Category: zerohedge

As non-collocated, carbon-based traders walk in today, they are once again greeted by a very unfamiliar shade of green in the equity futures market. There has not been a specific catalyst for another day of equity weakness however it started in Asia, where we again witnessed a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng.

In Europe, stocks also traded lower, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, where UniCredit shares fell over 4% as credit spreads widened (iTraxx subFin index up 6bps). The focus was very much on the UK, where market participants digested the release of better than expected jobs report and then the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, GBP outperformed its peers and the short-sterling strip bear steepened as market participants reassessed future interest rate path. Looking elsewhere, softer stocks supported Bunds, which edged higher after supply from Italy and Germany was successfully absorbed.

As DB notes, it appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent – so his comments that the government shutdown will make coming data “less reliable” than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.

In other words, an Oscar-worthy good-cop/bad-cop performance by the Fed’s henchmen, confusing algotrons for the second day in a row.

Going forward, the US Treasury will auction off USD 24bln in 10y notes, while Cisco will report after the closing bell on Wall Street. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

 

Overnight news bulletin from Bloomberg and RanSquawk

• BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.
• UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) – 12th straight monthly decline.
• German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.
• Treasuries gain, led by belly of curve; 10Y yield retreat from highest level since mid-Sept. as stocks decline across the globe, copper falls.
• Focus remains on timing of any Fed decision to taper asset purchases; Yellen may shed light at tomorrow’s confirmation hearing. Lockhart yday said taper would likely be considered in December; Kocherlakota said tapering could impede economy’s slow progress
• 10Y notes to be sold today yield 2.790% in WI trading; drew 2.657% at October auction and 2.946% in Sept., which was highest since June 2011
• Bank of England Governor Mark Carney signaled that officials may consider raising interest rates sooner than they previously forecast as the U.K. economy recovers “robustly” and inflation slows * U.K. unemployment declined to 7.6% in 3Q, closer to the  BOE’s key threshold, while a narrower measure of joblessness fell for a 12th month in October
• U.K. Deputy Prime Minister Nick Clegg will distance himself from David Cameron’s call for permanently lower state spending, saying his Liberal Democrats aren’t ideologically wedded to budget cuts
• Merkel’s willingness to compromise with the Social Democrats to form a coalition risks rolling back steps taken by her predecessor that made Europe’s biggest economy stronger, her Council of Economic Experts said
• Former President Bill Clinton endorsed altering a key provision of Obamacare, saying Obama should keep a pledge he repeatedly made in campaigning for the law that Americans wouldn’t lose coverage they liked when it took effect
• China elevated the role of markets while maintaining the state’s dominance in the nation’s economic strategy, seeking to balance finding new sources of growth with sustaining the Communist Party’s grip on power
• Sovereign yields mostly lower, EU peripheral spreads widen. Asian and European stocks, U.S. equity-index futures fall. WTI crude, and gold gain; copper lower

Asian Headlines

On the Chinese third plenum, Goldman Sachs says China Plenum is ‘insufficient’ to drive China stocks up.

Separately S&P’s Kim Eng Tan says the implementation of reforms that support the decisive role of market forces in the allocation of resources could in turn support the long term sovereign credit ratings on China. In other news, Morgan Stanley says China to cut interest rates twice in 2014.

BoJ’s Miyao said won’t rule out any steps in advance if BoJ were to act again.

EU & UK Headlines

BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.

BoE’s Carney said constant rate scenario shows potential advantages of keeping rates unchanged after hitting 7% unemployment. He also did not rule out lower jobless threshold to 6.5% from 7.0%. Forecasts are based on market expectations, not nominal rates and uses market forecasts of key rate reaching 1% by 2015 Q4.

UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) – 12th straight monthly decline.
– ILO Unemployment Rate 3-months (Sep) 7.6% vs. Exp. 7.6% (Prev. 7.7%)
– Employment Change 3M/3M (Sep) 177K vs. Exp. 113K (Prev. 155K)
– Claimant Count Rate (Oct) M/M 3.9% vs Exp. 3.9% (Prev. 4.0%) – lowest Since Jan 2009
– Average Weekly Earnings (Sep) 3M/Y 0.7% vs Exp. 0.7% (Prev. 0.7%, Rev. to 0.8%)
– Weekly Earnings ex Bonus (Sep) 3M/Y 0.8% vs Exp. 0.9% (Prev. 0.8%)

German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.

Eurozone Industrial Production SA (Sep) M/M -0.5% vs Exp. -0.3% (Prev. 1.0%)

Eurozone Industrial Production WDA (Sep) Y/Y 1.1% vs Exp. 0.0% (Prev. -2.1%) – biggest gain since September 2011.

Italy successfully sold EUR 5.468bln (vs. exp. EUR 5.5bln) in 3y, 30y and CCTeu bonds. The shorter dated paper was sold at lowest yield since March 2010. Germany also sold EUR 4.032bln in 0.25% 2015, b/c 2.2 (Prev. 2.3) and avg. yield 0.1% (Prev. 0.19%), retention 19.4% (Prev. 15.18%).

US Headlines

PIMCO’s Bill Gross raised the percentage of Treasuries and other US g
overnment-related debt in his flagship fund in October after the Federal Reserve unexpectedly maintained its bond purchases.

CME Group has substantially raised transaction fees for the first time in four years as it flexes its pricing muscle as the dominant US futures exchange operator.

Equities

Risk averse sentiment dominated the session this morning, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, as credit spreads widened (iTraxx subFin index up 6bps) and Bunds moved into positive territory after supply from Italy and Germany was absorbed.

FX

GBP outperformed its peers, driven by the release of better than expected jobs report and also the release of the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, the pair managed to recover some of the losses made yesterday following the release of softer than expected inflation data.

RBNZ Financial Stability Report said the NZD remains elevated, and timing and size of interest rate increases are uncertain. RBNZ’s Wheeler said interest rates are likely to rise.

Commodities

Commerzbank’s technician Axel Rudolph says that a slip through the six-month support line at USD 1270.16 will confirm bearish outlook.

AMCU lowered basic wage increase demand to ZAR 8,668 from ZAR 12,500, according to Impala spokesman. Also, according to AMCU, Impala Platinum raises wage offer to union by 0.5%. It was also reported that Amplats security disperses protest with rubber bullets, according to SAFM.

The Israeli PM Netanyahu has called for Western countries to trim their dependency on oil for the transportation sector due to the instability of the commodity.

Libya’s Zawiya refinery has reopened, according to the National Oil Corp

Following last month’s late payment by Ukraine to Russia, Ukraine has said it does not need to buy any Russian gas before the year’s end.

Key Macro/FX highlights from SocGen

Let’s hear it from the horse’s mouth this morning: does BoE governor Carney now believe that the UK unemployment rate threshold of 7% will be reached earlier than it though t back in August? GBP is not an outright buy vs the USD if that is the case (UK real rates are falling vs the US), but sterling should stay bid vs the currencies where deflationary or disinflation pressures reign supreme, ie the Scandis, the EUR and the Swiss Franc. EUR/GBP did well yesterday to reach back over the 50d ma (0.8440) but this should be as good as it gets if the BoE revises up its short-term growth and inflation forecast. UK rate hike expectations have eased back thanks to the delayed tapering in the US, but short sterling may not easily be swayed by the governor to give up pricing in a first hike at the turn of 2014/2015 in particular if the employment data due one hour ahead of the QIR shows a fall in the unemployment rate to 7.6%.

UST 10y yields traded a 2.79% high yesterday (swaps 2.92% high) giving the USD free rein to strengthen vs its major counterparts. Scandi currencies continued to take a beating after CPI data showed Sweden slipped into deflation in October. Whether that leads the majority on the Riksbank committee to give in to the two doves Ekholm and Flordenand vote for a 25bp rate cut at the December meeting remains to be seen, but the high correlation with US 10y yields suggests there is further upside potential for USD/SEK. Also keep an eye on USD/JPY. As the pair approaches 100.00, short-term vol has started to pick up.

Bank of Indonesia, in a surprise decision yesterday increased its benchmark reference rate by 25bps to 7.25% a move aimed at easing its current account shortfall. Meanwhile, INR depreciated for a 9th day in a row (MSCI EM down for an 8th day on trot) and there could be more pain for the rupee after weaker industrial output (+2% yoy) and higher inflation (10.09%) sparked worries of stagflation.

The RUB took no solace from the flash GDP estimate yesterday (Q3 GDP +1.2% yoy in Q3). The central bank widened tio corridor by 5 kopeks to 32.45-39.45 rubles. We believe another quarter of growth below1.5% would force CBR to cut its benchmark rate in early 2014. With EUR/HUF on the verge of 300, we will be paying close attention to the minutes of Hungary’s central bank meeting. Will these provide justification to expect future policy easing after a sharp drop in CPI inflation to 0.9% in October? Next resistance is at 303.21.

DB’s Jim Reid concludes the overnight event recap

It appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent – so his comments that the government shutdown will make coming data “less reliable” than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.

In Asia this morning, we are again witnessing a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng. On this point, DB’s Jun Ma thinks further detail may be released a few days later, but it’s fair to say that the market has been a little underwhelmed thus far. US treasury secretary Jack Lew said this morning that there are “lots of questions still to be answered” on Chinese reforms, particularly in the area of currency.

Coming back to the issue of low inflation, European inflation has been topical recently especially following the low inflation reading for the euro area in October, the recent rate cut from the ECB and a dovish report on Draghi yesterday (Germany’s FAZ newspaper reported that Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly). Indeed yesterday we saw the October inflation reading in Germany confirmed at just 1.2% YoY, while in the UK the annual inflation reading was below consensus at both the headline (2.2% vs 2.5% expected) and at the core level (1.7% vs 2.0% expected). Indeed the UK’s core inflation number is at a level that was last seen in 2009. Again this ties in with the arguments made in our long-term study from September “A Nominal Problem” where we highlighted how we were having a global problem with both low real GDP and low inflation. The latter get mentioned less when talking about central bank policy, especially in connection with the US taper. In terms of the market reaction, EURGBP gained 0.75% yesterday, with the bulk of the increase coming after the UK inflation p
rint with 10yr gilts outperforming amid a generally weakish day for fixed income.

