Politics, hungry lawyers and media help abuse the system

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Re: Politics and hungry lawyers help abuse the system for gain

Postby admin » Tue Jan 19, 2010 4:39 pm

Punishing Lawyers in Corporate Frauds
January 19, 2010, 9:01 AM

Peter J. Henning, a professor at Wayne State Law School, specializes in issues related to white-collar crime and follows them for DealBook’s White Collar Watch.

Joseph P. Collins, a former partner at the international law firm Mayer Brown, received a seven-year prison sentence for his role as the lead attorney for the failed futures trading firm Refco Inc., whose collapse as a result of accounting fraud cost investors and lenders more than $2 billion. Mr. Collins was convicted of conspiracy, wire fraud and securities fraud in July 2009 for his role in the stunning demise of Refco only weeks after the firm’s initial public offering.

The company hid debts owed by its chief executive, Phillip R. Bennett, from a buyout firm in an leverage buyout in 2004 and then in the public offering in 2005. In addition to Mr. Collins’s conviction, Mr. Bennett received a 16-year sentence, and Refco’s former president, Tone N. Grant, was sentenced to 10 years for their role in the accounting fraud.

Mr. Collins was Refco’s long-time outside counsel and the firm was his largest client, generating $35 million in billings for Mayer Brown. It is rare that an outside lawyer is prosecuted for legal representation of a client, and the case can be understood as part of a growing trend in which federal prosecutors and regulatory agencies, including the Securities and Exchange Commission, focus on those who enable corporate fraud along with the officers and directors who orchestrate it. The punishment of Mr. Collins is substantial, and The New York Times’s chief financial correspondent, Floyd Norris, asked on his blog last week, “What are the longest sentences given to partners (or former partners) of major law firms, for crimes committed on behalf of clients?”

Although uncommon, Mr. Collins is not the first outside lawyer to be prosecuted for work on behalf of a client, although his sentence is among the most severe. Other lawyers are included on the list of those who have been convicted for conduct related to their legal practice:

Terry Christensen, a well known entertainment lawyer, received a three-year prison sentence for his role in the wiretapping of the ex-wife of his client, the billionaire Kirk Kerkorian,the during a child-support case. Mr. Christensen worked with private investigator Anthony Pellicano, the so-called “private eye to the stars” who was convicted in other cases.
Raymond Ruble, a tax lawyer at Sidley Austin, received a 6½-year prison term for his role in the sale of tax shelters by KPMG that resulted in more than $100 million in avoided taxes.
Melvyn I. Weiss and William S. Lerach, name partners at the plaintiffs class-action firm Milberg Weiss (which later split into two firms), received sentences of 30 months and 24 months, respectively, for their role in paying kickbacks to lead plaintiffs and expert witnesses in the firm’s cases. Two other name partners from the firm, Steven G. Schulman and David J. Bershad, received six-month prison terms.
John G. Gellene, a leading bankruptcy lawyer at Milbank Tweed, received a 15-month prison term for filing false documents in a corporate bankruptcy proceeding in 1994 that did not disclose a conflict of interest he had through prior work on behalf of a major creditor of the company. An excellent book by Professor Milton C. Regan Jr., “Eat What You Kill: The Fall of a Wall Street Lawyer,” looks at how Mr. Gellene came to find himself in a criminal prosecution.
I have not included Marc Dreier on the list because he did not act on behalf of clients in enriching himself, although certainly his standing in the legal community contributed to the fraud he perpetrated.

In-house counsel have also been the subject of criminal prosecutions, most recently in the options backdating cases. For example, the former general counsel of Comverse Technology, William Sorin, received a year-and-a-day sentence for his role in the issuance of backdated options by the company.

Not every case involving the prosecution of lawyers is successful, however, as juries have acquitted inside lawyers from McAfee, Tyco International and McKesson.

What is striking about the sentence that Mr. Collins, the former Mayer Brown lawyer, received is its length. This is largely a product of a change in the Federal Sentencing Guidelines adopted in late 2001 that substantially increased the likely sentence in fraud cases. The United States Sentencing Commission amended the fraud-loss table used to calculate the sentences so that a loss of more than $400 million pushed the potential punishment to more than 20 years and could even result in a term of life in prison when other factors, such as the number of victims, were considered.

The timing of that change could not have been more propitious for prosecutors because shortly afterward financial meltdowns at companies like Enron, WorldCom and Adelphia Communications hit. While at one time prison sentences for white-collar offenders were uncommon, and anything over two years almost unheard of, the sentencing guidelines made substantial prison terms much more likely when a large corporation collapsed. Thus, defendants like WorldCom’s chief executive, Bernard Ebbers, got 25 years; Adelphia’s chief executive, John Rigas, 15 years; and Enron’s chief executive, Jeffrey K. Skilling, more than 24 years, although that term will be reduced and he could even be back in court for a new trial if the Supreme Court reverses his conviction.

More recently, Mr. Dreier received a 20-year sentence for his fraud that cost victims at least $400 million. A Florida lawyer, Scott Rothstein, has been accused of a similar scheme that may exceed $1 billion in losses, and he is likely to receive at least as much prison time if he pleads guilty as expected on Jan. 27.

