Montag, Mai 17, 2010

Fraud and The Implications If Everyone Does It...

If you haven't been reading ZeroHedge at all, get thee hence. It is not written for the layman, and you need to largely ignore the comments, which are full of BSD trying to impress each other. You also need to read carefully and understand what is being written, as a lot of it may not otherwise be terribly easy to understand.

But occasionally there are some gems there. For instance, the testimony of Galbraith before Congress, where he says:

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

If you do not understand this, then you will never understand what is happening: the financial crisis it is the breakdown of the rule of law in America, where fraud and corruption led to the enrichment of a few on an unprecedented scale. What's worse: this was all done deliberately in order to make that money.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: "liars' loans," "ninja loans," "neutron loans," and "toxic waste," tells you that people knew. I have also heard the expression, "IBG,YBG;" the meaning of that bit of code was: "I'll be gone, you'll be gone."

Bingo: the fact that those in political control supported and abetted this should give you an idea of the scale of the disaster.

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails -- those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the "Paulson Put" was intended to delay an inevitable crisis past the election. Does the internal record support this view?

The problem will be finding a "competent authority" before the files are misplaced underneath a table in the White House. This is not a new story, just a new chapter: the Clintons brought this corruption with them when they were elected, as all of their financial dealings stunk to high heaven, but were never properly investigated.

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye. What is the appropriate response?

The appropriate response is to suck it up and enforce the rule of law. Otherwise, there is no difference, fundamentally, between the US and any other country enthralled to a corrupt and vindictive elite.


In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

Clearer words have rarely been spoken: listen and heed his words. If those who have profited from the collapse illegally are not brought to justice, you've created a huge moral hazard because the system itself then becomes corrupted. Once that happens, literally anything goes, and you've got the worst of Chicago politics in control.

Keine Kommentare: