“If serious prosecutions of fraud by Wall Street firms are never brought, the public’s suspicion about Washington’s policies toward bankers will only grow, as will cynicism about the rule of law as it is applied to the rich and powerful.”
Jeff Madrick and Frank Partnoy
The past decade has seen a broad assortment of legal outrages. Wall Street firms have flagrantly violated the law. Often they are not prosecuted at all. When they are, they typically receive a slap on the wrist that will not deter future wrong-doing. At the same time, Congress has passed laws and regulators have written regulations that further entrench Wall Street’s interests. The following are some of the worst.
1. HSBC Laundering Money for Terrorist Organizations and Drug Cartels
Hongkong and Shanghai Bank Corporation (HSBC) laundered billions of dollars for Al Qaeda, Iran, Mexican drug cartels and similar “clients.” When warned by regulators or reported by news media, HSBC alternately denied the activity or said they would stop it. Instead, they allowed it to continue for at least a decade. In fact, an HSBC whistleblower claims it is still going on. (see Chapter 2).
2. 2005 Bankruptcy Law
In 2005, Congress revised the bankruptcy law to make it much more “creditor-friendly.” This is to say, good for the banks, bad for the borrower. To give one example, judges are no longer allowed to reduce amounts owed on student loans to private lenders, even if the schools are scamming for-profit “degree mills”. Lo and behold, in 2010, student loans pulled ahead of credit-cards as a form of 99% indebtedness. 
3. LIBOR Manipulation
Although it is obscure, the London Interbank Offered Rate (LIBOR) is crucial to trillions of dollars of financial instruments—quite possibly including your mortgage, your credit card or your city’s borrowing. Despite its incredible importance to rates around the world, LIBOR is set through casual communications among banks, and traders routinely adjusted these “communications” to benefit one another. They basically skewed the entire international financial system for personal gain.
This episode epitomizes two things about Wall Street. First of all, this was done by traders without apparent oversight. It is not clear that the banks involved actually benefited. But, the traders did increase their own bonuses. A trader has even been quoted as saying, “It’s us against the bank.” The bank in question was his employer. Clearly, the mega-banks are unable to govern themselves. Second, this behavior happened at many banks in several countries. It was so common that traders felt no compunction about putting damning statements in e-mail messages. For traders, their bonus is paramount, obligations to their employer are secondary, and consideration of other people is not even on the radar screen.
4. Repeal of Glass-Steagall
After the Great Depression, reforms were put in place to restrict banks from taking risky positions with depositors’ money or with funds borrowed from the Federal Reserve. This reduced the frequency of bank failure for fifty years. But beginning in the 1980s, many of these restrictions were removed, with the capstone being the Gramm-Leach-Bliley Act of 1999. More specifics of this sad history are discussed in Chapter 4.
5. Too Big to Fail / Too Big to Jail
There is a widespread belief that failure of one of the largest banks or other financial institutions could have catastrophic consequences for the economy. Rather than trying to address this threat, the fear of these consequences has been used as justification for bailing out these institutions when they get into trouble (see Chapter 2). President Obama and his administration will claim that this problem was addressed by the Dodd-Frank Wall Street Reform Act. But even the Fed does not believe it. In a major speech on the topic, Federal Reserve Board member William Powell noted, “Success is not assured.” This is Fed-speak for “we have our fingers crossed.” Richard Fisher, President of the Dallas Federal Reserve Bank, is more forthright; he says the banks are still too big, practice crony capitalism, and need to be broken up.
Even worse, too big to fail has been used as an excuse not to prosecute banks even when they admit to a long history of criminal activity (see point 12 below, “Lack of Accountability”).
In addition to the injustice of all that, because the megabanks are deemed too big to fail, they can borrow at lower interest rates—in essence, this is a subsidy worth tens of billions of dollars to the banks every year.
6. Special Tax Break for Hedge Fund and Private Equity Managers
Hedge fund managers and private equity executives get a big break on their personal income tax. They pay about half of the ordinary tax rate because their income is deemed to be long-term capital gains subject to a preferential rate—even if it really isn’t.
This is called “carried interest” treatment.