Given the sizable losses in the Refco case, Mr. Collins may be fortunate to have received only seven years, as the potential punishment under the sentencing guidelines called for a maximum of 85 years in prison. The Federal District Court rejected his request not to be sent to prison at all, an unlikely result given the amount of the loss. Mr. Collins is seeking a new trial based on recently revealed e-mails, and he is certain to appeal the conviction. Whether the district court permits him to remain free pending the appeal remains to be seen.

The substantial sentence is sure to be noticed in major law firms throughout the country, but whether it has any deterrent effect is another issue.

– Peter J. Henning
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Re: Politics and hungry lawyers help abuse the system for gain

Postby admin » Fri Jan 01, 2010 5:50 pm

Ottawa tries to skirt challenges to market regulator
Government plans to ask Quebec judge not to hear province's objections to national securities body, sources say

Jimmy Jeong/The Canadian Press

Iris Evans, Alberta Minister of Finance and Enterprise,
presents the 2009 Alberta Budget at the Alberta Legislature
in Edmonton, Alta..
Karen Howlett, Janet McFarland, Rhéal Séguin

Toronto, Quebec — Globe and Mail Update Published on Friday, Dec. 18, 2009 7:51PM EST Last updated on Saturday, Dec. 19, 2009 3:09AM EST

The federal government plans to turn up the heat on its constitutional showdown with Quebec by asking the courts to toss out the province's legal challenge to a proposed national securities regulator.
The government plans to appear before the Quebec Court of Appeal and ask a judge not to hear the province's objections to a national regulator, government and industry sources said Friday.
The move is part of a two-pronged assault by the Stephen Harper government. It is also asking the Supreme Court of Canada to rule on whether Ottawa has the power to replace Canada's 13 provincial and territorial regulators with a single entity. And it comes just as Alberta launches its own challenge over a national securities watchdog.
“By going to the Supreme Court, the federal government is implicitly asking the Quebec Court of Appeal not to hear our case,” a Quebec government official who asked not to be named said Friday. “We figured this would be their strategy all along.”
No date has been set as yet for the Quebec court to hear the province's case, the official added.
The Alberta government announced Friday that it will go to the Alberta Court of Appeal and will also intervene in the Quebec case, where it will argue that securities regulation is a matter of provincial jurisdiction. Joining forces with Quebec allows the two provinces to send a stronger message of opposition to the federal government's plans, said Alberta Finance Minister Iris Evans.
“We do not want to easily relinquish something that has been our constitutional right,” Ms. Evans told reporters in Whitehorse. “That's why we feel it's important to participate with Quebec and also to pursue this as Alberta on behalf of Albertans.”
Federal Finance Minister Jim Flaherty is the chief architect of a single regulator, an initiative that has strong support from the Ontario government. Canada's largest province – home to the lion's share of the country's securities markets – has long advocated for a strong national regulator to improve the efficiency of the capital markets and to better co-ordinate enforcement and investor protection.
“We believe that the most appropriate venue to ultimately decide the federal government's jurisdiction in relation to securities regulation is the Supreme Court of Canada,” a spokeswoman for Ontario Finance Minister Dwight Duncan said Friday.
Quebec and Alberta both regard a national regulator as an encroachment on their turf. Alberta government officials are worried that once the federal government controls securities regulation, it will also control the province's capital markets and the ability of Albertans to raise funds in their home market, said a securities industry source close to the government. As a result, the source said, Alberta government officials are concerned they will lose an important lever on the province's economy.
Ms. Evans said Alberta does not want to allow Ottawa to open a door to permit federal control of other areas that historically have been regulated by the provinces.
The move means three courts in Canada are now expected to rule on the legality of the national regulator plan.
Alberta said Friday it is taking its own action because it could be many months before the federal government launches its Supreme Court challenge, and it wanted to move forward now on its action.
Canadian provinces have no option but to refer questions of constitutionality to their own appeal courts because they cannot refer a case directly to the Supreme Court of Canada, said Toronto securities lawyer Phil Anisman. And Alberta can frame its questions itself in an Alberta challenge, which it cannot do just by relying on intervention in support of the Quebec case, he said.
With files from reporter David Ebner in Whitehorse
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Re: Politics and hungry lawyers help abuse the system for gain

Postby admin » Thu Dec 24, 2009 12:55 pm

A few examples:

-Our Heritage trust fund stands at $14 bil after some decades of operation while the similar fund in Norway is over $300 billion in half the time.

-Investment assets which have proven to be tainted and sold without care and knowledge were allowed under Alberta Finance and Enterprise and he Alberta Securities Commission, costing Albertans billions, and nearly bankrupting the Alberta Treasury Branch. (they placed 47% of deposits into tainted investments according to the Alberta Auditor General)

-It appears that our Finance Minister is along for the ride, in Alberta instead of doing any of the driving or managing of provincial finances.

There have been calls for her resignation by persons both inside and outside of the Conservative Party due to the damage done under her supervision.

There is now a request for criminal investigation with the RCMP IMET over manufacture, distribution and regulatory failure (negligence?) by financial institutions, and regulators who gave these institutions permission to violate Alberta laws to distribute toxic products.

There is discussion underway about citizen class action against government and regulatory officials who may be shown to have acted in a manner contrary to the public interest.
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Greenspan’s legacy will be how he turned the United States i

Postby admin » Tue Nov 10, 2009 3:34 pm

Sunday, November 8, 2009

"Greenspan’s legacy will be how he turned the United States into a third world country."

Five Questions
for Frederick J. Sheehan, Author,

Q. What was Alan Greenspan’s greatest influence on the United States?

FS: Alan Greenspan was the kingpin in the impoverishment of the American people. The middle class barely exists today, though the barrage of government spending prolongs the illusion of stability. As Federal Reserve chairman, Alan Greenspan’s pronouncements were sacrosanct. He told the American people they were getting richer when they were becoming poorer. It is axiomatic that when savings are depleted and debts are rising the person, or company, or government is poorer.

Q. How did Greenspan create an illusion of recovery, based on complex math-designed products, rather than the creation of goods and real jobs?

FS: The American economy’s recovery from the early 1990s was financial. This was a first. The recovery was a product of banks borrowing, leveraging and lending to hedge funds. The banks were also creating and selling complicated and very profitable derivative products. Greenspan needed the banks to grow until they became too-big-to-fail. It was evident the ‘real’ economy – businesses that make tires and sell shoes – no longer drove the economy. Thus, finance was given every advantage to expand, no matter how badly it performed. Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

The change in the American economy can be seen in how profits shifted from manufacturing to finance. In 1950, 59% of U.S. corporate profits were from manufacturing; 9% from financial activities. During the past decade (2000 -2008), 18% of profits were from manufacturing and 34% from finance.

Middle management, a staple of the middle class, had lost considerable ground during the early-1990s. Companies hollowed out middle management to cut costs. A large portion of those who were laid off never recovered financially. The same was true after the recession that followed the stock market bubble that popped in 2000, particularly among technology workers. Many have never recovered.

Q. What role did Greenspan play in the financialization of the economy?

FS. He cut the fed funds rate from nearly 10% in early 1989 to 3% by late 1992. This was the platform from which the financial firms borrowed at low short term rates and invested at higher long-term rates. This also chased the middle class into the stock market. Net cash flows into stock-mutual funds rose from $8 billion in 1985 to $79 billion in 1992 and to $127 billion in 1993. In 1992 and 1993, money market funds suffered net outflows. This was unusual: individuals were pouring money into the stock market when their incomes were falling (according to the Census Bureau). In addition to incomes falling, so had returns on fixed investments. They were chased into the stock market by the Federal Reserve.

Q. Did Greenspan continue to influence destructive consumer behavior?

FS. Behind closed doors, at FOMC meetings, the Federal Reserve Open Market Committee] Alan Greenspan was told (in 1994) by Federal Reserve governor Lawrence Lindsey: “[T]he non-rich, non-old live paycheck to paycheck, quite literally.” In 1995: “[T]here has been a lot of easing of credit terms. At some point this is going to stop.” In 1996, Lindsey lectured Greenspan: “I think there is a long-term social cost we are going to pay from all this…. [T]he price we are paying is the increasing fragility of the underlying financial structure of the household sector.”

How did Alan Greenspan respond? “[T]his big increase in installment credit” is a product of the mortgage market. “[L]arge realized capital gains…have been financed in the mortgage market. Those funds are going disproportionately into the financing of consumer durables.”

That was in 1996, when he told the FOMC: "I recognize that there is a stock market bubble problem at this point.... We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” He soon retreated and claimed central banks could not see a bubble until it popped. Greenspan needed the stock market bubble to support the economy. Greenspan was no dummy when it came to enticing the public to speculate when interest rates fell. Again, behind closed doors, to the FOMC: “The sharp decline in long-term yields has struck me as quite extraordinary.... [W]e are getting issues of 100-year bonds…. The fact that some borrowers are issuing these bonds is terrific. Until you get somebody dumb enough to buy them...."

Q. Has Greenspan learned any lessons from the stock market bubble?

FS. He certainly remembered how to lure the public into an inflating bubble: cut interest rates. The platform for wild housing speculation was the fed funds cut from 6.5% in 2001 to 1.0% in 2003. Money always chases the rising asset class, especially when so much of the money is superfluous to the “real” economy: From the time Greenspan was named Federal Reserve chairman until he left office, the nation’s debt rose from $10.8 trillion to $41.0 trillion. The “real” economy only grew by a fraction of that rate-of-growth. Alan Greenspan had turned the country into a gambling casino.