The economic data calendar looks light again today but one highlight will be the Bank of England’s inflation report. UK employment, Eurozone industrial production and Spanish CPI are also worth looking out for today. It will be a bumper day of Italian auctions with more than $5bn in new issuance today consisting of 5yr floaters, 2016s and 2044s. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/v25lBWBJJxA/story01.htm Tyler Durden

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children.

 

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks.

 

– From an excellent MarketWatch article:  Want 18% returns? Become a subprime lender

Being a somewhat conscious human being in a world in which our “leaders” have completely lost their minds can be challenging at times. One side effect of this condition is a certain emotional numbness when it comes to reacting to new events occurring in the world around you. It’s simply hard to shock me these days, but every now and then it does happen. The following article published by MarketWatch had me literally shaking my head the entire time. If this isn’t peak insanity, I do not want to know what is. We now have chiropractors and orchestral conductors competing with Blackstone in a crowded, insane trade.

Read it and weep:

Barry Jekowsky wanted to build “legacy wealth” to pass down to his children. But the 58-year-old orchestral conductor, who waved the baton for 24 years at the California Symphony, didn’t trust the stock market’s choppy returns to achieve his goals. And the tiny interest earned by his savings accounts were of no help. Instead, Jekowsky opted for an unlikely course: He became a subprime lender, providing his own cash to home buyers with poor credit and charging interest rates of 10% to 18%. It may sound risky, but “it helps me sleep better at night,” he says. “Where else can you find [these] returns?”

Go ahead and read that twice. Ok, now let’s move on, it gets worse.

It has come to this. Unable to save enough for retirement with traditional investments, baby boomers in search of yield are becoming their own private Countrywide Financials. They’re loaning cash from their deposit accounts and retirement plans and hoping for a big pay day: specifically large returns that will boost their income and maybe even allow them to pass an inheritance on to their children. There is no official data, though it’s estimated that at least 100,000 such lenders exist — and the trend is on the rise, says Larry Muck, chairman of the American Association of Private Lenders, which represents a range of lenders including private-equity firms and individuals who are lending their own cash. “We know the number of people who are doing this is increasing dramatically — over the last year it’s grown exponentially,” he says.

The baby boomers will not rest until they destroy the entire world.

It used to be that individual lenders were millionaires who could afford to loan cash and handle the risk of not being paid back. Now middle-income pre-retirees, ranging from chiropractors to professors, are joining their ranks.

 

The move toward mom-and-pop lending comes in the wake of what experts say is the creation of a perfect storm: Banks are still skittish about lending to home buyers with poor credit. Meanwhile, investors who have endured years of low returns from plain-vanilla investment portfolios are itching for something more.

 

The operations often function like a game of telephone. Subprime home buyers, who know they have no shot at getting a mortgage from a bank, start spreading the word to friends and acquaintances that they are on the lookout for anyone who will lend to them. Eventually, the word reaches someone who is willing to lend his or her cash. Other times, a group of individuals pool their cash together to fund the loan.

A game of telephone…

What all these lenders have in common, however, is their willingness to lend to borrowers with low credit scores. In some cases, they do not even check their scores. They point to examples of otherwise reliable borrowers who fell on hard times during the recession and were unable to keep up with loans. Many say they work with borrowers who intentionally stopped paying mortgages (even though they could afford the payments) when they ended up owing more on the loans than the home was worth.

 

Separately, lenders are supposed to be registered with the state where they are originating loans, but many mom-and-pop loan officers are not, says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. And since most of these lenders do not originate a large number of loans per year, they are not required to report their activities to the federal government. “It’s a shadow business,” says Cecala.

 

In a sign that the trend may be here to stay, boot camps are training average Joes to become private lenders. Last month, Wealth Classes, a financial-education company based in Walnut Creek, Calif., that launched in 2007, hosted a networking retreat for 250 students who recently became lenders. Many of the company’s students end up lending to subprime borrowers, though others lend to real estate investors who don’t want to wait weeks to get a mortgage from a bank, says George Antone, founder of Wealth Classes. (Private lending transactions typically take about a week or two to go through, while a mortgage from a bank usually requires at least one-month of waiting time.)

 

Randy King, 61, joined Wealth Classes about three years ago when he started using his own cash to fund other people’s mortgages. A former U.S. Air Force servicemember, King, who is based in Colorado Springs, transitioned to buying fixer uppers and selling them and is now a lender for borrowers — many of whom are subprime — who are buying investment properties.

 

Going forward, experts say, it will be difficult to slow down privately funded subprime loans. This funding spreads mostly by w
ord of mouth, so there’s no official advertisement plug that anyone can pull. Consider King. He recently visited his chiropractor who inquired about his lending operations and then asked if he could jump into one of the deals as well. The chiropractor explained where he would get the funds to become a loan officer: He would use some cash he had saved and withdraw equity from his home using a home-equity line of credit.

QE insanity has arrived. Next up silicon bagel implants.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Jto_Ma2Lixo/story01.htm Tyler Durden

Sadly, only in our new normal world is this funny…

 

 

(h/t @DCMFutures)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zttkwt1u_NI/story01.htm Tyler Durden

By US District Judge Jed S. Rakoff (pdf)

Why Have No High Level Executives Been Prosecuted In Connection With The Financial Crisis?