7. Commodity Futures Modernization Act of 2000
In the 1990s, instruments called “derivatives” were traded outside of public view and often without regulatory oversight in volumes representing more money than the entire world economy. Brooksley Born, then head of the agency with authority to regulate most derivatives, tried to include these within the agency’s scope. This effort was squashed first through the combined efforts of Treasury Secretary Lawrence Summers and Fed Chairman Alan Greenspan, and then by Congress in this so-called “Modernization” Act (see Chapter 4).
8. Privatization of Fannie Mae and Freddie Mac
Fannie Mae was created as a government agency in the 1930s to foster the issuance of long-term fixed-rate mortgages. It served this purpose well for nearly 50 years. But in the 1970s, Congress decided to privatize it. They did the same with Fannie’s brother “Freddie Mac” shortly afterward. As private companies, they paid their shareholders tens of billions of dollars in dividends by taking enormous risks. But, when the risks turned sour, Fannie and Freddie were deemed “too big to fail” and considered “government sponsored enterprises” and so we, the taxpayers, got to absorb their hundreds of billions of dollars in losses.
9. Fiduciary Obligations of Pension Trustees
Trustees of pension funds might appropriately be concerned not just about the financial returns on investments they secure for participating employees—but also on whether the industries the employees work in survive, or for that matter, whether the world they live in survives. Which means the trustees may want to avoid investing in companies that are engaging in unsavory labor practices, war profiteering, or are contributing to climate change. The plan beneficiaries might in fact agree with these criteria. But, fiduciary obligations have been interpreted to pretty much prevent trustees from considering such “non-financial” factors. This means that the financial criteria that are generated by Wall Street to evaluate investments are effectively all the trustees are allowed to consider when investing trillions of dollars of the 99%’s savings. The harm that may be done by the companies invested in is considered irrelevant.
10 Robo-signing and the Settlement
After the collapse of the housing market, banks had many mortgages in default. When they took the bail-out money, the banks assured the government that they would work with the borrowers to make the best of the situation. Working with the borrowers would also have been good for banks, in many cases, because it is often more profitable to adjust a mortgage of an existing borrower who is behind, than to try recouping the money on the delinquent loan by selling the house in foreclosure.
Because of the extensive securitization of mortgages, it often wasn’t clear which institution had title to the loans. The law required the banks to work through the documentation and figure it out. But many banks decided neither to work with borrowers nor go through the pain-staking process of lawfully foreclosing on them. Instead, they hired unqualified people to sign documents without reading them so that foreclosures could proceed quickly. This came to be called the robo-signing scandal.
When the robo-signing scandal came to light, the banks were let off with light settlements and no prosecutions.
11. Companies Are Just Like People … Until They Owe Money
Another not sufficiently discussed, but sadly entrenched, outrage in the law is the use of corporations as a means to run from commercial debts. In a very real sense, that is what the law understands corporations are for. As we have discussed, especially since the 2005 bankruptcy amendments, the ability of human beings to get out from under their debts, especially loans to pay for college, is almost non-existent. Mitt Romney (and the Supreme Court in its Citizens United decision), have told us that “corporations are people,” but it turns out that this is not entirely true. People get stuck with the consequences of their promises (at least the 99% does); corporations do not.
Consider, for example, the fact that a human (as opposed to a “corporate”) person can pretty much give away all of his future earnings by signing papers that obligate him to a huge student loan or a home mortgage that he can’t really afford. Say what you may about whether someone should sign such documents, a signature on a loan or a mortgage means what it means: you are obligated to repay.
This is not so for corporations. Because they are really not things at all, but just names on registries, they can easily go out of business, leaving whomever they owed money to, such as their workers, in the lurch. Indeed, when principals of companies (in rare cases) try to back-up the promises of the companies they create by saying they will be personally liable for the corporate debt— courts often won’t let them. Even when the language they have signed agreeing to do this is crystal clear.
Similarly, companies will almost never be found responsible for one another’s debts even if it is overwhelming clear that they are run by the same people, using the same phone numbers, and sharing the same office. Again, the motivation here is that companies are entities that are designed to run-up debts. Absent extraordinary circumstances, courts will not undermine that purpose by doing something so “inefficient,” so “socialistic,” as holding the humans behind the companies responsible for the damage to society that their corporate creations inflict, even though we know it is these same human principals who stand to benefit on the upside if their companies succeed. If only it were so easy for the broke students who never got the benefit of a good job after graduation to get out of the bet they took in going to college.