The median cost of an existing, single-family house in California rose from $237,060 in 2000 to $542,720 in 2005. We can see the consequences are spreading far beyond the housing market. The state of California is cutting costs by laying off workers, not fixing sewers, and plans to release 40,000 prisoners. California leads the other states in trends. Greenspan’s legacy will be how he turned the United States into a third world country.
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Re: Politics and hungry lawyers help abuse the system for gain

Postby admin » Thu Sep 17, 2009 6:10 pm


Sept 18, 2009

Iris Evans
Alberta Finance and Enterprise
208 Legislature Building
10800-97 Ave
Edmonton, AB T5K 2B6

Re: Petition to “come clean or resign”

Dear Mrs. Evans,

I write to you further to your letter of Aug 12, 2009. It relates to more than a billion dollars of substandard investments that have been sold into our Alberta economy, with the help of your Alberta Securities Commission, (ASC) and legal exemptions granted by this Commission to allow our provincial laws to be bypassed or ignored.

You state in your letter to me that your deputy minister Robert Bhatia addressed the question of “what public interest” is served when granting legal exemptions to financial corporations? The specific cases (to narrow it down for a public inquiry request under the Provincial Inquiries Act) were limited to the approximately twenty legal exemptions granted to sellers or manufacturers of Asset Backed Commercial Paper, and commission rebating (commission kickbacking) exemptions granted to Assante’s proprietary mutual funds.

Out of several thousand legal exemptions (found on the ASC web site) for which the very same questions could and should be answered by you, these two cases are significant enough, damaging enough, and documented well enough to this justify public inquiry. One case has allowed $800 million to be put into the pockets of an investment firm at the expense of its trusting clients, while the second case has resulted in $32 billion dollars disappearing from the pockets of the public, and appearing in the pockets of financial service providers.

A public inquiry will, in my opinion, show a damaging incestuous relationship between the financial services industry and our government securities regulator (ASC). As our Minister of Finance you should not be hiding from this issue as you now appear to be doing but rather moving forcefully towards honest accountability.

Again, for clarification, the questions unanswered by you are:

What possible public interest is served by taking money (by a Crown Corporation) in exchange for allowing our financial laws to be violated or ignored? This smacks of selling out the public interest for money. I ask this in general terms and in specific relation to the two cases mentioned for public inquiry.

Why are special deals to exempt our laws done without public input and without public notice when known toxic products or tainted investment advice are then passed to Alberta consumers?

Why does it appear, that despite numerous notices to you, and over one billion gone in Alberta, ($32 billion in Canada overall) that your ministry seems more intent on protecting the ASC, or suppressing investigation into this matter, than in protecting the citizens of Alberta?

You state in your response to me that “I believe that Mr. Robert Bhatia, in his January 5, 2009 response sent on my behalf, addressed this issue”, when you refer to those public interest questions. Would you mind resending me the responses to those questions, in case I am misinformed, as I am unaware of them being addressed by your department in any way?

Here for your information is Mr. Robert Bhatia’s answer to this issue from his January 5, 2009 letter:

“In this particular situation (ABCP) it appears the commissions carefully considered the situation and acted properly in granting the exemptions.”

As you can see, Mr. Bhatia’s one line response in no way addresses the issues, or answers the public interest questions posed. In fact it appears to be more an effort to conceal or hide the full answers to those questions. You were copied his letter, but I gather that you are unaware of his lack of answers, and that you would like the Alberta public to be treated in a manner befitting honest and transparent disclosure. I therefore ask you once again, for at least the fifth occasion, to provide the correct information so that we can be assured that corrupt, inept or industry favoring behaviors have not infected our public financial agency, The Alberta Securities Commission.

I trust that you are up to this task, and that we will be provided access to the documents within the ASC that show what, if any, process was followed to ensure that the public interest was not compromised. In the event that this is not possible, I would ask you to convene a commission of public inquiry into allowing certain entities to bypass our provincial laws without notice to the public. A public inquiry specifically to investigate these questions.

In the event that this level of openness is not possible from your ministry, then I must respectfully ask that you resign your position as Finance Minister, as it will then be clear that you are unable to be truthful with myself, or with the Alberta public. These matters have caused billions of dollars to be siphoned out of our economy by legal trickery assisted by your securities commission. Your public service position would demand that you do the only right thing and turn over your portfolio to someone who can provide honesty and transparency in this most important portfolio of Minister of Finance. Our province and our economy can no longer afford the type of help that is coming from this current Ministry.

I await your proper response so that it can be posted in public view at one or more social justice web sites who fully support this request:

Yours Truly
Larry Elford
Former CFP, CIM, FCSI, Associate Portfolio Manager, retired
www.investoradvocates.ca 403 328-0391 403 393-4742

Starting today, there has begun a movement and a petition for the honest accountability requested in this letter. Please visit http://alfimi.epetitions.net/
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Re: Politics assists financial fraud against public

Postby admin » Tue Sep 01, 2009 2:04 pm

Here in Canada, we have a similar problem of lawyers feeding off the investment industry......advocate.