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans  leading lives of quiet desperation: without jobs, without resources, without hope. Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever-more-esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

If it was the former – if the recession was due, at worst, to a lack of caution – then the criminal law has no role to play in the aftermath. For, in all but a few  circumstances (not here relevant), the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct, and nothing less. If the Great Recession was in no part the handiwork of intentionally fraudulent practices by high-level executives, then to prosecute such executives criminally would be “scapegoating” of the most shallow and despicable kind.

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years or so in bringing to justice even the highest level figures who orchestrated mammoth frauds. Thus, in the 1970’s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. Again, in the 1980’s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than 800 individuals, right up to Charles Keating. And, again, the widespread accounting frauds of the 1990’s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected C.E.O.’s as Jeffrey Skilling and Bernie Ebbers.

In striking contrast with these past prosecutions, not a single high level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be. It may not be too soon, therefore, to ask why.

One possibility, already mentioned, is that no fraud was committed. This possibility should not be discounted. Every case is different, and I, for one, have no opinion as to whether criminal fraud was committed in any given instance.

But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgagebacked securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

Without multiplying examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the sole collateral for highly-leveraged securities that were marketed as triple-A, i.e., of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?

While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and  other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. Rather, their position has been to excuse their failure to prosecute high level individuals for fraud in connection with the financial crisis on one or more of three grounds:

First, they have argued that proving fraudulent intent on the part of the high level management of the banks and companies involved has proved difficult. It is undoubtedly true that the ranks of top management were several levels removed from those who were putting together the collateralized debt obligations and other securities offerings that were based on dubious mortgages; and the people generating the mortgages themselves were often at other companies and thus even further removed. And I want to stress again that I have no opinion as to whether any given top executive had knowledge of the dubious nature of the underlying mortgages, let alone fraudulent intent. But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this context. Who, for example, were generating the so-called “suspicious activity” reports of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top level banker, one might argue, confronted with increasing evidence from his own and other banks that mortgage fraud was increasing, might have inquired as to why his bank’s mortgage-based securities continued to receive triple-A ratings? And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?

This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, in cases involving complexities, such as accounting treatments, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068 (2011), “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants
cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.” Thus, the Department’s claim that proving intent in the financial crisis context is particularly difficult may strike some as doubtful.

Second, and even weaker, the Department of Justice has sometimes argued that, because the institutions to whom mortgage-backed securities were sold were themselves sophisticated investors, it might be difficult to prove reliance. Thus, in defending the failure to prosecute high level executives for frauds arising from the sale of mortgage-backed securities, the then head of the Department of Justice’s Criminal Division, told PBS that “in a criminal case … I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides. And so even though one side may have said something was dark blue when really we can say it was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying at all on the description of the color.”

Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law. In actuality, in a criminal fraud case the Government is never required to prove reliance, ever. The reason, of course, is that would give a crooked seller a license to lie whenever he was dealing with a sophisticated counterparty. The law, however, says that society is harmed when a seller purposely lies about a material fact, even if the immediate purchaser does not rely on that particular fact, because such misrepresentations create problems for the market as a whole. And surely there never was a situation in which the sale of dubious mortgage-backed securities created more of a huge problem for the marketplace, and society as a whole, than in the recent financial crisis.

The third reason the Department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.” To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse — sometimes labeled the “too big to jail” excuse – is disturbing, frankly, in what it says about the Department’s apparent disregard for equality under the law.

In fairness, however, Mr. Holder was referring to the prosecution of financial institutions, rather than their C.E.O.’s. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations, for your consideration or amusement as the case may be.

At the outset, however, let me say that I totally discount the argument sometimes made that no such prosecutions have been brought because the top prosecutors were often people who previously represented the financial institutions in question and/or were people who expected to be representing such institutions in the future: the so-called “revolving door.” In my experience, every federal prosecutor, at every level, is seeking to make a name for him-or-herself, and the best way to do that is by prosecuting some high level person. While companies that are indicted almost always settle, individual defendants whose careers are at stake will often go to trial. And if the Government wins such a trial, as it usually does, the prosecutor’s reputation is made. My point is that whatever small influence the “revolving door” may have in discouraging certain white-collar prosecutions is more than offset, at least in the case of prosecuting high-level individuals, by the career-making benefits such prosecutions confer on the successful prosecutor.

So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis? I offer, by way of speculation, three influences that I think, along with others, have had the effect of limiting such prosecutions.

First, the prosecutors had other priorities. Some of these were completely understandable. For example, prior to 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after 9/11 many of these agents were shifted to anti-terrorism work. Who can argue with that? Eventually, it is true, new agents were hired for some of the vacated spots in fraud detection; but this is not a form of detection easily learned and recent budget limitations have only exacerbated the problem.

