Great Leap Forward

Eric Holder Makes it Official: Crime Is The Economic Model


It’s official. The nation’s top cop, Attorney General Eric Holder, has clearly articulated the administration’s policy on crime at the biggest banks: it will not be prosecuted. Indeed, as we’ve long expected, the criminals in top management will not be investigated, they will not be indicted, they will not be prosecuted, and they will not be punished.


If you want to lie, cheat, and steal, the safest place to be is at an institution like Citi, BofA, Wells Fargo, JPMorgan, or Goldman. There’s no downside to criminal behavior if you can work your way to the top of any of these “systemically dangerous institutions” (SDIs as Bill Black calls them). Their business model is based on crime, and since crime is rewarded within these institutions and ignored by our top cop, the worst criminals will naturally rise to the highest positions in these SDIs. The incentives are aligned to continue promulgating the biggest criminal conspiracies the world has ever seen as these institutions not only enrich top management, but serve as bankers to international terrorists and drug lords.

Here’s Holder’s justification: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” he said. “And I think that is a function of the fact that some of these institutions have become too large.”

He went on, trying to shift some of the blame to Congress: sheer size of the big banks “has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.  That is something you (members of Congress) all need to consider.”

He’s saying: You see, Congress, it is your fault that I will not prosecute crime because you have allowed these big banks to exist. However, it is largely due to the Administration’s efforts—led by Timmy Geithner—that the biggest banks not only survived the crisis, but grew bigger as they gobbled up the competition (often with help from the Treasury). Uncle Sam backstopped these control frauds—Bill Black’s term for corporations that are run by top management to enrich themselves.

While I would not want to relieve Congress of all responsibility for protecting the criminal class on Wall Street, the truth is that the Administration is far more culpable—so it is downright disingenuous for Holder to point his finger at Congress.

So this is what we’ve come to: 21st century capitalism is a control fraud.

If Wall Street were a small part of our economy it might not matter too much—as Keynes said, speculation on a steady stream of enterprise is not a big problem, but matters become grave when speculation dominates. And Wall Street’s FIRE sector does dominate the economy: 40% of corporate profits and 20% of value added.

Not only does finance continue to spread its bloodsucking vampire squid tentacles into every sphere of life—the process labeled financialization—but it sets the standard of behavior that nonfinancial firms adopt. Look, you cannot have one sector that rewards top management fabulously while others do not.

The entire corporate sector must follow Wall Street’s lead—and any firm that does not will be taken over by a rapacious thief in a leveraged buy-out. Workers will be fired, shareholders are screwed, divisions are spun-off, and a handful of thieves make out like bandits. That’s modern capitalism.

The main tool used to enrich corporate management is “pump and dump”: take a myopic view of the corporation, do anything to get a short-term gain in equity prices (including using cash to buy the firm’s own shares), and include generous stock option plans in management’s compensation. This is why Wall Street went public in the late 1990s—to enrich the likes of Bob Rubin and Hank Paulson. Pump up the stocks, exercise the options, and dump. Walk away from the hulking mess you made, with your own hundreds of millions intact.

Remember General Electric—Thomas Edison’s industrial giant? Jack Welch took it over and ran it like a financial firm—reporting profits of 20% quarter after quarter through, shall we say, “creative accounting”. He drove up the stock price by 4000% over his tenure, then cashed out, making a reputed half a billion dollars for himself. He was a key figure in promoting the notion that generous compensation for top management—much in the form of stock options—properly aligns incentives.

As Bill Black notes, what this does is to provide spectacular rewards to control frauds and to ensure massive losses for average shareholders and employees of the firms when stock prices collapse. Shortly after Welch took the money and ran, GE’s stock price fell by two-thirds and the firm had to take big write-offs for the phony profits it had been reporting. While GE stocks slowly recovered in the mid-2000s boom, they collapsed to 5 in the GFC and in the current, historic, stock bubble GE is only in the low twenties. Welch is still treated as a corporate hero. And teaches his business philosophy to MIT students.

In any case, Wall Street has taken all this to a new level—outright, admitted, criminal behavior. And not just any crimes. It is not a stretch to say that financing global terrorists and drug lords rises to treason. Wall Street is committing crimes that would lead to drone strikes and the electric chair if anyone else did them. Corporations are now supposedly people, too. Electric chair for Wall Street’s funding of terrorists?