Madoff and the SEC's Revolving Door
The long-awaited investigative report by the Securities and Exchange Commission’s (SEC) Inspector General on how the SEC bungled multiple investigations of Bernard Madoff is set for release this week. Unfortunately, according to media reports, the long suffering investing public will not receive the report until the SEC itself has had a chance to review it.
The team that produced this report on one of the most long-running and convoluted frauds in the history of Wall Street included Inspector General H. David Kotz who came to the SEC-IG post in December 2007 after five years as Inspector General and Associate General Counsel for the Peace Corps. The Deputy Inspector General, Noelle Frangipane, also came to the SEC from the Peace Corps where she had served as Director of Policy and Public Information.
This lack of Wall Street cronyism by the top two in the Inspector General’s office might have been refreshing to some in Congress and compensated for their not knowing the difference between puts and calls and peaks and troughs and the intricacies of Mr. Madoff’s split-strike conversion strategy (he splits with your money while converting you to a pauper). But the background of the member of the team heading up the Inspector General’s Office of Investigations, J. David Fielder, should have rang serious alarm bells to Congressional investigators.
For the ten years leading up to July 2007, J. David Fielder worked for the SEC as a Senior Counsel in the Division of Enforcement. In February 1999, he moved to the Division of Investment Management, first as Senior Counsel on the Task Force for Adviser Regulation, then as Advisor to the Director. In November 2000, SEC Chairman, Arthur Levitt, appointed Fielder Counsel to the Chairman.
In July 2007, Mr. Fielder was invited to join the corporate law firm, Haynes and Boone LLP, as a partner. In other words, Mr. Fielder’s government issue rolodex filled with the names, home numbers and email addresses of his colleagues at the SEC along with the investigatory matters in his head is deemed fungible currency among corporate law firms and can be freely exchanged for partner status, instantaneously moving one from the lowly wages and attendant lifestyle of public servant to the rarefied bracket and luxuriant trappings of corporate law firm partner.
But what happened next is where things get interesting. In March 2009, just as the SEC Inspector General was hot in pursuit of Madoff aiders and abettors, Mr. Fielder gave up his lucrative partner status at Haynes and Boone to accept the lowly post of Assistant Inspector General of Investigations, working under a boss from the Peace Corps. In other words, he gave up big bucks for a demotion at the SEC.
What Mr. Fielder did might not raise alarm bells were it not happening on a regular basis throughout the corridors of Washington and Wall Street. To understand the implications, this maneuver deserves an appropriate name. A revolving door is assumed to mean one gets all the right connections as a public servant and cashes them in to the highest bidder in private industry. That concept doesn’t typically entertain the door revolving back to public servant status. On Wall Street, they call a maneuver like that a round trip: you buy 100 shares and eventually sell the same 100 shares. You end up back where you started: a round trip.
Just how many lawyer round trippers are involved in the Madoff investigation? Enough to raise a strong stench of circular corruption.
Linda Chatman Thomsen left the SEC in February and has now returned to the corporate law firm that represents many of the largest Wall Street firms, Davis Polk & Wardwell LLP. Ms. Thomsen, who served as head of Enforcement at the SEC, also achieved partner status in this round trip. Ms. Thomsen is married to Steuart Hill Thomsen, a partner in the law firm, Sutherland Asbill & Brennan LLP, which brags as follows in its brochure: “Many of our financial services attorneys have worked in the federal government, including regulatory agencies such as the SEC, FINRA and the Department of Justice.” Mr. Thomsen represents “many in the financial services industry” including “securities fraud cases.”
Linda Thomsen’s February 4, 2009 appearance before the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises left Chairman Paul E. Kanjorski (D-PA) and Committee Member Gary Ackerman (D-NY) smoldering over her smug attitude and refusal to answer questions. Congressman Ackerman erupted at one point, telling Ms. Thomsen and her colleagues: “You have single handedly diffused the American public of any sense of confidence in our financial markets if you are the watchdogs…”
Congressmen Kanjorski and Ackerman’s outrage was set off by earlier testimony that day from whistleblower Harry Markopolos who presented the multi year, documented complaints he had filed with the SEC advising that the Madoff operation was a giant Ponzi scheme, without any serious action on the part of the SEC. Markopolos said the agency “roars like a mouse, bites like a flea” and “when an entire industry you were supposed to be regulating disappears due to unregulated, unchecked greed, then you are both a captive regulator and a failed regulator….”
