The Washington Post has published a very silly op-ed by Chrystia Freeland accusing President Barack Obama of unfairly "demonizing" Wall Street. Freeland wants to see Obama tone down his rhetoric and play nice with executives in pursuit of a harmonious economic recovery. The trouble is, Obama hasn't actually deployed harsh words against Wall Street. What's more, in order to avoid being characterized as "anti-business," the Obama administration has refused to mete out serious punishment for outright financial fraud. Complaining about nouns and adjectives is a little ridiculous when handcuffs and prison sentences are in order.
Freeland is a long-time business editor at Reuters and the Financial Times, and the story she spins about the financial crisis comes across as very reasonable. It's also completely inaccurate. Here's the key line:
"Stricter regulation of financial services is necessary not because American bankers were bad, but because the rules governing them were."
Bank regulations were lousy, of course. But Wall Street spent decades lobbying hard for those rules, and screamed bloody murder when Obama had the audacity to tweak them. More importantly, the financial crisis was not only the result of bad rules. It was the result of bad rules and rampant, straightforward fraud, something a seasoned business editor like Freeland ought to know. Seeking economic harmony with criminals seems like a pretty poor foundation for an economic recovery.
The FBI was warning about an "epidemic" of mortgage fraud as early as 2004. Mortgage fraud is typically perpetrated by lenders, not borrowers -- 80 percent of the time, according to the FBI. Banks made a lot of quick bucks over the past decade by illegally conning borrowers. Then bankers who knew these loans were fraudulent still packaged them into securities and sold them to investors without disclosing that fraud. They lied to their own shareholders about how many bad loans were on their books, and lied to them about the bonuses that were derived from the entire scheme. When you do these things, you are stealing lots of money from innocent people, and you are, in fact, behaving badly (to put it mildly).
The fraud allegations that have emerged over the past year are not restricted to a few bad apples at shady companies-- they involve some of the largest players in global finance. Washington Mutual executives knew their company was issuing fraudulent loans, and securitized them anyway without stopping the influx of fraud in the lending pipeline. Wachovia is settling charges that it illegally laundered $380 billion in drug money in order to maintain access to liquidity. Barclays is accused of illegally laundering money from Iran, Sudan and other nations, jumping through elaborate technical hoops to conceal the source of their funds. Goldman Sachs set up its own clients to fail and bragged about their "shitty deals." Citibank executives deceived their shareholders about the extent of their subprime mortgage holdings. Bank of America executives concealed heavy losses from the Merrill Lynch merger, and then lied to their shareholders about the massive bonuses they were paying out. IndyMac Bank and at least five other banks cooked their books by backdating capital injections.
For the past decade, fraud has been a mainstream business on Wall Street. That's to be expected--massive financial crashes simply do not occur without widespread fraud. After the savings and loan crisis, more than 1,000 bankers went to jail for fraud, and the S&L bust was a much smaller debacle than the frenzy that took down Wall Street in 2008.
This is not to suggest that everyone on Wall Street is a criminal--many of these frauds were committed against reasonable financial professionals. But the only reason we haven't we seen throngs of financiers in handcuffs over the past two years is precisely because Obama has been listening to people like Freeland, trying to avoid "demonizing" bankers who broke the law. Obama critics like hedge fund manager Daniel Loeb have been calling him "anti-business" precisely because some fraud charges have surfaced in the past two years-- even though his agencies have gone easy on the fraudsters themselves.
The regulators Obama kept on board at the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) have not recommended any fraud prosecutions to the Justice Department--and we know that the OTS itself was involved in the illegal backdating scheme at IndyMac and other banks. The SEC has not pursued civil fraud cases against some of the executives it believes were involved in Citibank's subprime scam, nor is the agency seeking serious accountability for Barclays. Nothing has happened to Lehman Brothers or Bank of America for their Enron-style derivatives scams that hid debt from investors, or to Merrill Lynch for its self-dealing of subprime derivatives. The Justice Department is letting Wachovia off the hook for laundering drug money. Let me repeat that: the Obama administration has been so eager to please Wall Street that it is letting bankers get away with laundering drug money.
Applying the law equally to all citizens isn't demonization and it isn't socialism-- it's a basic proponent of justice. When you steal a lot of money, you go to jail. When your theft crashes the global economy and throws eight million people out of work, you go to jail for a long time. Obama doesn't just need tough talk for Wall Street, he needs to prosecute the frauds that were committed, and explain them to the American people. Nothing about this should be threatening to the millions of fair and reasonable American financial professionals who have done nothing wrong.
If you examine Freeland's two examples of so-called "demonization," her story simply becomes absurd. When hedge funds who owned Chrysler bonds complained about losing money in the Chrysler bankruptcy, Obama called them "speculators" who needed to take losses. That's perfectly reasonable. They were speculators, and they speculated on a company that went bankrupt. When you invest in a bad company, you lose money. That's how capitalism works.
Freeland also claims that Obama was "out of line in permitting the denunciation of Goldman Sachs." Goldman deserved to be denounced-- their ABACUS scam was abhorrent, and it wasn't the only egregious act the company engaged in (see: "shitty deal"). But Obama has had plenty of nice things to say about Goldman. He defended the massive bonus that Goldman CEO Lloyd Blankfein paid himself, and praised Blankfein as a "savvy" fellow.
You cannot reason with someone who claims he is being demonized when you call him "savvy," nor should you. Any president who neglects basic principles of justice and standards for economic security in order to pamper princely executives isn't doing his job. Ethical financiers and reasonable business editors should have nothing to fear from a president who criticizes and prosecutes illegal finance.