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Arguments about regulation have long been reported as good-guy Democrats using government power to restrain evil bad-guy businessmen. As proof, we're told, most businesspersons are so unenlightened that they give campaign contributions to Republicans, for heaven's sake!
Democrats cheered when Eliot Spitzer, later elected Governor of New York and self-appointed Client #9, hounded Maurice Greenberg, chairman of insurance giant AIG, from his office at the helm of the company he had founded and built up over decades. Spitzer extracted a billion-dollar settlement from the company and disrupted management.
This resulted in the loss of hundreds of billions of stockholder equity, all for nothing provable in court. Not only were neither Greenberg nor AIG convicted of any crime, they were never even indicted and no solid accusations were ever made. Of course, this was OK because most AIG stockholders were presumably those irredeemably wealthy Republicans.
A few years later, when Mr. Obama was carving up GM to reward his supporters, far more Republicans then Democratic donors among the GM and Chrysler dealers were shut down. Mr. Obama's Attorney General and Justice Department didn't happen to trouble themselves to investigate the matter for some strange reason. So far, so partisan.
That's why it is so utterly astonishing to watch the SEC attack prominent, wealthy, well-connected Democrats for the type of lies and fraud that have been endemic in their circles for lo these many years.
The New York Times reports that the SEC is going after six former executives of Fannie and Freddie, the Government-sponsored mortgage giants who did so much to bring down our housing market. It's taken three years, but the SEC has finally brought charges:
One S.E.C. complaint contends that Freddie Mac executives falsely proclaimed that the company had virtually no exposure to ultra-risky loans, despite internal warnings admonishing against such claims.
A separate complaint contends that Fannie Mae executives described subprime loans as those made to individuals “with weaker credit histories” while only reporting one-tenth of the loans that met that criteria in 2007. Both complaints were filed in the United States District Court in Manhattan.
It's not a crime to make bad loans. Given government pressure to make loans to unqualified minorities, it's no surprise that both the banks and the government had lots of bad loans.
Lying about bad loans, however, is a serious crime. The Times reports that the SEC believes that the bosses said they had virtually no subprime loans when in fact they were exposed $50 billion worth.
Why are they going after these guys? The SEC didn't cover itself with glory in the run-up to the crash. They missed Bernie Madoff despite many calls and letters accusing him of wrongdoing. They missed other Ponzi schemes. The Times explained:
The agency has come under fire for not pursuing top Wall Street and mortgage industry executives who contributed to the financial crisis. In cases contending the deceptive marketing of securities tied to mortgages, the S.E.C. has been criticized for citing only midlevel bankers while settling with the Wall Street firms themselves.
They have to hang somebody. They tried going after mid-level bankers in 2009 but the defendants were acquitted.
It's no mystery to anyone exactly whom they should charge. In October 2008, the Independent reported:
In 2006, it was revealed that Fannie Mae had overstated its earnings - to which its senior executives' bonuses were linked - by a stunning $9.3 billion. Between 1998 and 2003, Fannie Mae's executive chairman, Franklin Raines, picked up over $90m in bonuses and stock options. [emphasis added]
Overstating earnings to pump your stock price is as illegal as understating liabilities. Why not go after Franklin Raines, the executive chairman? He's Bill Clinton's pal, that's why.
Why go after mid-level Democrats at all? Because they can't find Republicans who broke the law. If the government says they'll buy bad loans, it's no crime to sell bad loans to the government, which is all most of the bankers did. The real crime was at the government-sponsored enterprises Fannie Mae and Freddie Mac, who merrily bought bad loans while telling Congress they had hardly any.
We saw the same cover-up when the SEC pointed out that New Jersey lied about its pension obligations when borrowing $26 billion. Securities fraud is as criminal a lie as understating bad loans. Instead of assessing fines, the SEC told the state not to do it again. The fact that Jon Corzine, New Jersey governor during the worst of the lies, is a prominent Democrat had nothing to do with their dropping the matter, of course.
Having done their best to bring on the financial crisis by blocking Republican efforts to reign in Fannie Mae and Freddy Mac, Sen. Dodd and Rep. Frank rammed through the "Dodd-Frank" financial reform bill. This 1,200 page monster rewarded all the agencies who couldn't catch risky behavior before the housing crash by giving them a lot more responsibilities and a lot more money.
Dodd-Frank gave them authority to regulate hedge funds and other entities which hold customer's money to invest. By keeping these firms from taking excessive risks, the agencies are supposed to protect investors' money.
Still smarting from the criticism they'd encountered after the crash, the agencies looked hard for risky behavior to regulate.
They found some and reluctantly blew the whistle. Instead of protecting customer money, their actions resulted in more than a billion dollars worth of customers' money going missing. The trades they tried to block turned out to be highly profitable, just as the hedge fund had thought.