On May 14, 2009, Wayne Jett, Managing Principal and Chief Economist of Classical Capital LLC summed up Ms. Thomsen’s more recent SEC tenure as follows in a published letter to the SEC:
“As SEC's director of enforcement, Thomsen presided over the firing of her investigating attorney, Gary Aguirre, in 2005 shortly after Aguirre disclosed to Paul Berger, Thomsen's immediate subordinate, evidence of insider trading by a hedge fund. Berger learned that Aguirre's evidence pointed to Wall Street player John Mack [the head of Morgan Stanley] as the "tipper" in insider trading by Pequot Capital, a major hedge fund. Berger fired Aguirre and closed the investigation of Pequot…
After a statute of limitations expired foreclosing further action against Mack, Berger resigned from the SEC to accept a position with a major Wall Street law firm -- the same law firm which had contacted the SEC on behalf of investment bank Morgan Stanley to inquire whether Mack was exposed to any pending investigation. Berger pursued his new position as he exercised authority in the Pequot investigation and in the inquiry by Morgan Stanley.
Two Senate committees investigated Aguirre's firing and a joint minority report found appearances of impropriety. The report was followed by resignations of the SEC's inspector general, chief economist and three commissioners. A new SEC inspector general investigated and recommended disciplinary action against Thomsen for her conduct in the Pequot/Mack/Aguirre matter. But the Enforcement staff issued its own press release denying misfeasance. Commissioners voted to take no action against Thomsen despite the inspector general's report, and laudatory comments followed her eventual resignation.
In other words, if you’re only a domestic diva like Martha Stewart, SEC round trippers may see fit to throw you to the wolves. If you’re a major Wall Street firm generating tens of millions in billable hours to round trippers and their legal colleagues, you may get a gift-wrapped get out of jail free card.
This isn’t just my suspicion. U.S. District Court Judge Jed Rakoff smelled something fishy in the August 3rd deal the SEC cooked up with Bank of America. The Judge refused to approve what he perceived as a measly SEC settlement of $33 million in a lawsuit over Bank of America withholding from investors information that it had approved of Merrill Lynch paying out billions of dollars in bonuses as part of its rescue acquisition of the firm. (Both firms required life support from the public purse known as TARP.) Bloomberg News quotes Judge Rakoff as follows: “I would be less than candid if I didn’t express my continued misgivings about this settlement at this stage…When this settlement first came to me, it seemed to me to be lacking, for lack of a better word, in transparency. I did not know much about the facts from the complaint. I did not know much, or really anything, about the basis for the settlement.”
That was the same view held by the Congressional questioners in the Madoff matter at the February 4, 2009 dust up with top SEC officials. After many rounds of pointed questions produced unresponsive answers, round tripper Andrew Vollmer, then Acting General Counsel of the SEC, explained why. He and his fellow SEC panelists were claiming executive privilege. This position elicited the following outburst from Congressman Ackerman: “Your value to us is useless…Our economy is in crisis, Mr. Vollmer. We thought the enemy was Mr. Madoff. I think it’s you…you were the shield…You come here and fumble through make believe answers that you concoct and attribute it to executive privilege….”
On April 2, 2009, another of Wall Street’s favorite law firms, WilmerHale, announced that Andrew Vollmer would be returning to the firm as a partner. According to the press release, before joining the SEC, Vollmer was a vice-chair of WilmerHale’s Securities Department.
The idea that highly paid corporate lawyers have an insatiable altruistic bent to periodically serve as low wage staffers at the SEC is worthy of its own Congressional hearing. Any serious reading of the facts will likely prove these lawyers are going to protect that big Wall Street firm that represents their next big pay day and fast track to partnership.
And just what does the Madoff fraud have to do with the big firms on Wall Street? The multi billion dollar proceeds of the fraud were wired in and out of JPMorgan Chase where Madoff maintained his firm’s account. Also, Madoff partnered with Citigroup’s Smith Barney, Morgan Stanley, Merrill Lynch and Goldman Sachs to compete head on with the New York Stock Exchange in a venture called Primex Trading as reported here at HYPERLINK "http://www.counterpunch.com/martens01152009.html" CounterPunch on January 15, 2009.
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at HYPERLINK "mailto:pamk741@aol.com" pamk741@aol.com
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Re: Politics assists financial fraud against public