Of course, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the S.E.C. But at the very time the financial crisis was breaking, the S.E.C. was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes, which for awhile were, along with accounting frauds, its chief focus. More recently, the S.E.C. has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led S.E.C. enforcement to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

As for the Department of Justice proper, a decision was made around 2009 to spread the investigation of these financial fraud cases among numerous U.S. Attorney’s Offices, many of which had little or no prior experience in investigating and prosecuting sophisticated financial frauds. At the same time, the U.S. Attorney’s Office with the greatest expertise in these kinds of cases, the Southern District of New York, was just embarking on its prosecution of insider trading cases arising from the Rajaratnam tapes, which soon proved a gold mine of good cases that absorbed a huge amount of the attention of the securities fraud unit of that office. While I want to stress again that I have no inside information, as a former chief of that unit I would venture to guess that the cases involving the financial crisis were parceled out to Assistants who also had insider trading cases. Which do you think an Assistant would devote most of her attention to: an insider trading case that was already nearly ready to go to indictment and that might lead to a high-visibility trial, or a financial crisis case that was just getting started, would take years to complete, and had no guarantee of even leading to an indictment? Of course, she would put her energ
y into the insider trading case, and if she was lucky, it would go to trial, she would win, and she would then take a job with a large law firm. And in the process, the financial fraud case would get lost in the shuffle.

Alternative priorities, in short, is, I submit, one of the reasons the financial fraud cases were not brought, especially cases against high level individuals that would take many years, many investigators, and a great deal of expertise to investigate. But a second, and less salutary, reason for not bringing such cases is the Government’s own involvement in the underlying circumstances that led to the financial crisis.

On the one hand, the government, writ large, had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the for-a-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations; and what did the government care, since they were helping to boom the economy and helping voters to realize their dream of owning a home.

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

Please do not misunderstand me. I am not alleging that the Government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important, and it is the shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?

In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower level participant in the fraud whom you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate in order to reduce his sentence, and – aided by the substantial prison penalties now available in white collar cases – you go up the ladder. For a detailed example of how this works, I recommend Kurt Eichenwald’s well-known book The Informant, which describes how FBI agents, over a period of three years, uncovered the huge price-fixing conspiracy involving high-level executives at Archer Daniels, all of whom were successfully prosecuted.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.

I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more
than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.

In conclusion, I want to stress again that I have no idea whether the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was — as various governmental authorities have asserted it was –- then, the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.

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By US District Judge Jed S. Rakoff (pdf)

Why Have No High Level Executives Been Prosecuted In Connection With The Financial Crisis?

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans  leading lives of quiet desperation: without jobs, without resources, without hope. Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever-more-esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

If it was the former – if the recession was due, at worst, to a lack of caution – then the criminal law has no role to play in the aftermath. For, in all but a few  circumstances (not here relevant), the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct, and nothing less. If the Great Recession was in no part the handiwork of intentionally fraudulent practices by high-level executives, then to prosecute such executives criminally would be “scapegoating” of the most shallow and despicable kind.

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years. Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years or so in bringing to justice even the highest level figures who orchestrated mammoth frauds. Thus, in the 1970’s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. Again, in the 1980’s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than 800 individuals, right up to Charles Keating. And, again, the widespread accounting frauds of the 1990’s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected C.E.O.’s as Jeffrey Skilling and Bernie Ebbers.

In striking contrast with these past prosecutions, not a single high level executive has been successfully prosecuted in connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be. It may not be too soon, therefore, to ask why.

One possibility, already mentioned, is that no fraud was committed. This possibility should not be discounted. Every case is different, and I, for one, have no opinion as to whether criminal fraud was committed in any given instance.

But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgagebacked securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

Without multiplying examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the sole collateral for highly-leveraged securities that were marketed as triple-A, i.e., of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?

While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and  other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. Rather, their position has been to excuse their failure to prosecute high level individuals for fraud in connection with the financial crisis on one or more of three grounds:

First, they have argued that proving fraudulent intent on the part of the high level management of the banks and companies involved has proved difficult. It is undoubtedly true that the ranks of top management were several levels removed from those who were putting together the collateralized debt obligations and other securities offerings that were based on dubious mortgages; and the people generating the mortgages themselves were often at other companies and thus even further removed. And I want to stress again that I have no opinion as to whether any given top executive had knowledge of the dubious nature of the underlying mortgages, let alone fraudulent intent. But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this context. Who, for example, were generating the so-called “suspicious activity” reports of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top level banker, one might argue, confronted with increasing evidence from his own and other banks that mortgage fraud was increasing, might have inquired as to why his bank’s mortgage-based securities continued to receive triple-A ratings? And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?

This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, in cases involving complexities, such as accounting treatments, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068 (2011), “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.” Thus, the Department’s claim that proving intent in the financial crisis context is particularly difficult may strike some as doubtful.

Second, and even weaker, the Department of Justice has sometimes argued that, because the institutions to whom mortgage-backed securities were sold were themselves sophisticated investors, it might be difficult to prove reliance. Thus, in defending the failure to prosecute high level executives for frauds arising from the sale of mortgage-backed securities, the then head of the Department of Justice’s Criminal Division, told PBS that “in a criminal case … I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides. And so even though one side may have said something was dark blue when really we can say it was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying at all on the description of the color.”

Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law. In actuality, in a criminal fraud case the Government is never required to prove reliance, ever. The reason, of course, is that would give a crooked seller a license to lie whenever he was dealing with a sophisticated counterparty. The law, however, says that society is harmed when a seller purposely lies about a material fact, even if the immediate purchaser does not rely on that particular fact, because such misrepresentations create problems for the market as a whole. And surely there never was a situation in which the sale of dubious mortgage-backed securities created more of a huge problem for the marketplace, and society as a whole, than in the recent financial crisis.