Senator Elizabeth Warren demanded to know: “What does it take, how many billions of dollars do you have to launder from drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution?”

Holder answered her question. This administration will never investigate, will never prosecute, will never punish top management at any big financial institution. No matter what. It might shake financial markets. It might throw a monkey wrench into the 21st century version of capitalism.

Folks, there is no Plan B. This is all we’ve got. Control Fraud Capitalism. Pump and dump from one election cycle to the next.

Call it Bubbleonia (Michael Hudson’s term): create a bubble in some financialized asset, pay huge bonuses to our financial engineers, wait for the next crash, and then  bail-out Wall Street.




26 Responses to “Eric Holder Makes it Official: Crime Is The Economic Model”

lanceMarch 19th, 2013 at 3:27 am

Depressing, is that the first step of acceptance? Or is it the acceptance itself thats so suffocating?

James ThomasMarch 19th, 2013 at 2:29 pm

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,”

So as I understand it, AG Holder is choosing to violate his oath of office because the job is too hard.

Barack Obama has many fine attributes but the ability to surround himself with quality executives has never been one of them.

Peter ShawMarch 19th, 2013 at 3:03 pm

I'd appreciate expert comment on my understanding (so far) here of "fringe" economic concepts.

I used to assert that "banks are organisations which take risks with other people's money". MMT argues that "loans create deposits", so I must revise to "banks are organisations which take risks with their endogenous money".
The loans are fractionally secured by reserves of real (exogenous) money from the central bank.
A bank bailout comprises payment to the bank of the total (not reserve) real money.
Credibly, bank bailout = austerity (Lancastle, after Keen):

So banksters are exclusively rewarded by this; bankers of probity, and the general public aren't.
In the post above, Holden refers to "… these institutions" where LRW refers to "… top management at any big financial institution". This is surely a key ambiguity; a bank may well be too-big-to-fail, but no human is.
In the latter case – "… you send all the top management to long jail terms" (LRW), so this appears not a fundamental problem.

Readers of Brunner's "Shockwave Rider" might be alarmed by this post, but not surprised.

SchofieldMarch 19th, 2013 at 4:29 pm

Control Fraud Capitalism needs Revolving Door Government, Campaign Finance Corruption and Oligarchic Main Stream Media Control to operate optimally. It now has this in most governments on the planet. Since morality drives the Social Contract and this represents everybody's need to have a stake in a cooperative environment it will not hold. The movement to remove CF Capitalism is now growing. CF Capitalism will effectively collapse under the weight of its own internal moral inconsistency.

llisa2u2March 19th, 2013 at 7:25 pm

Great article! HSBC has just added the latest cyclical dump. Perhaps, decriminalization of certain drugs could be the latest miracle-cure to allow an extensive buildup of infrastructure for an alternative predatory market place. Perhaps, then certain lower-class entrepreneurs could pull-the-rug out from under a few super wealthy conclaves, and join their game.

Alan AvansMarch 19th, 2013 at 10:43 pm

Depressing? Acceptance?

We're not very given to acceptance of tyranny, nor are we particularly depressed. On the contrary. We're looking forward to the fight.

And we're going to win. We are the People. And it's too damn late to expect us. We're here.

stridentMarch 20th, 2013 at 10:21 pm

Simply unacceptable, and intolerable. To accept his version of an answer points to the fact he is also part of the problem. The corruption is obviously many layers thick at the top. If you think of the hundreds of billions that will not be invested because of these factors if we held these people and systems accountable faith in the system could be restored which is the first step to accountability and a restored system. Saying it is too complicated and it will end the financial system as we know it BLA… That is exactly what we ARE looking for.

Guest, for nowMarch 20th, 2013 at 10:29 pm

The only thing surprising about this is that it is openly, explicitly stated. And that is significant because it means there is no political counterweight in the US, or in the rest of the world — for now — capable of challenging it. Those who think it's an outrage are thoroughly splintered. No window-dressing to placate anyone is necessary.

