Five years ago today, financial contagion and panic spread as investors withdrew hundreds of billions of dollars from money market funds and as insurance giant AIG, brought down by its disastrous credit default swap and securities lending bets, was rescued with a taxpayer bailout of $85 billion – a bailout that would eventually grow to over $180 billion. The fall out from the financial meltdown of 2008 would cost millions of Americans their jobs, their homes, and their savings and result in deep and lasting damage to our nation’s economy, while ironically the nation’s biggest financial institutions would bounce back quickly after receiving trillions of dollars in assistance from taxpayers.
Following up on my emails of last week, here is the fourth email in a series about 5 critical must do’s to prevent another crisis and to remake our financial system and economy to serve all Americans, not just powerful financial interests. Also, below you will find another short summary of daily events leading up to the financial meltdown of 2008, drawn from the timeline on the website of the Financial Crisis Inquiry Commission.
Must Do #2 – Enforce the Law
When the Financial Crisis Inquiry Commission (FCIC) issued its final report in January 2011, it concluded, “there was a systemic breakdown in accountability and ethics” in our financial system, with breaches “stretching from the ground level to the corporate suites.” Consistent with its statutory duty, where the FCIC found potential violations of law in the course of its investigation, it referred those matters to the Department of Justice.
Five years after the financial collapse, there have been no real economic or legal consequences for the wrongdoing that brought our nation’s economy to its knees. Indeed, it is clear from reading the business sections of the newspapers that misconduct has persisted with big banks tied to activities such as interest rate manipulation, bid rigging, and money laundering. A 2012 survey of 500 financial services executives in the U.S. and U.K. turned up stunning results: 24% said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed; 26% said that they had observed or had knowledge of wrongdoing in the workplace; and 16% said they would engage in insider trading if they could get away with it.
In the face of what occurred in the run-up to crisis and its aftermath, Americans rightfully feel that justice has not been served. Claims of financial fraud have been settled for pennies on the dollar, with no admission of wrongdoing. Executives who ran companies that made, packaged, and sold trillions of dollars in toxic mortgages and mortgage backed securities remain unscathed.
And the pace of investigation and enforcement has been ponderously slow as the statute of limitations on misconduct that led to the financial meltdown is rapidly approaching, Just one example: News reports indicate that the Department of Justice subpoenaed documents from Clayton Holdings, a firm that performed due diligence on mortgages being bought, bundled and sold by the nation’s biggest banks, in July of this year – almost a full three years after the FCIC released documents in September 2010 from Clayton showing that these banks knew about the defects in the mortgages they were bundling and selling, without disclosing that information to the buyers. As the FCIC noted in its final report, the banks’ conduct raised “the question of whether the [banks’] disclosures were materially misleading, in violation of the securities laws.” (See pages 165-170 of the FCIC Report.)
It is clear that the current system of financial law enforcement is woefully broken. There is no real deterrence against corruption that undermines the productive work of the many good people in the financial sector and that puts our banking system at risk. Banks break the rules, pay modest fines which amount to a small cost of doing business (actually shareholders pay those fines!), and then return to business as usual. This is not sustainable.
A complete overhaul is needed. Only vigorous enforcement with real consequences will protect our financial system and economy. This means pursuit of criminal cases against individuals involved in wrongdoing. It means enforcement agencies eschewing weak settlements in civil cases and seeking remedies with teeth such as civil penalties, restitution, admission of responsibility, and executives forfeiting their jobs. It means giving enforcement agencies the resources and muscle they need so they can conduct thorough investigations, effectively go up against the banks’ phalanx of high paid lawyers, and take cases to trial as needs be. And, It means tougher penalties for financial wrongdoing.
All of this will require substantial political will, but the status quo of continued risk to financial stability, let alone to the integrity of our legal system, is unacceptable.
Must Do #3 – Tougher, Simpler Capital Requirements for Banks (sent out 9/13/13)
Must Do #4 – To Reform Compensation, Shareholders Unite! (sent out 9/12/13)
Must Do #5 – A Federal Reserve Chair Who Will Protect the Public Interest, Not Wall Street (sent out 9/9/13)
5 Years Ago Today in the Financial Crisis
On Tuesday, September 16, 2008:
- The Reserve Primary Fund, the oldest money market fund, “breaks the buck” when its shares fall to 97 cents as a result of write-downs on Lehman Brothers commercial paper and investor withdrawals. It is only the second time in the 37-year history of money market funds that the net asset value of a money market fund has fallen below $1 a share. Panicked investors withdraw hundreds of billions of dollars from money market funds. Other funds suffering similar losses are propped up by their sponsors. The run soon hits money market funds with no Lehman exposure.
- The Federal Reserve Board announces that it has authorized the Federal Reserve Bank of New York to lend up to $85 billion to AIG, to be secured by a pledge of the capital stock and assets of certain of AIG’s subsidiaries. AIG explains, in a press release, that borrowings under the revolving credit facility are conditioned on the Federal Reserve Bank of New York being reasonably satisfied with, among other things, AIG’s corporate governance.
- The Dow Jones rose by 141 points (1.30%) and the S&P increased by 20 points (1.75%).
Chairman, Financial Crisis Inquiry Commission, 2009 – 2011
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