Roger Lowenstein, Meet Bill Black

In an essay in Bloomberg Businessweek, financial journalist Roger Lowenstein compares those calling for more criminal investigation of Wall Street to 9/11 truthers and conspiracy theorists. He also distinguishes the current crisis from the S&L debacle by claiming that “The bankers convicted in the savings and loan scandal who dealt sweetheart loans to friends were fraudulent. These people had their hands, willfully, in the till—and knew it.”

You would think that anyone making that argument would want to engage with the work of William K. Black, who has repeatedly compared the finance practices of 2003-2008 to those which led to the S&L crisis. But no, Lowenstein appears too detached to confront Black’s ideas, which have been published in articles and finance sites, and repeatedly debated in televised programs. Praised for his prior work by Paul Volcker, George A. Akerlof, and many other luminaries, Black is off Lowenstein’s radar.

Lowenstein also fails to address the structural foundations of the recent lack of prosecutions; namely, the lack of referrals from financial regulators to law enforcers:

[D]ata supplied by the Justice Department and compiled by a group at Syracuse University show that over the last decade, regulators have referred substantially fewer cases to criminal investigators than previously. The university’s Transactional Records Access Clearinghouse indicates that in 1995, bank regulators referred 1,837 cases to the Justice Department. In 2006, that number had fallen to 75. In the four subsequent years, a period encompassing the worst of the crisis, an average of only 72 a year have been referred for criminal prosecution.

Law enforcement officials say financial case referrals began declining under President Clinton as his administration shifted its focus to health care fraud. The trend continued in the Bush administration, except for a spike in prosecutions for Enron, WorldCom, Tyco and others for accounting fraud. The Office of Thrift Supervision was in a particularly good position to help guide possible prosecutions. From the summer of 2007 to the end of 2008, O.T.S.-overseen banks with $355 billion in assets failed. The thrift supervisor, however, has not referred a single case to the Justice Department since 2000, the Syracuse data show. The Office of the Comptroller of the Currency, a unit of the Treasury Department, has referred only three in the last decade.

I find it rather hard to believe that financiers dramatically cleaned up their act in the late 1990s. Rather, it is far more likely that there was a shift of investigative resources, first to health care, then to terror. There was pressure from Treasury on regulators and law enforcers to pipe down in order to avoid further spooking the markets. There was deregulatory fundamentalism at OCC and OTS. Lowenstein doesn’t address the toxic interaction of these dynamics in his piece, even though part of the crisis involves what Janet Tavakoli has called “the biggest fraud in the history of the capital markets.” He instead prefers to score points against media outlets for being “reductive.”

One of those outlets, Rolling Stone, has another piece which Lowenstein will have to grapple with. Whatever you think of the rest of the Matt Taibbi oeuvre, this piece is based on the the Senate’s Levin/Coburn report, and boils down its hundreds of pages into a very disturbing narrative. As Taibbi notes:

Last year, in the one significant regulatory action the government has won against the big banks, the SEC sued Goldman over a scam called Abacus . . . . Goldman agreed to pay $550 million to settle the suit, though no criminal charges were brought against the bank or its executives. But in light of the Levin report, that SEC action now looks woefully inadequate. Yes, it was a record fine — but it pales in comparison to the money Goldman has taken from the government since the crash. As [former NY AG Eliot] Spitzer notes, Goldman’s reaction was basically, “OK, we’ll pay you $550 million to settle the Abacus case — that’s a small price to pay for the $12.9 billion we got for the AIG bailout.” Now, adds Spitzer, “everybody can just go home and pretend it was only $12.4 billion — and Goldman can smile all the way to the bank. The question is, now that we’ve seen this report, there are a bunch of story lines that seem to be at least as egregious as Abacus. Are they going to bring cases?”

Adam Levitin called the Abacus settlement “$550 million in hush money.” As he has noted, “For Goldman, the total amount of the settlement is frankly insignificant and unlikely to serve as a deterrent to future wrong-doing.” Lowenstein wrings his hands over similarly trivial punishments for the likes of Angelo Mozilo, but he resists the type of investigations necessary for regulators and law enforcers to end the epidemic of destructive behavior in finance.

Fortunately, some forward-thinking prosecutors have a broader view. In the recent Rajaratnam case, “the Justice Department got involved in the investigation at the beginning” and “could listen in as the [inside] information was provided just before trades were made.” We can hope that financial surveillance from the OFR might also lead to intelligence-gathering that can nip massive frauds in the bud. As the OFR sets standards for Legal Entity Identification for Financial Contracts, and the SEC works on its Consolidated Audit Trail, they must develop methods for real-time monitoring of troubling developments. As these capacities develop, hopefully regulators will pay more attention to criminology like Black’s than to Lowenstein’s anodyne apologetics.

Lowenstein has also written for the New York Times for a while. That fact came to mind when I read this description by Chris Hedges of Hedges’ ex-colleagues:

My former employer, the New York Times, with some of the most able and talented journalists and editors in the country . . . never saw the financial meltdown coming. These journalists and editors are besotted with their access to the powerful. They look at themselves as players, part of the inside elite. They went to the same elite colleges. They eat at the same restaurants. They go to the same parties and dinners. They live in the same exclusive neighborhoods. . . .

Journalists who should have been . . . reporting from low income neighborhoods—where mortgage brokers and banks were filing fraudulent loan applications to hand money to people they knew could never pay it back—were instead “doing” lunch with the power brokers in the White House or on Wall Street. All that talent, all that money, all that expertise, all those resources proved useless when it came time to examine . . . major cataclysmic events of our age.

I do not agree with Hedges’ despairing and MacIntyrean politics. But who wouldn’t become a bit alienated when one of the leading financial journalists in the country can dismiss concerns about criminality on Wall Street without even addressing the most pertinent work on the topic? Journalism used to be about “comforting the afflicted and afflicting the comfortable.” Now some of its leading practitioners appear satisfied with scoring points against the best chroniclers of the financial crisis.

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