Postby admin » Thu Aug 20, 2009 3:26 pm

alberta finance 20 exemptions jpeg pg 1.jpg
Ponoka News
Aug 2009

Adam Eisenbarth

Something about the Alberta government isn’t sitting right with one man
from Lethbridge.
Larry Elford of Visual Investigations is imploring Albertans to wake up
and start making the provincial government accountable for their
actions, and he has plenty of evidence to back up his allegations.
Elford has no background in politics but has extensive knowledge of
“toxic investments” that have cost investors millions of dollars. He
wants answers from Finance Minister Iris Evans but has yet to receive
Elford says several legal exemptions have been made on several occasions
so the government can turn around and make money off a fee.
“If you wanted to go and rob a bank, that’s against the law, you can’t
get permission to do that, but if a bank wants to rob you, you can go
and get permission to change the laws and sell something that is
otherwise illegal and all they have to do is prove that it’s in the
public interest in some way and they won’t answer that question.”
Lacombe-Ponoka MLA Ray Prins immediately shot down the accusations.
“This sounds really crazy, I won’t even comment on this.”
Prins also mentioned that several accusations are often thrown around
without any truth to them, and he has no knowledge of the toxic
investments and legal exemptions.
“I’m all for upholding the law.”
Finance Minister Iris Evans could not be contacted for explanations as
she was out of town.
Elford insists investment plans with no value have made their way into
Alberta, thanks to the irresponsibility of the government.
“The Alberta Securities Commission has 100 pages of legal exemptions on
their website. So that’s 100 pages of approximately some several
thousand times that they have exempted the law to a financial company
and they won’t tell you why they’ve done that and they won’t give you
any public notice of it because what they’ve done has affected your
retirement. You could have mutual funds, a royal trust, a bond or
anything in your investment portfolio. It could have not met our laws,
applied for it and received an exemption to get around our laws and you
could be the proud owner of that and they don’t have to tell you.”
Elford also has a letter from Alberta Finance that says there have been
legal exemptions to about 20 issuers.
“So they had applications from 20 different financial groups that were
packaging up this crap to sell to the public and they had to go through
the regulators and say, ‘This stuff doesn’t meet your requirements but
can we please have permission to violate your law?’
So why would the Alberta government allow these investments into the
province? Elford says the government is simply being irresponsible with
its power.
“The Alberta government earned $24 million last year, selling fee
revenue. One of those fees is selling permission to violate our law. I
can’t balance that with logic. How do we sell permission to violate our
Elford says the toxic investments have cost the University of Calgary
$18 million, the City of Lethbridge $32 million and the Alberta Treasury
Branch nearly went under.
“The Alberta Treasury Branch, they were a failed institution after
putting 47 per cent of their money, your deposits, into toxic
investments that have no value. There’s been over $1 billion put into
that, it’s in the auditor general’s report.”
Elford says the cost of bailing out the Alberta Treasury Branch was a
major one, and it is likely part of the reason for Alberta’s recent
“So how do we have something that could have brought down the entire
Alberta Treasury Branch sold into Alberta when it didn’t meet our laws
to start with? That’s all they have to answer to and they won’t say.”
Elford has plenty of experience in the financial services. He had a
20-year career in the industry and he is hoping to give Albertans an
idea of the money woes the government is causing.
“Ive got an application in with the Alberta government to get a
provincial inquiry under the Provincial Inquiries Act. They don’t want
to have to investigate themselves so there’s not a lot that’s going to
happen there.”
Elford is doing his best to get through to the government as well.
“I’m going to ask them if they will explain themselves. They aren’t
answering questions very openly or very transparently and that’s an
answer unto itself. Unfortunately there’s an imbalance of power between
them and myself. I spent 20 years in the financial services industry, 17
years with RBC, so I’ve been in the business and I know that side of it
and I’ve found honesty is more often spoke of and less often practiced.
That’s not surprising, I think we all know that.”
Elford says the government has gone too far and Albertans will be paying
for it.
“It’s a sad tragedy when even good intentioned people get into power.
There becomes this ‘I will do anything to stay in power’ mentality, and
even if that means violating your own principles, you want to stay in
power. I have no political stripes whatsoever but I see a government
that’s in power 32 years and they don’t have to answer to anyone. They
are a power unto themselves and I feel there’s got to be a way to stand
up and ask them a question, even if it’s just to embarrass them. That’s
the only result I can see.”
Elford continues his movement to find an answer, one that he knows the
government won’t answer.
The question is simply Why? Why would you do that? And the answer has
been ‘None of your damn business.’”
Elford encourages people to check his website, breachoftrust.ca which
includes his appearance on CTV W5 and his Ottawa testimony.
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Re: Politics assists financial fraud against public

Postby admin » Thu Aug 06, 2009 7:54 pm

1. A recent letter to premier Ed Stelmach
Jan 17, 2009

To: Premier Ed Stelmach,

In a Jan 15th Globe and Mail newspaper article by Kevin Carmichael of Ottawa, you were quoted as saying that there has not been a scandal in the Canadian markets that would justify having government focus its energy on overhauling the securities system instead of the economy.

The Alberta Securities Commission (ASC) has knowingly allowed tainted investments to be sold in Alberta. Investments that did not meet our securities laws. Iris Evan’s department has admitted that there were 22 exemptions to our laws to facilitate the sale of ABCP and short term commercial paper. This has hurt our economy.

These tricks were done with the help of our very own crown corporation, the ASC, which calls into question the public interest value of this agency.
They were done in secret, which is why you may not be aware of them. Back-room deals, done between investment firms and the ASC, for a fee. There was no public notice, nor public input into allowing our laws to be violated. The ASC and the investment firms have effectively hidden vital information from the public on investments which have ended up costing billions of dollars. A scandal, done in secret is still a scandal.
The total economic costs of financial frauds and crimes against Canadians is growing to somewhere between $50 billion and $100 billion per year due to a failed securities regulatory system. (source, BREACH OF TRUST) These numbers are equal to two or three times the budget for Alberta. It is an economic tsunami, and you must deal with it.
The economic costs of frauds, abuses and crimes like these, against Canadians is, according to government of Statistics Canada and Justice Canada, greater than the costs of each and every other crime in Canada. Imagine ignoring financial damage sufficient to equal every robbery, auto theft, property crime, murder, mugging, break and enter etc., etc.

I have submitted to your finance minister, Iris Evans, two (2) case studies recently, that clearly illustrate how the Alberta Securities Commission has aided in pulling the wool over the eyes of the public while damaging the public. Damaging our economy.

In the interests of full, public discourse, I am asking you to open a provincial inquiry into these two case studies to show the public if there is any cause for concern. You will discover that there has been more than one scandal that justifies an overhaul of the securities system.

I thank you for your time and for your timely response to this matter on behalf of all Albertans.

