Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

by Matt Taibbi at Rolling Stone:

America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we’re broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year’s retirees from the IRS, the SEC and the Department of Energy.

Why isn’t Wall Street in jail?

Most Americans know about that budget. What they don’t know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the “other” budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. “Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. “Every one of these transactions is outrageous.”

Wall Street’s big win

But if you want to get a true sense of what the “shadow budget” is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall’s haul doesn’t seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn’t seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley’s investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income.

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility. But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.” If you want to learn how the shadow budget works, follow along. This is what welfare for the rich looks like.

In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper East Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him.

The Macks make for an interesting couple. John, a Lebanese-American nicknamed “Mack the Knife” for his legendary passion for firing people, has one of the most recognizable faces on Wall Street, physically resembling a crumpled, half-burned baked potato with a pair of overturned furry horseshoes for eyebrows. Christy is thin, blond and rich — a sort of still-awake Sunny von Bulow with hobbies. Her major philanthropic passion is endowments for alternative medicine, and she has attained the level of master at Reiki, the Japanese practice of “palm healing.” The only other notable fact on her public résumé is that her sister was married to Charlie Rose.

It’s hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that’s exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan’s penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.

So how did the government come to address a financial crisis caused by the collapse of a residential-mortgage bubble by giving the wives of a couple of Morgan Stanley bigwigs free money to make essentially risk-free investments in student loans and commercial real estate? The answer is: by degrees. The history of the bailout era reads like one of those awful stories about what happens when a long-dormant criminal compulsion goes unchecked. The Peeping Tom next door stares through a few bathroom windows, doesn’t get caught, and decides to break in and steal a pair of panties. Next thing you know, he’s upgraded to homemade dungeons, tri-state serial rampages and throwing cheerleaders into a panel truck.

It was the same with the bailouts. They started out small, with the government throwing a few hundred billion in public money to prop up genuinely insolvent firms like Bear Stearns and AIG. Then came TARP and a few other programs that were designed to stave off bank failures and dispose of the toxic mortgage-backed securities that were a root cause of the financial crisis. But before long, the Fed began buying up every distressed investment on Wall Street, even those that were in no danger of widespread defaults: commercial real estate loans, credit- card loans, auto loans, student loans, even loans backed by the Small Business Administration. What started off as a targeted effort to stop the bleeding in a few specific trouble spots became a gigantic feeding frenzy. It was “free money for shit,” says Barry Ritholtz, author of Bailout Nation. “It turned into ‘Give us your crap that you can’t get rid of otherwise.’ ”

The impetus for this sudden manic expansion of the bailouts was a masterful bluff by Wall Street executives. Once the money started flowing from the Federal Reserve, the executives began moaning to their buddies at the Fed, claiming that they were suddenly afraid of investing in anything — student loans, car notes, you name it — unless their profits were guaranteed by the state. “You ever watch soccer, where the guy rolls six times to get a yellow card?” says William Black, a former federal bank regulator who teaches economics and law at the University of Missouri. “That’s what this is. If you have power and connections, they will give you a freebie deal — if you’re good at whining.”

This is where TALF fits into the bailout picture. Created just after Barack Obama’s election in November 2008, the program’s ostensible justification was to spur more consumer lending, which had dried up in the midst of the financial crisis. But instead of lending directly to car buyers and credit-card holders and students — that would have been socialism! — the Fed handed out a trillion dollars to banks and hedge funds, almost interest-free. In other words, the government lent taxpayer money to the same assholes who caused the crisis, so that they could then lend that money back out on the market virtually risk-free, at an enormous profit.

Cue your Billy Mays voice, because wait, there’s more! A key aspect of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don’t pay the Fed back, it’s no big deal. The mechanism works like this: Hedge Fund Goon borrows, say, $100 million from the Fed to buy crappy loans, which are then transferred to the Fed as collateral. If Hedge Fund Goon decides not to repay that $100 million, the Fed simply keeps its pile of crappy securities and calls everything even.

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed’s books. If the securities lose money, you leave them on the Fed’s lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. “Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, ‘The government is giving out free money!’ ” says Black. “As crazy as he was, this is making it real.”