The third reason the Department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.” To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse — sometimes labeled the “too big to jail” excuse – is disturbing, frankly, in what it says about the Department’s apparent disregard for equality under the law.

In fairness, however, Mr. Holder was referring to the prosecution of financial institutions, rather than their C.E.O.’s. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations, for your consideration or amusement as the case may be.

At the outset, however, let me say that I totally discount the argument sometimes made that no such prosecutions have been brought because the top prosecutors were often people who previously represented the financial institutions in question and/or were people who expected to be representing such institutions in the future: the so-called “revolving door.” In my experience, every federal prosecutor, at every level, is seeking to make a name for him-or-herself, and the best way to do that is by prosecuting some high level person. While companies that are indicted almost always settle, individual defendants whose careers are at stake will often go to trial. And if the Government wins such a trial, as it usually does, the prosecutor’s reputation is made. My point is that whatever small influence the “revolving door” may have in discouraging certain white-collar prosecutions is more than offset, at least in the case of prosecuting high-level individuals, by the career-making benefits such prosecutions confer on the successful prosecutor.

So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis? I offer, by way of speculation, three influences that I think, along with others, have had the effect of limiting such prosecutions.

First, the prosecutors had other priorities. Some of these were completely understandable. For example, prior to 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after 9/11 many of these agents were shifted to anti-terrorism work. Who can argue with that? Eventually, it is true, new agents were hired for some of the vacated spots in fraud detection; but this is not a form of detection easily learned and recent budget limitations have only exacerbated the problem.

Of course, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the S.E.C. But at the very time the financial crisis was breaking, the S.E.C. was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes, which for awhile were, along with accounting frauds, its chief focus. More recently, the S.E.C. has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led S.E.C. enforcement to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

As for the Department of Justice proper, a decision was made around 2009 to spread the investigation of these financial fraud cases among numerous U.S. Attorney’s Offices, many of which had little or no prior experience in investigating and prosecuting sophisticated financial frauds. At the same time, the U.S. Attorney’s Office with the greatest expertise in these kinds of cases, the Southern District of New York, was just embarking on its prosecution of insider trading cases arising from the Rajaratnam tapes, which soon proved a gold mine of good cases that absorbed a huge amount of the attention of the securities fraud unit of that office. While I want to stress again that I have no inside information, as a former chief of that unit I would venture to guess that the cases involving the financial crisis were parceled out to Assistants who also had insider trading cases. Which do you think an Assistant would devote most of her attention to: an insider trading case that was already nearly ready to go to indictment and that might lead to a high-visibility trial, or a financial crisis case that was just getting started, would take years to complete, and had no guarantee of even leading to an indictment? Of course, she would put her energy into the insider trading case, and if she was lucky, it would go to trial, she would win, and she would then take a job with a large law firm. And in the process, the financial fraud case would get lost in the shuffle.

Alternative priorities, in short, is, I submit, one of the reasons the financial fraud cases were not brought, especially cases against high level individuals that would take many years, many investigators, and a great deal of expertise to investigate. But a second, and less salutary, reason for not bringing such cases is the Government’s own involvement in the underlying circumstances that led to the financial crisis.

On the one hand, the government, writ large, had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the for-a-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations; and what did the government care, since they were helping to boom the economy and helping voters to realize their dream of owning a home.

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

Please do not misunderstand me. I am not alleging that the Government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important, and it is the shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent. Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?

In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower level participant in the fraud whom you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate in order to reduce his sentence, and – aided by the substantial prison penalties now available in white collar cases – you go up the ladder. For a detailed example of how this works, I recommend Kurt Eichenwald’s well-known book The Informant, which describes how FBI agents, over a period of three years, uncovered the huge price-fixing conspiracy involving high-level executives at Archer Daniels, all of whom were successfully prosecuted.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.

I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.

In conclusion, I want to stress again that I have no idea whether the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was — as various governmental authorities have asserted it was –- then, the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_Kcs2ih2sEk/story01.htm Tyler Durden

“It’s not just the Fed, it’s central banking,” Jim Rogers exclaims to Reuters in this brief clip, “this is absolute insanity.” As the world’s central banks, for the first time in history “try to debase their currencies,” simultaneously, Rogers cautions, “the world’s floating around on a huge artificial sea of liquidity.” Rogers goes on to explain that he doesn’t expect Bernanke to taper and fears that Yellen won’t either but hopes that she “knows that this is going to cause problems when they stop producing so much money.” His ominous warning, eventually “it’s going to dry up.. and when it dries up, we’re all going to pay the price for this madness.”

 

Is the Fed doing more harm than good..?

“Central Banks are making a terrible mistake…”

 

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“It’s not just the Fed, it’s central banking,” Jim Rogers exclaims to Reuters in this brief clip, “this is absolute insanity.” As the world’s central banks, for the first time in history “try to debase their currencies,” simultaneously, Rogers cautions, “the world’s floating around on a huge artificial sea of liquidity.” Rogers goes on to explain that he doesn’t expect Bernanke to taper and fears that Yellen won’t either but hopes that she “knows that this is going to cause problems when they stop producing so much money.” His ominous warning, eventually “it’s going to dry up.. and when it dries up, we’re all going to pay the price for this madness.”

 

Is the Fed doing more harm than good..?

