely going to be a long wait since the FBI said,

With losses totaling approximately $40 billion per year, combating Securities and Commodities Fraud remains a priority for the FBI. The FBI is investigating 1655 cases of Securities and Commodities Fraud and has 157 agents dedicated to the problem.

Let’s be clear: these are criminal cases the FBI is referring to. That many cases and less than 200 agents to handle them. It’s mind boggling, really. How did the problem get so big to start with?

Too Big to Fail

It all began five years ago when Lehman Brothers collapsed and we realized just how devastating this financial crisis was going to be. Five years. Sixty months. Few of those cases have resulted in criminal charges. So far, there have been two UBS traders indicted over the massive Libor rate fixing scandal with a couple of former JPMorgan and Bank of America employees pleading guilty to acts such as rigging bids in the municipal bond market. A few others are facing charges from the Justice Department, but there are literally thousands more who would likely be found guilty on a criminal level – if someone would actually pursue those cases.

Instead, too big to fail is even bigger.

It’s a gross miscarriage of justice,

said Dennis Kelleher, president of the financial reform group Better Markets.

How can you have the biggest crash since 1929, causing the worst economy since the Great Depression, and not a single person at a major, politically connected, too-big-to-fail Wall Street bank is held accountable?

It’s not because prosecutors aren’t ready and able to file those criminal charges, they’re just being limited from unseen forces. Even as lawsuits are piling up against the nation’s biggest banks – including Goldman Sachs, which the Dow just welcomed with open arms, these suits are moving at an excruciatingly slow pace.

The government believes they have some kind of case, because they’ve secured hundreds of millions of dollars in settlements, but clearly they don’t believe they have the evidence to charge people in the executive suites,

said Michael Einstein, a white-collar defense lawyer and former federal prosecutor.

In the past sixty months, since the height of the crisis, those big banks have paid more than $66 billion in litigation costs alone. Because prosecutors are concerned about proving intent in court, that could be one reason for the hesitation. But if that’s the case, then why aren’t there other efforts being made on the civil side?

Remember, these massive efforts of fraud are what resulted in those higher interest rates you’re now paying on your credit cards and mortgages. They’re also partly to blame for the mortgage meltdown. Their greed allowed so many of the subprime mortgages to move forward.

With the Consumer Financial Protection Bureau kicking off a few years ago, there have been impressive strides made against those who make it their business to defraud consumers. The government watchdog agency has secured far more fines than the nation’s most noted prosecutors.

Still, there’s not a complete lack of movement (even if we have no idea where all of these fines are going to):

The SEC announced a $67.5 million settlement with Angelo Mozilo, who is a co founder of the now defunct Countrywide. He was accused of defrauding investors when he refused to share growing risks associated with the subprime mortgages the lender was writing.

Goldman Sachs

As mentioned, Goldman Sachs has just been named as the replacement on the Dow for Bank of America. It’s difficult to understand why these things happen; however, just a few short weeks ago, the SEC was able to claim victory when Goldman Sachs vice president Fabrice Tourre was found liable for the misleading information provided to his investors.

Both Mozilo and Tourre were able to avoid any criminal charges.

And speaking of mortgages, as far back as 2006, the Mortgage Brokers Association for Responsible Lending wasn’t quiet in its efforts of warning that 37% of all American mortgages were “stated income” loans, or as they’re known, “liars’ loans”. These loans required no verification efforts in terms of bank balances, employment or income verification.

Greed by mortgage brokers, banks, and real estate developers must not be encouraged by keeping this issue unaddressed,

MBARL president Steven Krystofiak.

Martin Act

The best we can hope for (and it’s a long shot) is that some of these states will see the benefits of the Martin Act. This allows prosecutors to present evidence without being cornered with the burden of proving intent. It’s a long shot, but remember, we’re five years into this mess. The faith of American people is at stake and until and less real changes are made, it’s entirely likely the rest of us will watch with frustration.

What will the financial sector look like in another five years? That remains to be seen – but if history is any indication, it’s entirely possible that little will be done before the decisions are made to chase other cases that present as a “sure thing”.

What are your thoughts? Has the greed of those in the financial markets infuriated you to the point of losing faith? Also – have you found yourself being cornered with higher interest rates?

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