This whole setup — in which millionaires and billionaires gambled on mountains of dangerous securities, with taxpayers providing the stake and assuming almost all of the risk — is the reason that it’s insanely premature for Wall Street to claim that the bailouts have actually made money for the government. We simply can’t make that determination until the final bill comes in on all the dicey securities we financed during the bailout feeding frenzy.

In the case of Waterfall TALF Opportunity, here’s what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here’s the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

The public has no way of knowing how much Christy Mack and Susan Karches earned on these transactions, because the Fed has repeatedly declined to provide any information about how it priced the individual securities bought as part of programs like TALF. In the Waterfall deal, for instance, we know the Fed pledged some $14 million against a block of securities called “Credit Suisse Commercial Mortgage Trust Series 2007-C2” — but that data is meaningless without knowing how many units were bought. It’s like saying the Fed gave Waterfall $14 million to buy cars. Did Waterfall pay $5,000 per car, or $500,000? We have no idea. “There’s no way of validating or invalidating the Fed’s process in TALF without this pricing information,” says Gary Aguirre, a former SEC official who was fired years ago after he tried to interview John Mack in an insider-trading case.

In early April, in an attempt to learn exactly how much Mack and Karches made on the TALF deals, Sen. Chuck Grassley of Iowa wrote a letter to Waterfall asking 21 detailed questions about the transactions. In addition, Sen. Sanders has personally asked Fed chief Bernanke to provide more complete information on the TALF loans given not only to Christy Mack but to gazillionaires like former Miami Dolphins owner H. Wayne Huizenga and hedge-fund shark John Paulson. But Bernanke bluntly refused to provide the information — and the Fed has similarly stonewalled other oversight agencies, including the General Accounting Office and TARP’s special inspector general.

Christy Mack and Susan Karches did not respond to requests for comments for this story. But even without more information about the loans they got from the Fed, we know that TALF wasn’t the only risk-free money being handed over to Wall Street. During the financial crisis, the Fed routinely made billions of dollars in “emergency” loans to big banks at near-zero interest. Many of the banks then turned around and used the money to buy Treasury bonds at higher interest rates — essentially loaning the money back to the government at an inflated rate. “People talk about how these were loans that were paid back,” says a congressional aide who has studied the transactions. “But when the state is lending money at zero percent and the banks are turning around and lending that money back to the state at three percent, how is that different from just handing rich people money?”

Those kinds of deals were the essence of the bailout — and the vast mountains of near-zero government cash turned companies facing bankruptcy into monstrous profit machines. In 2008 and 2009, while Christy Mack was busy getting her little TALF loans for $220 million, her husband’s bank hauled in $2 trillion in emergency Fed loans. During the same period, Goldman borrowed nearly $800 billion. Shortly afterward, the two banks reported a combined annual profit of $14.5 billion.

As crazy as it is to lend to banks at near zero percent and borrow back from them at three percent, one could at least argue that the policy may have aided American companies by providing banks more cash to lend. But how do you explain the host of other bailout transactions now being examined by Congress? Like the Fed’s massive purchases of securities in foreign automakers, including BMW, Volkswagen, Honda, Mitsubishi and Nissan? Or the nearly $5 billion in cheap credit the Fed extended to Toyota and Mitsubishi? Sure, those companies have factories and dealerships in the U.S. — but does it really make sense to give them free cash at the same time taxpayers were being asked to bail out Chrysler and GM? Seems a little crazy to fund the competition of the very automakers you’re trying to rescue.

And then there are the bailout deals that make no sense at all. Republicans go mad over spending on health care and school for Mexican illegals. So why aren’t they flipping out over the $9.6 billion in loans the Fed made to the Central Bank of Mexico? How do we explain the $2.2 billion in loans that went to the Korea Development Bank, the biggest state bank of South Korea, whose sole purpose is to promote development in South Korea? And at a time when America is borrowing from the Middle East at interest rates of three percent, why did the Fed extend $35 billion in loans to the Arab Banking Corporation of Bahrain at interest rates as low as one quarter of one point?

Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That’s right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.