“Central Banks are making a terrible mistake…”

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8xp2I_G0RjA/story01.htm Tyler Durden

Much has been made recently of the 'implicit' tax cut that a sliding gas price is providing for the beaten-down, confidence-sapped, credit-using consumer. Sure enough, gas prices are at their lows of the year. But, unfortunately, recency bias is our enemy once again since the price of regular gas is still 8.5% above its average since the crisis began – and that with miles-driven still slumping. Not quite as 'tax-cut'-inspiring when viewed that way…

 

 

Chart: Bloomberg

Bonus Chart: Miles Driven vs gas price… (via Advisor Perspectives)

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZcphXvzCEtg/story01.htm Tyler Durden

Much has been made recently of the 'implicit' tax cut that a sliding gas price is providing for the beaten-down, confidence-sapped, credit-using consumer. Sure enough, gas prices are at their lows of the year. But, unfortunately, recency bias is our enemy once again since the price of regular gas is still 8.5% above its average since the crisis began – and that with miles-driven still slumping. Not quite as 'tax-cut'-inspiring when viewed that way…

 

 

Chart: Bloomberg

Bonus Chart: Miles Driven vs gas price… (via Advisor Perspectives)

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZcphXvzCEtg/story01.htm Tyler Durden

While chart analogs provide optically pleasing (and often far too shockingly correct) indications of the human herd tendencies towards fear and greed, a glance through the headlines and reporting of prior periods can provide just as much of a concerning 'analog' as any chart. In this case, while these 3 pictures can paint a thousand words; a thousand words may also paint the biggest picture of all. It seems, socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well… from devaluations lifting stocks to inflationary side-effects of money flow and from short-covering, money-on-the-sidelines, Jobs, Europe, low-volume ramps, BTFD, and profit-taking, to brokers advising stocks for the long-run before a 40% decline.

Stocks look eerily similar…

Income inequality has ramped back to the same levels…

 

 

and Rates look awfully similar…. (h/t @Not_Jim_Cramer)

and that didn't end well… (War!)

But when we look at the headlines in the Wall Street Journal from mid 1936 to mid 1937 as the market topped out, dipped, was bought back (orange oval), then collapsed 40% in 3 months, nothing ever changes…

 

 

Government Bailouts Repaid – Bullish Implications…

 

 

N.Y. Central Has Repaid All Government Loans
The Wall Street Journal, 978 words
Dec 1, 1936
WASHINGTON Numerous railroad developments here yesterday were climaxed by the announcement of RFC Chairman Jesse H. Jones that New York Central had repaid all of its government loans, totaling $16,858,950, most of which was not due until 1941.

The Buying Is Not Speculation – Cash On The Sidelines…

 

 

It's Cash Bull Market With Little Inflation, Says Exchange Bulletin
The Wall Street Journal, 169 words
Dec 16, 1936
"This is eminently a cash market, and as such is relatively devoid of that major characteristic of speculative inflation, the use of borrowed money." says the December Bulletin of the N.Y. Stock Exchange.

Inflationary Side-Effects – Buy It All It's Going Up…

 

 

Wheat Prices Soar To 7-Year Highs On Heavy Buying Stimulated by Broad Advances in Foreign Pits
The Wall Street Journal, 1497 words
Dec 19, 1936
CHICAGO An avalanche of buying, encouraged by buoyancy in foreign markets, particularly in Winnipeg, swept wheat prices to the highest levels since December, 1929, Friday.

 

But… 3 days before…

The Wall Street Journal, 1027 words
Dec 16, 1936
As commodity prices continued to advance yesterday to the accompaniment of increasing public speculation in futures markets, signs of a feeling of caution appeared from widely separated centers.

As Goes The US So Goes The Rest Of The World…

 

 

London Trade Stimulated By Wall Street Strength; Averages at New Highs
The Wall Street Journal, 859 words
Nov 6, 1936
LONDON Overnight strength in Wall Street considerably stimulated the stock market yesterday. Dealers again arrived earlier than usual in anticipation of activity in international issues and found large buying orders in these stocks awaiting execution.

Global Economy To Lift Stocks…

 

 

London, New York Stock Transactions Largest in Months – British Brokers Stand in Queues to Fill Orders Activity Ascribed to World Efforts to Revive Trade
The Wall Street Journal, 956 words
Oct 8, 1936
Growing realization that the determined international effort now being made to sweep away trade barriers will be followed by improved business conditions throughout the world brought a rush of business to the security markets in New York and London yesterday such as not been seen for months.

Devaluation Always A Winner… (Market Prices Prove Economy Likes It)

 

 

Wall Street Weighs Devaluation Effects On U.S. Markets; Sees Little Likelihood of Dumping

 The Wall Street Journal, 1759 words
Sep 28, 1936
Rising security and commodity markets Saturday gave ample indication of the financial district's "bullish" interpretation of the U.S. Anglo-French monetary agreement.

Markets Cheerful Over Devaluation; Morgenthau Not Afraid of Dumping
Selective Buying Here and Abroad Motors and Other Shares Held To Benefit From Improved World Trade Are Strong Commodities Less Responsive International Markets
The Wall Street Journal, 1726 words
Sep 29, 1936
A note of cautious optimism was sounded by leading stock exchanges of the world which were open for business yesterday.