Ed Dolan EdDolanMarch 22nd, 2013 at 2:44 pm

Great post. It is a scandal, but there is one (small) hope: Opposition to banksters is one of the few issues where a genuinely bi-partisan coalition is forming. For the conservative side, see Dallas Fed President Richard Fisher's speech on Ending Too Big to Fail, delivered a few days ago to the Conservative Political Action Committee, dripping with Reagan quotes but making many of the same points made in this post. Here's the link:

L. Randall Wray L. Randall WrayMarch 23rd, 2013 at 1:36 am

Agree, Ed. Opposition to criminal activity should not be partisan. And, on the other hand, promotion of, and support of, the criminal elite on Wall Street is not partisan either–both Democrats and Republicans happily feed at Wall Street’s campaign funding trough. The only hope is democracy from the ground-up. Yertle the Turtle is getting mighty mad about supporting the 1% at the top.

Bruce EwertMarch 26th, 2013 at 8:03 am

The banks were bailed out and made larger under Bush, not Obama. Obama inherited that mess without any choice in the matter.

However, Obama chose to inherit Geitner, a bad choice only superceded by the choice to enlarge the drone war.

William LattaMarch 28th, 2013 at 3:56 pm

I guess I'm not as smart as the many people who have commented on this article, because I don't see what laws were broken. Professor Wray is angry with the poor judgement of the banking sector and appears to want to see the senior management of each bank punished. But for what? What law did they violate? Or is Professor Wray advocating in inquisition and punishment because he doesn't like what happened. This is a country of law and if we slip into mob justice then Prof Wray might be lynched for spreading false information. Why doesn't Prof. Wray focus his anger on the politicians who created the mortgage crisis or the senior management of Freddie Mac and Fanny Mae, or the politicians who prevented the auditing of the GSA's? I give the good Professor an "F" for his research and a"F-" for his conclusions and recommendations.

L. Randall Wray L. Randall WrayMarch 29th, 2013 at 6:58 pm

Will: I guess you answered your own question right in the first sentence.

The top management has already admitted they broke the laws. Ergo, they pay fines. I want an investigation, prosecution, and then conviction. That is the normal process when it is suspected that laws are broken. Holder has publicly proclaimed that these banks are simply too big, so his department will not follow normal procedure.

Guest, for nowMarch 29th, 2013 at 9:51 pm

The Attorney General explicitly admits that certain institutions are too big to prosecute, regardless of what they did, and it's The Angry Professor Wray who advocates mob justice? When I see comments like Latta's, there is only one conclusion I can draw: this person is either a paid shill, or they are incredibly stupid. It is hard to tell which. Shilling used to require a measure of creativity, and dissimulation had to be both empirically plausible and logically consistent with the current prejudices.

But standards have fallen everywhere.

spiderMarch 31st, 2013 at 1:32 am

Try reading James Hamilton's article reporting some real research on the world view and motivations of many high level finance managers. Makes a lot more sense than your populist drivel.

Or, try showing a little courage and follow the logic of you position to it obvious, lefty, grossly anti-semitic outcome.

L. Randall Wray L. Randall WrayMarch 31st, 2013 at 1:58 am

Ahh, Spidey Troll, you are back. Fridays are still open for Trolls. Anti-Semitic? What, are you the new Joe McCarthy, slinging your unfounded accusations? Crawl back into your little hole, Troll. Left-wing/progressive? Guilty as charged. Read my very first blog at GLF–that was made clear. Don’t like it? Suggestion: Go Troll Elsewhere. All of my posts on this blog will ALWAYS be left wing, progressive, and infuriating to little Trolls like you. Pissing people like you off is what I do.

But if you can string together a few more-or-less coherent sentences, I’ll give you a Troll Friday to make a case near and dear to your little Troll heart. Or whatever it is that drives you.

jack strawApril 14th, 2013 at 2:24 am

still doesn't prevent "disintermediation" though. "only this time it's the State of Illinois that's being disintermediated." there can't be more than a few thousand of these people doing this insanity. "good luck shutting down the war machine." nice article. keep up the fire.

jack strawApril 14th, 2013 at 2:27 am

again "the Supreme Court never ruled on the nullification crisis because of a thing called the Civil War." the idea that the Federal Government will "bail out everyone" is so ridiculous as to SOUND criminal. i mean "more handouts so we don't have to pay taxes?" in my opinion "standing smack dab in the middle of this is Bank America" but we shall see.

Most Read | Featured | Popular