Perhaps the most irritating facet of all of these transactions is the fact that hundreds of millions of Fed dollars were given out to hedge funds and other investors with addresses in the Cayman Islands. Many of those addresses belong to companies with American affiliations — including prominent Wall Street names like Pimco, Blackstone and . . . Christy Mack. Yes, even Waterfall TALF Opportunity is an offshore company. It’s one thing for the federal government to look the other way when Wall Street hotshots evade U.S. taxes by registering their investment companies in the Cayman Islands. But subsidizing tax evasion? Giving it a federal bailout? What the fuck?

As America girds itself for another round of lunatic political infighting over which barely-respirating social program or urgently necessary federal agency must have their budgets permanently sacrificed to the cause of billionaires being able to keep their third boats in the water, it’s important to point out just how scarce money isn’t in certain corners of the public-spending universe. In the coming months, when you watch Republican congressional stooges play out the desperate comedy of solving America’s deficit problems by making fewer photocopies of proposed bills, or by taking an ax to budgetary shrubberies like NPR or the SEC, remember Christy Mack and her fancy new carriage house. There is no belt-tightening on the other side of the tracks. Just a free lunch that never ends.

It’s not enough to see it as a ping-pong: Hamas attacked this, and Israel retaliated. Israel is never retaliating, because it’s the occupying power, and occupation, by definition, is aggression and violence.

Very interesting interview with Omar Barghouti about the Boycott-Divest-Sanctions movement against the apartheid policies of the Israeli government. Please check it out at Democracy Now!

In the meantime, here are some exchanges on this, posted in Facebook:

CS: There’s an old saying among us Jews. The Arabs put down their guns and there’s no more conflict. The Israelis put down their guns and there’s no more Israel. Israel is fighting for its survival against a billion people bent on exterminating us from the planet. And we occupy a postage-stamp size piece of former wasteland that the world seems determined to view as a setting for Jewish bad behavior. I just don’t get it.

JW: Where are you, CS? and who is the we? I heard a holocaust survivor speak and bemoan with all his heart the fact that the present Israeli governmental higher ups are representing all of his beloved Judaism.

CS: I am a 71-year old Jew by choice. When I converted, a friend said, “Great! Now you can experience anti-semitism first hand!” I have trouble condemning Israel when so many people are determined to exterminate us Jews. Do you know that there are fewer Jews today than there were in 1939? That worldwide, there are 13 million Jews? Why? Because Mr. Shicklegruber murdered one third of the world’s Jews. I cannot affect anyone else’s opinion of Israel, but in a fight for survival, sometimes things happen.

GK: So then, the American Indians should see us as an occupying power and by definition, agressive and violent. Rightfully so. We condemn other countries on their human rights records, well you don’t have to look too far back to see our own ugliness.

AE: For many years from the age of 16, when I played Anne’s boyfriend in The Diary of Anne Frank and then read both her diary and the background of the Holocaust, and ever since then have read with great sympathy Jewish writers stretching back from contemporary times thousands of years, I considered (very seriously, much more than “toyed with”) becoming a Jew by choice, too. Probably had I not evolved toward atheism, I might well have converted, too (among the three faiths of the Book, Judaism has always been the most appealing to me). I’ve traveled many times to Germany since the late 1980s and I realize that before Herr Schickelgruber and his Third Reich the currently nearly absent Jewish presence there and in Poland and Lithuania (Hasidic, Orthodox, Reform, secular) was as noticeable as it currently is in many parts of Brooklyn. I’ve often felt that carving up Germany and creating an “Israel” for a Jewish homeland out of, say, Bavaria and Baden-Wuerttenberg, would have been more justifiable than taking over Palestine. Recently I saw the documentary Jaffa–the Oranges Clockwork, which reveals, contrary to the Zionist propaganda presented in, say, the movie Exodus, how fertile and well-cared-for that supposed wasteland was before 1948 and the kibbutzim. To see how Palestinians’ land has withered away since 1946 see Israeli Committee against House Demolitions. CS, when you say “we” and “us,” please be careful. The Israel lobby, AIPAC, likes to conflate the terms “Israel” and “Judaism” and “Zionism,” when they are really very different things. And anyone who has criticism of the policies of the government of Israel, including a great many Israelis (see so many of the articles and letters in Haaretz) is an “antisemite”? Or if that person happens to be Jewish, he or she is a “self-hating Jew”? I deplore violence by both the IDF and Palestinians, though I do note the vast difference in degree. I do not advocate pushing any people into the sea, but would love to see some kind of arrangement where Jews and Palestinians could live in peace, in a land that guarantees equal citizenship to all. The so-called 2-state solution was once appealing to me, but with the expansion of the settlements into “Judaea and Samaria” and the de facto apartheid policy protected and promoted by successive right-wing Israeli governments, I see little hope for that anymore.

from Democracy Now!:

President Obama has failed the American people. He hasn’t led. His job in our constitutional system is to help show a way forward and help to explain, help to say why we need to go this way, not to stand in the back and then announce how historic an agreement is…. That’s not his job. His job is to lead….