Equity Valuations Irrelevant…

 

 

Earnings Yield of 15 Stocks 4.8%, Compared with 9.4% Ten Years Ago
The Wall Street Journal, 1280 words
Aug 7, 1936
Industrial earning power is valued nearly twice as highly in the current stock market as it was ten years ago.

Europe Ever The Optimist Even In The Face Of Dismal Reality…

 

 

France Optimistic Despite Continuing European Tension – Growing Franco-English Cooperation Inspires Confidence
The Wall Street Journal, 652 words
Dec 5, 1936
Despite the unabated international tension and sudden menace of a constitutional crisis in Great Britain, the continuance of quarrels between Right and Left wings of the Popular Front, and the persistent antagonism between employers and labor, the general feeling in France is rather optimistic than pessimistic.

Short Covering As Ever…

 

 

Active Short Covering Sweeps Grain Prices To New High Levels – Chases Bears
The Wall Street Journal, 1345 words
Dec 2, 1936
New highs for the season were recorded in wheat, corn, rye and oats Tuesday. Spot red winter wheat advanced to the highest level since February, 1929. The sharp upturn, which boosted December corn almost 5 cents, and December wheat about 3 cents, was due principally to short covering by those made uneasy over the sale of an unusually large quantity of spot wheat out of local store, and by generous snowfall over the grain belt. Early in the session the market ruled easy on reports of rain and snow, and predictions for continued unsettled weather.

Government Spending Cuts Cause Concern…

 

 

Sabotaging Federal Economy
The Wall Street Journal, 412 words
Dec 5, 1936
Even the modest beginning which is attempted by WPA officials to reduce cost of government by cutting down the relief roles is encountering strong opposition. It is perhaps only natural that the workers themselves should object, although their methods of protesting through "sitdown" strikes, not to mention the violence which has manifested itself, may be open to question. But much more …

States And Taxes…

 

 

Sales Tax Repeal May Unbalance Kentucky Finances
The Wall Street Journal, 1002 words
Jan 14, 1936
LOUISVILLE, Ky.–Repeal of Kentucky's 3% sales tax, effective the moment Governor Albert B. Chandler signs it, probably Wednesday will deprive the state of $3,500,000 of revenue budgeted to the expiration of the biennium ending June 30, 1936 and the counties of $1,750,000.

The Foreign Money Will Save Us…

 

 

Financial Centers Expect Greater Foreign Interest in Our Securities As Congress Delays Alien Tax Boost – Foreign Interest Here
The Wall Street Journal, 765 words
Aug 6, 1937
Some resumption of foreign interest…

Money On The Sidelines…

 

 

The Wall Street Journal, 590 words
Jul 1, 1937
While the Street remains in a cautious frame of mind, there are undoubtedly more possible buyers than sellers around, and it would not take a lot of encouragement to get these gentlemen aboard. Feeling in brokerage circles is that stocks are more likely to advance on any break in the unpleasant headlines these days than to decline far on a continuation of current uncertainties.

Jobs And Europe never far from fear…

 

 

The Wall Street Journal, 683 words
Jun 29, 1937
Certainly the market was more active on the downside, which surprised a lot of traders who had expected otherwise. The labor and foreign situations remain the main factors in the picture, and brokers feel that these have not changed one whit for the better thus far.

Buy The F##king Dip…

 

 

The Wall Street Journal, 508 words
Aug 24, 1937
A rather depressed feeling is extant in Wall Street as small volume and lower prices continue. Yet there are not many bears in the Street so far as the long pull is concerned. Traders still are stubborn in their theory that stocks are reactionary at the moment from lack of interest rather than any important liquidation. This is the period of the year when business takes a final breathing spell before the more active Fall and some think the stock market is doing likewise and that better days are ahead.

Rallies had Real Volume Then – No Low Volume Ramps…

 

 

The Wall Street Journal, 564 words
Aug 16, 1937
If Saturday's volume was any indication, revived interest in the stock market is here in the opinion of the Street. Furthermore the scope of trading Friday and Saturday indicated a broadening interest which included medium priced as well as low priced issues on contrast to the extended period wherein so-called "quality" stocks held sway in a limited market with small volume.

And At The Top… Brokers Suggest Stocks For The Long-Run (based on 'expectations')

 

 

The Wall Street Journal, 665 words
Aug 7, 1937
Profit taking for the week-end brought prices down in yesterday's market, but the undertone remained stead
y and brokers said there was nothing important in the character of the selling. Many houses were advising the purchase of favored issues on any further reactions. Metal shares ended the day with advances in many cases. There was impressive buying reported in the copper issues largely for long pull purposes.

The Wall Street Journal, 649 words
Aug 10, 1937
While volume left much to be desired, the expectation of stronger and more active markets continued to pervade Wall Street. Moreover, the general business picture is regarded as more pleasing than at any time since the so-called Summer "lull" came into force. Incidentally, the seasonal letdown thus far has not proved to be as extensive as many predicted and expected. Brokers say that many clients are away and that there are others who will be replacing their sold-out long positions in coming weeks.

See – it really is never different this time. It merely appears so since – as Kyle Bass so eloquently noted, the brevity of financial memory is about two years…

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YjQ97P7jWNo/story01.htm Tyler Durden