12. Lack of Accountability and Prosecution
After running up billions of dollars in losses in their companies and trillions of dollars in “collateral damage” to the economy, the megabanks were not required to replace their CEOs or other senior executives. Not only did the CEOs keep their jobs, they even kept their bonuses, their stock options, and their corporate jets.
In many cases, the CEOs should have been prosecuted. Although some people admit that there were regrettable acts, they still argue that few of these acts were actually illegal. This is not true. We provide a list of some of the crimes below. Despite this extensive law-breaking, there were actually fewer criminal prosecutions after 2008 than after the comparatively tiny 1980s savings and loan scandals (see Chapter 4). In many cases since 2008, no prosecution was brought at all. In others, there was a settlement on terms that amounted essentially to a slap-on-the-wrist. What’s worse, none of the senior executives was prosecuted.
Although some try to justify the inaction or light penalties by arguing it would have been hard to prove the crimes, this is not an adequate excuse. First of all, as former prosecutor Neil Barofsky noted when he met with Alternative Banking, it is a prosecutor’s job to try hard cases. But secondly, it shouldn’t have been so hard. After the bubble in Internet stocks of the 1990s, Enron’s massive book-keeping fraud, and other corporate accounting scandals, Congress passed the Sarbanes-Oxley Act specifically to make senior executives liable for crimes committed by their companies.
The salt in the wound has been that after seeing the bankers get away with all this, we now get to hear the U.S. Attorney General, Eric Holder, explain why. Holder noted that “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them”, specifically because their immensity means any harm to them will harm the economy. They are just too big and too important to be bothered with having their crimes punished. They are literally “too big to jail.” Lack of prosecution, or inadequate prosecution, only encourages continued law-breaking.
 Jeff Madrick and Frank Partnoy, “Should Some Bankers Be Prosecuted”, New York Review of Books, November 10, 2011
 Marni Halasa, “Is Anybody Listening? HSBC Continues to Launder Money for Terrorist Groups Says Whistleblower” Huffington Post, August 28, 2013
 “HSBC money laundering report: Key findings”, BBC News, December 11, 2012
 Kayla Webley, “Why Can’t You Discharge Student Loans in Bankruptcy?” Time Magazine, February 9, 2012
 Mark Kantrowitz, “Total College Debt Now Exceeds Total Credit Card Debt”, fastweb.com, August 11, 2010.
 John Lanchester, “Let’s Consider Kate”, London Book Review, July 18, 2013
 Governor Jerome Powell, “Ending ‘Too Big to Fail’”, Institute for International Bankers 2013 Washington Conference, March 4, 2013
 Pedro Nicolaci da Costa, “Richard Fisher Says Too-Big-To-Fail Banks Need to Be Broken Up”, Huffington Post, March 16, 2013
 PBS Frontline, “The Untouchables”, January 22, 2013
 Dean Baker and Travis McArthur, “The Value of the ‘Too Big to Fail” Big Bank Subsidy”. Center for Economic and Policy Research, September, 2009.
 Jacob Goldstein, “Carried Interest: Why Mitt Romney’s Tax Rate Is 15 Percent”, January 19, 2012.
 The preferential treatment of capital gains should not exist at all. It is not at all clear why capital should be taxed less than labor. What’s more, it creates opportunities for tax gimmicks. Reagan abolished in 1986 with no ill effects. It was brought back under Bush I but, even if there is a preferential rate for capital gains, it is clear that carried interest should not qualify.
 Mason Tenders Dist. Council Welfare Fund v. Thomsen Constr. Co., 301 F.3d 50, 52 (2d Cir. N.Y. 2002)
 See Donovan v Bierwirth 680F.2d 263 (2d Cir. 1982)
 Marian Wang, “Why No Financial Crisis Prosecutions? Ex-Justice Official Says It’s Just too Hard”,
ProPublica, Dec. 6, 2011
“Prosecuting Wall Street”, 60 Minutes, December 4, 2011
Jeff Madrick and Frank Partnoy, “Should Some Bankers Be Prosecuted”, New York Review of Books, November 10, 2011
 Mark Gongloff, “Eric Holder Admits Some Banks Are Just Too Big To Prosecute”, Huffington Post, March 6, 2013