The American public speaks clearly in opinion survey after opinion survey. It says the rich have had a free ride, the corporations have been running our country, the spending on the military is completely unjustified, and we want a public option on healthcare. All large majorities, not one of them happening. Why? Because the lobbyists are in control, both of the White House and Congress….

Check out the excellent interview.

by Ed Pinkington in The Guardian:

Commander in Chief Obama is ultimately responsible for Manning’s treatment, but he says the treatment is “appropriate and meets our basic standards”. Obama was once a professor of constitutional law, and he entered the national stage as an eloquent moral leader, but his current conduct does not meet fundamental standards of decency.

More than 250 of America’s most eminent legal scholars have signed a letter protesting against the treatment in military prison of the alleged WikiLeaks source Bradley Manning, contesting that his “degrading and inhumane conditions” are illegal, unconstitutional and could even amount to torture.

The list of signatories includes Laurence Tribe, a Harvard professor who is considered to be America’s foremost liberal authority on constitutional law. He taught constitutional law to Barack Obama and was a key backer of his 2008 presidential campaign.

Tribe joined the Obama administration last year as a legal adviser in the justice department, a post he held until three months ago.

He told the Guardian he signed the letter because Manning appeared to have been treated in a way that “is not only shameful but unconstitutional” as he awaits court martial in Quantico marine base in Virginia.

The US soldier has been held in the military brig since last July, charged with multiple counts relating to the leaking of thousands of embassy cables and other secret documents to the WikiLeaks website.

Under the terms of his detention, he is kept in solitary confinement for 23 hours a day, checked every five minutes under a so-called “prevention of injury order” and stripped naked at night apart from a smock.

Tribe said the treatment was objectionable “in the way it violates his person and his liberty without due process of law and in the way it administers cruel and unusual punishment of a sort that cannot be constitutionally inflicted even upon someone convicted of terrible offences, not to mention someone merely accused of such offences”.

The harsh restrictions have been denounced by a raft of human rights groups, including Amnesty International, and are being investigated by the United Nations’ rapporteur on torture.

Tribe is the second senior figure with links to the Obama administration to break ranks over Manning. Last month, PJ Crowley resigned as state department spokesman after deriding the Pentagon’s handling of Manning as “ridiculous and counterproductive and stupid”.

The intervention of Tribe and hundreds of other legal scholars is a huge embarrassment to Obama, who was a professor of constitutional law in Chicago. Obama made respect for the rule of law a cornerstone of his administration, promising when he first entered the White House in 2009 to end the excesses of the Bush administration’s war on terrorism.

As commander in chief, Obama is ultimately responsible for Manning’s treatment at the hands of his military jailers. In his only comments on the matter so far, Obama has insisted that the way the soldier was being detained was “appropriate and meets our basic standards”.

The protest letter, published in the New York Review of Books, was written by two distinguished law professors, Bruce Ackerman of Yale and Yochai Benkler of Harvard. They claim Manning’s reported treatment is a violation of the US constitution, specifically the eighth amendment forbidding cruel and unusual punishment and the fifth amendment that prevents punishment without trial.

In a stinging rebuke to Obama, they say “he was once a professor of constitutional law, and entered the national stage as an eloquent moral leader. The question now, however, is whether his conduct as commander in chief meets fundamental standards of decency”.

Benkler told the Guardian: “It is incumbent on us as citizens and professors of law to say that enough is enough. We cannot allow ourselves to behave in this way if we want America to remain a society dedicated to human dignity and process of law.”

He said Manning’s conditions were being used “as a warning to future whistleblowers” and added: ”

I find it tragic that it is Obama’s administration that is pursuing whistleblowers and imposing this kind of treatment.”