Instead of thwarting evil Republicans, the regulators bagged a big-time Democrat - none other than Jon Corzine, who thought he'd learned from his earlier brush with the law that his party label granted absolute immunity.
Over the course of his career in and out of politics, Jon Corzine made an immense personal fortune, rising to the top of Goldman Sachs. Godlman was so well connected to the Obama administration that when the government pulled the plug on AIG because their trades were thought to be too risky, Goldman got 100 cents on the dollar. In a normal bailout, creditors are supposed to take a 20-30% haircut.
The fact that Goldman got paid in full led to the term "Government Sachs" as in "Government Motors." Having been boss at Goldman, Jon Corzine had easy entree into the halls of power.
After making a fortune, he spent $67 million of his own money getting elected Senator from New Jersey in 2000. He helped write the Sorbanes-Oxley law which holds chief executives responsible for financial misdeeds during their tenure. He was elected Governor of New Jersey in 2005 and was defeated by Republican Chris Christie in 2010. He was hired as the boss of trading firm MF Global in March, 2010.
In Obama's Washington, there's no more untouchable person than a multi-millionaire ex-Democratic Senator and ex-Democratic state governor - or at least, so everyone assumed.
As head of MF Global, Jon Corzine reverted to his skills as a top Goldman Sachs trader and bought bonds issued by the Italian and Spanish governments. Traders were bailing out because they believed that not even the Germans could afford to pay off the bonds.
As a well-connected Democrat, Corzine would have known that the Obama administration didn't want financial problems in Europe to hurt American economy and damage Mr. Obama's chances for re-election. He knew that the US government would help out.
He bought $6.3 billion worth of distressed bonds, borrowing about 80% of the money. He knew they'd pay off in full because the Obama administration stood behind them with our tax money. The New York Times tells us how MF Global went bankrupt:
... for the first time it is now clear that ratings agencies knew the risks for months but, as they did with subprime mortgages, looked the other way until it was too late, underscoring how three years after the financial crisis, little has changed on Wall Street. [emphasis added]
Despite all the earlier criticism and despite the new powers given them by Dodd-Frank, the regulators "looked the other way." Need we ask why? An agency which isn't part of the government caught on:
When Finra [Financial Industry Regulatory Authority] realized what MF Global was doing, it grew concerned. The Wall Street self-regulator told MF Global to set aside enough money in case the trades went bad. But Finra didn’t have the authority to force the firm to do so — that power was in the hands of the Securities and Exchange Commission, whose rule Finra was citing.
Finra couldn't force MF Global put put up money to cover their trades. The SEC had the authority, but they weren't doing anything.
Finra got the SEC's attention even though Jon Corzine is the biggest possible sort of Democrat except for President Obama himself. After weeks of dithering, the SEC grudgingly asked MF Global to put up an additional $200 million. This was the beginning of the end.
Moody’s Investors Service and Standard & Poor’s had applauded Mr. Corzine’s effort to reverse losses at MF Global and had given the firm a good rating when he took over. When they had to put up extra money in October, however, Moody's cut MF Global's rating to just above junk.
Everybody who traded with MF Global panicked. Those who'd lent money demanded more collateral. Other firms refused to trade. The stock price plunged. MF Global went bankrupt on Oct 31, All Hallow's Eve.
Along the way, $1.2 billion worth of customers' money went missing. As CEO, Jon Corzine is personally accountable for that under the law he helped write.
Corzine's trades turned out to be profitable, but the profit came too late to save the firm. George Soros - another well-connected Democrat - bought $2 billion of the bonds at the bankruptcy sale and will reap the profits instead.
Although his trades seemed risky, Mr. Corzine's inside information about government intentions was accurate - European debts will in fact be covered with our money, so the bonds are good.
MF Global wasn't brought down by bad trades. MF Global fell when the SEC demanded that the firm put up more capital to cover their trades. When word got out that the SEC thought MF Global was at risk, everybody lost faith and demanded money now! This caused a run which killed MF Global.
A few points:
What fascinates us the most is that the incompetents at the SEC were wrong about risk and destroyed the career, company, fortune, and reputation of a big-time Democrat. Mr. Corzine is the first ex-Senator to be called before an investigating committee since 1908.
The Senate is so inured to corruption and fraud that they didn't even investigate Sen. Chris Dodd who did so much to cause the housing crisis and cut shady real-estate deals on the side to profit from his legislating. This tells you how concerned the powers that be are about what Jon Corzine's experience reveals about their regulatory system.
Republicans have complained about evil regulations for years, but this was OK since regulations weren't hurting Democrats. Now that they've nuked a big-time Democrat, maybe even Democrats will understand that incompetent regulators not only damage the economy, they haven't got enough sense not to damage Democrats.
Will the enemy of our enemy become our friend?