Ackerman pointed out that under the Pentagon’s own rule book, the Uniform Code of Military Justice, Manning’s jailers could be liable to prosecution for abusing him. Article 93 of the code says “any person who is guilty of cruelty toward any person subject to his orders shall be punished”.

The list of professors who have signed the protest letter includes leading figures from all the top US law schools, as well as prominent names from other academic fields. Among them are Bill Clinton’s former labour secretary Robert Reich, President Theodore Roosevelt’s great-great-grandson Kermit Roosevelt, the former president of the American Civil Liberties Union Norman Dorsen and the writer Kwame Anthony Appiah.

by William Greider in The Nation

If people rob a bank, they go to prison; but when the banks rob the people? Bernie Madoff goes to prison because his victims were the elite. The victims of the Wall Street crooks, however, are mere paeons like us. With “authentic cooperation” those thieves get a “deferred prosecution agreement.”

When Charles Ferguson received an Oscar for his documentary on the financial crisis, Inside Job, he reminded the audience that “not a single financial executive has gone to jail, and that’s wrong.” Given the abundant evidence of massive fraud, Americans everywhere have asked the same question: Why haven’t any of those bankers gone to jail? If federal investigators could not establish criminal intent for any top-flight executives, didn’t they have enough evidence to prosecute banks or financial houses as law-breaking corporations?

Evidently not. Except for occasional civil complaints by the Securities and Exchange Commission, the nation is left to face a disturbing spectacle: crime without punishment. Massive injuries were done to millions of people by reckless bankers, and vast wealth was destroyed by elaborate financial deceptions. Yet there are no culprits to be held responsible.

Former Senator Ted Kaufman was especially upset by this. Kaufman was appointed in 2008 to fill out the remaining two years of Vice President Biden’s term as senator from Delaware. With no ambition to stay in politics, he was free to speak his mind. He made unpunished bankers his special cause.

“People know that if they rob a bank they will go to jail,” Kaufman declared in an early speech. “Bankers should know that if they rob people, they will go to jail too.” Serving on the Senate Judiciary Committee, he helped get expanded funding and manpower for investigative agencies. In hearings, he politely prodded the Justice Department, the SEC and the FBI to be more aggressive.

“At the end of the day,” Senator Kaufman warned, “this is a test of whether we have one justice system in this country or two. If we do not treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole $500 from a cash register, then how can we expect our citizens to have any faith in the rule of law?”

Kaufman, now retired, sounded slightly embarrassed when I reminded him of his question. “When you look at what we got, it ain’t very much,” he conceded. “I’m genuinely concerned there are a lot of guys walking around Wall Street, the bad apples, saying, ‘Hey, man, we got away with it. We’re going to do it again.’”

If the legal system cannot locate the villains in this story, then “the law is a ass—a idiot,” as Charles Dickens put it. The technical difficulties in making a case for criminal prosecutions are real enough, given the complexities of modern finance. But the government’s lack of response to enormous wrongdoing reflects a deeper conflict of values. Will society’s sense of right and wrong prevail, or will corporate capitalism’s amoral need to maximize profit? So far, the marketplace appears to be winning.

The government’s ambivalence about prosecuting the largest corporate interests could be heard in the president’s comments. “Nothing will be gained by spending our time and energy laying blame for the past,” Barack Obama said in a different context (crimes of torture and unlawful detention committed under the Bush administration). Treasury Secretary Timothy Geithner bluntly dismissed the “public desire for Old Testament justice.” That might be morally satisfying, he said, but it would be “dramatically damaging” to economic recovery.

No one had to tell federal prosecutors to go easy. They can read the newspapers. The Treasury’s inspector general called the financial system “a target-rich environment” for financial fraud. But the government at the same time expended a vast fortune in public funds to rescue and restore the biggest banks and brokerages. Criminal indictments would not be good for investor confidence.

The economic argument dilutes, even checks, law enforcement. This occurred in government policy long before the financial crisis erupted, with its revelations of widespread fraud. During the past decade, the government demonstrated a similar reluctance to act aggressively against corporations. The Justice Department instead adopted a softer, more forgiving approach, at least for major companies. The intention was to limit the economic damage that can result from vigorous prosecution.

Instead of “Old Testament justice,” federal prosecutors seek “authentic cooperation” from corporations in trouble, urging them to come forward voluntarily and reveal their illegalities. In exchange, prosecutors will offer a deal. If companies pay the fine set by the prosecutor and submit to probationary terms for good behavior, perhaps an outside monitor, then government will defer prosecution indefinitely or even drop it entirely. The corporation thus avoids the stigma of a criminal trial and the bad headlines that depress stock prices. More to the point, the “deferred prosecution agreement,” as it’s called, allows the company to escape the more severe consequences of criminal conviction—the loss of banking and professional licenses, charters, deposit insurance or other government benefits, including eligibility for federal contracts and healthcare programs. In other words, the punishment prescribed in numerous laws.

“With cooperation by the corporation, the government may be able to reduce tangible losses, limit damage to reputation, and preserve assets for restitution,” the Justice Department’s authorizing memorandum explained in 2003. “A deferred prosecution or non-prosecution agreement can help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct.”

The favored argument for the more conciliatory approach was that criminal indictment may amount to a death sentence for a corporation. The fallout will destroy it, and the economy will lose valuable productive capacity. The collateral consequences are unfair to employees who lose jobs and stockholders who lose wealth. Corporate defenders cited Arthur Andersen, the giant accounting firm that imploded after it was convicted in 2002 of multiple offenses in Enron’s collapse. But was it the firm’s indictment or its criminal behavior that caused clients, accountants and investors to abandon it?

A better name for the Justice Department’s softened policy might be “too big to prosecute.” Just as the Federal Reserve used the “too big to fail” doctrine to rescue big financial institutions from their mistakes, Justice has created an express lane for businesses and banks to avoid the uglier consequences of their illegal behavior. As a practical matter, the option is reserved for the larger companies represented by the leading law firms. They have the skill and clout to negotiate a tolerable settlement.

* * *

Russell Mokhiber, longtime editor of the Corporate Crime Reporter, describes deferred prosecutions as another chapter in the long-running degradation of corporate law. “Over the past twenty-five years,” Mokhiber says, “the corporate lobbies have watered down the corporate criminal justice system and starved the prosecutorial agencies. Young prosecutors dare not overstep their bounds for fear of jeopardizing the cash prize at the end of the rainbow—partnership in the big corporate defense law firms after they leave public service. The result—if there are criminal prosecutions, they now end in deferred or nonprosecution agreements—instead of guilty pleas. If executives are criminally prosecuted, they tend to be low-level executives.”

Deferring prosecution was made standard practice by George W. Bush’s Justice Department, which over eight years deferred or canceled some 108 prosecutions. The Los Angeles law firm Gibson, Dunn & Crutcher took the lead in promoting the new policy and has negotiated numerous agreements. A lawyer in a rival firm wisecracked that Gibson, Dunn had become “the West Coast branch of the Bush Justice Department.”

During Obama’s first two years, Justice deferred action on fifty-three corporate defendants. None of those cases stemmed from the financial crisis. In a recent article Gibson, Dunn’s leading lawyers dubbed deferred prosecution “the new normal for handling corporate misconduct.” The Justice Department does still indict hundreds of business entities every year for crimes ranging from routine price-fixing to environmental destruction. Some major corporations still plead guilty as charged, especially drug companies, but prosecutions are overwhelmingly aimed at garden-variety fraud and crimes of smaller enterprises. As Gibson, Dunn lawyers put it, negotiated settlements “are now the primary tool in DoJ’s efforts to combat corporate crime.” The statistics in this account are unofficial, drawn from Gibson, Dunn’s periodic reports to clients on deferred prosecutions.

Important corporations that have settled without a public trial include Boeing, AIG, AOL, Halliburton, BP, Health South, Daimler Chrysler, Wachovia, Merrill Lynch, Pfizer, UBS and Barclays Bank. The crimes ranged from healthcare fraud to cheating the government on military contracts, bribing foreign governments, money laundering, tax evasion and violating trade sanctions.

“Too big to prosecute” has generated controversy in legal circles but very little in politics. William Lerach, the notorious trial lawyer who has won huge investor lawsuits against Enron and many other corporations, describes deferred prosecutions as “sham guilt. They create a thin veneer of responsibility, but nothing really happens.” (Lerach is not a neutral or untarnished expert, having gone to prison himself for illegally recruiting plaintiffs.) “I call them headline fines—they make for good reading, but that’s all,” Lerach says. “The companies can pay them in a heartbeat. You know what it is to them? A cost of doing business, that’s all. The profitability of the illegal activity far exceeds the cost of the penalty.”

Lerach argues that negotiated settlements of corporate cases serve a different purpose: they shield the company’s top officers and directors, who could be held personally liable for crimes. “It shifts the blame to the corporate entity—the fictional person—rather than the individuals who engaged in the misconduct and really gained financially from it,” Lerach charges.

“The actual law says you are not allowed to indemnify a corporate officer or board member from prosecution for deliberate dishonest acts, i.e., criminal behavior,” he explains. “The way they get around this is a misuse of these agreements. They settle with the government on what is a criminal charge, and the shareholders end up paying. They use corporate guilt to pay off the prosecutor.”

Some of the penalties are huge—Pfizer paid $2.3 billion for marketing drugs in violation of labeling restrictions—but many fines seem trivial alongside a company’s ill-gotten gains. A series of federal judges have accused Justice and SEC lawyers of letting defendants off too easy. “A facade of enforcement,” New York Judge Jed Rakoff complained when he objected to a $33 million SEC settlement with Bank of America. The bank subsequently agreed to pay $150 million.

Judge Emmet Sullivan in Washington, DC, hammered Justice Department lawyers for giving “a free ride” to Barclays, which was accused of evading US sanctions on Iran and Cuba. Evidence made clear that its officers knew they were breaking the law, but none of them were indicted. “You know what?” Judge Sullivan told the government lawyers. “If other banks saw that the government was being rough and tough with banks and requiring banking officials to stand before federal judges and enter pleas of guilty, that might be a powerful deterrent to this type of conduct.”

In fact, federal judges have no authority to block or alter such agreements. The discretion belongs solely to Justice Department prosecutors and US Attorneys—in effect, a semi-private system with virtually no external checks. When New Jersey Governor Chris Christie was a US Attorney, he approved a series of deferred prosecution agreements and handed out sinecures to political pals—the lucrative lawyer’s job of monitoring the corporations. In one settlement Christie ordered Bristol-Myers-Squibb to finance an endowed chair in business ethics at Seton Hall law school, Christie’s alma mater. This became a minor issue in his gubernatorial campaign but not enough to defeat him.

Professor Kent Greenfield of Boston College, author of The Failure of Corporate Law, views all this as an ominous trend. “It has become the increasing normalization of law-breaking by corporations,” he says. When epic crimes go unpunished by the legal system, the wrongful behavior seems less shocking when it is repeated in the future, tolerated by discouraged citizens or regarded as an acceptable option by corporate managers.

“Crime is defined as price rather than punishment,” Greenfield notes. In the new normal, “corporations can say, ‘Well, is the crime worth the price, discounted by the probability of getting caught?’ Because you can’t make a corporation go to prison. They have no morality, no human personality or sense of morals, other than the morality of the market that reduces everything to money. If the only way to punish companies is with money, then the fine sets the price for crime.”

* * *

This amoral economic logic epitomizes the deep conflict over values our society is gradually losing. Corporate leaders may protest my characterization of business values, but Greenfield points out that during the past generation this bloodless market logic has become mainstream thinking among legal scholars. A rough version of the same thinking has crept into law enforcement. Oft-cited legal scholars Frank Easterbrook and Daniel Fischel argue, as Greenfield summarizes, that “corporations should, with some exceptions, seek to maximize profits even when they must break the law to do so…. As long as the expected penalties from illegality are less than the expected profits, the corporation should act illegally.” As Easterbrook and Fischel write: “Managers have no general obligation to avoid violating regulatory laws, when violations are profitable to the firm.” They even argue that “managers not only may but also should violate the rules when it is profitable to do so.”

The confusion of values starts with the fictitious premise that the corporation is a person, for purposes of law. The Supreme Court has awarded it many of the constitutional rights that a person possesses—free speech, the right to due process. But corporations are not mortal beings, of course, and unlike people, they can live forever. The language of “corporate personhood” is really a slick way of saying property rights come before people’s rights.

Government says it is acceptable to execute people for their crimes, then turns around and tries to eliminate the death penalty for corporations. When an actual person is sentenced to prison, the court does not pause to weigh the unfortunate collateral consequences for his children. “How many individuals do you know who get a deferred prosecution agreement?” Lerach asks. “They get marched into court and put in the clink.”

Lerach is sympathetic to the “death penalty” argument, because he has seen the negative consequences for people whose firms collapsed. “But you can’t have it both ways,” he says. “You can’t say you won’t indict the corporation because it will injure a lot of innocent people and have catastrophic impact. OK, but then you don’t indict the individuals who were responsible. And you let them use corporate money to pay the fine. That’s just a big game. There’s no accountability there.”

Restoring justice thus has two parts—establishing individual responsibility within the company and redefining criminal liability for the corporation in ways that have real impact on corporate behavior. Both require reforms that are fiendishly difficult to achieve, given the corporate dominance of politics. Prosecuting individuals is complicated, as Greenfield says, because responsibility is diffused within the corporation.

“It is hard to find the one individual who had a proper mental state that satisfies criminal intent, because everyone has a part of it,” Greenfield says. “The purpose of limited liability is to protect people from being responsible. If we put the assumptions about how we organize business in other areas of our lives and politics, people would be aghast.”

In other words, restoring individual responsibility requires big changes in the corporation itself—anti-trust legislation to make the big boys get smaller, and internal governance reforms that give voice and influence to other stakeholders, like employees and small shareholders, who now suffer most from recklessness at the top. People throughout the firm need incentives to take responsibility for its acts.

Corporations do not experience human guilt, since they exist only as artificial entities constructed from law. It is intolerable that these organizations wield so much power over society, but for many years people have been led to believe that corporate good fortune is synonymous with general prosperity. As broadly shared prosperity is steadily withdrawn, people may rise up and demand serious reforms.

* * *

Lerach thinks any reform is hopeless for now, but he nonetheless has lots of ideas about what it might look like. “Corporations are too big, too powerful,” he says. “The prosecutors are completely outgunned by the law firms, setting aside the fact that a young prosecutor is probably thinking about a job someday in a private firm. Corporate executives are not only greedy; they tend to be pretty smart. They surround themselves with professionals who tell them what they’re doing is reasonable. That creates a structural shield against prosecution.”

Yet Lerach thinks criminal penalties “can be created for corporations that wouldn’t amount to the death penalty for them but are still painful. So you wouldn’t put the prosecutor in that terrible bind where indictment might cost innocent people their jobs but would still put pressure on the company.”

If a company is convicted, law could prescribe a rising scale of mandatory measures depending on the severity of the crime: forcing the company to sell off subsidiaries, drop lines of business, surrender government licenses and contracts. This would be the equivalent of “three strikes, you’re out” for the mammoth corporations. The courts could also punish executives past and present, break up the company or put the entire enterprise up for sale at depressed prices. These actions are harsh—in some cases, fatal—but not really worse than what happens routinely to smaller businesses in the marketplace. Business failure gets punished unsentimentally. Criminal behavior should be clearly defined as business failure.

What will give political momentum to these ideas? Continuation of the status quo. Nobody went to jail, so eventually the corporate crooks will do it again. Next time, the rebellion won’t be aimed at government.

from Democracy Now!.

Reactionary Congressman Paul Ryan (R-WI), apparently a reincarnation of Herbert Hoover, is worried that we are transforming “our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.” Such were the arguments against Social Security in 1937, against Medicare in 1965.

Joe Baker, president of the Medicare Rights Center: “About half of people with Medicare right now—and this isn’t going to change in the future—are living at about $21,000, $20,000 or less a year in income. They’re already paying $4,000 to $5,000. And CBO estimates and others estimate that that could double under this plan. So we’re talking about half your income going to healthcare in the future for a lot of people with Medicare, and that’s just unsustainable for them. They’re really not going to be able to get the care.”

Hmmm–what was it that former Florida Congressman Alan Grayson called the Republican healthcare plan, the answer to “Obamacare”? Oh yeah: “DIE QUICKLY.”