Larry Elford (former CIM, CFP, FCSI, Associate Portfolio Manager, retired)
Executive Director of investoradvocates.ca
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Re: Politics assists financial fraud against public

Postby admin » Mon Aug 03, 2009 8:05 pm

Criminal Negligence (C.C.C. section 219 (1))

Criminal negligence

219. (1) Every one is criminally negligent who

(a) in doing anything, or

(b) in omitting to do anything that it is his duty to do,

shows wanton or reckless disregard for the lives or safety of other persons.

Definition of "duty"

(2) For the purposes of this section, "duty" means a duty imposed by law.

(applies to regulators and ministers responsible for those regulators who ignore their duties and instead serve a different master...........sometimes the master they choose is money, sometimes career advancement, etc)
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Re: Politics assists financial fraud against public

Postby admin » Wed Jul 15, 2009 4:35 pm

News Release from www.investoradvocates.ca

Larry Elford

Lethbridge Alberta

FOLLOW THE MONEY to find a partial cause of recent layoffs at the
University of Calgary

Starting at the layoffs at U of C, caused partially by a shorfall of
some $14 million dollars in their finances.

Step back one step to recall how they lost some $18 million in ABCP
(toxic Asset Backed Commercial Paper) which was sold to them as a
sound investment by an investment firm (s).

Step back one step from this to see that these investments DID NOT
meet Alberta Securities laws, and in fact had to be "exempted" from
the law in order to be sold in Alberta.

Step back one step to see that the ASC (Alberta Securities Commission)
sold these firms (Source Alberta Finance and Enterprise Dept) legal
permission slips to skirt our laws, thereby knowingly allowing tainted
and illegal investment products into our economy.

Step back one step to learn that the ASC earned up to $24 million in
fee revenue in 2009 from things like these exemptions (and other fees).

Step back one step to learn that Alberta Finance and Enterprise (in
charge of the ASC) is aware of these exemptions, and aware also that
they have had to bail out other institutions (Alberta Treasury
Branches were risking failure recently after placing 47% of deposits
into these failed investments, and prior to the Alberta Government
stepping in to save them)

Step back one step to ask Iris Evans why she is covering up these
issues and why she refuses to be accountable and responsible for
answering "what public interest is served" by allowing these
exemptions to be done to Albertans, behind closed doors.

It smacks of negligence and breach of trust by public officers, and in
light of the world financial crisis, should we be surprised to learn
that some financial regulators have crossed over the line and become
captured by the financial industry?

Iris Evans is avoiding answering the above questions. What is she
hiding? Where does the buck stop in Alberta?

Follow the money. Find the failures.

Larry Elford (former CFP, CIM, FCSI, Associate Portfolio Manager,

www.breachoftrust.ca doc film journey of similar "tricks of the
financial trade" learned during twenty years inside the industry
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Re: Politics assists financial fraud against public

Postby admin » Fri Jul 10, 2009 8:20 am

How to pay off a government agency, exempt yourself from the law in Alberta, (or any other province for that matter) and collect big $$ at public expense.
Third request for public interest answers from Alberta Finance Minister Iris Evans.

While I now know the difference between fraud and theft, learned in the last few years, after I left the investment industry, I am still in the dark about the differences between a commission, a fee, a kickback or a bribe.    Why might this be important?
It might be important to find out whether our current government is selling out the public interest for money. I have written before about the approximately 20 times (source Alberta Finance) that our crown corporation, the Alberta Securities Commission has given permission to sell toxic investments in Alberta.  I have asked both the ASC and the Alberta Finance department to provide a reason why these firms are allowed to skirt our laws.  They cannot seem to answer this question.  Not only did they sell permission to violate our laws for the recent Asset Backed Commercial Paper, as well as Concrete Equities Investments, which is now crumbling, but there are several thousand other examples of such legal tricks played upon the public on the ASC web site. Are you aware, as an investor that some of the investments you own did not have to follow our securities laws, and that your government allowed this for money?

How do we discover whether people running our finance department, or in the ASC, are simply inept at protecting the public interest, or corrupt and selling the public interest? 
The ASC earned $24 million in 2009 from fee revenue and this included fees for selling legal exemptions. (ASC 2009 Annual report) Selling permission slips to allow our laws to be violated by investment firms!
They can’t seem to find a public interest reason for doing this.  Is it all about money, and nothing about safety?  Is it a fee, a commission, a kickback, or a bribe by the investment industry?
This will be my third request to Iris Evans and Alberta Finance to see if they are willing to shed the disinfectant of sunlight on the practice. It now goes on behind closed doors.   I won’t go into negligence, breach of trust, and the other criminal aspects, but I notice them being involved in other cases.
For example, Allen Stanford was indicted and jailed recently for his ponzi scheme, and one of the bank regulators who should have stopped this, but looked the other way, was also charged.  In another case, an Austrian fund manager, Sonja Kohn, is now being investigated for receiving more than $40 million in kickbacks for helping funnel money to Bernie Maddoff’s ponzi scheme.  I am sure she would call these payments, “commissions”, and not bribes.
From the bottom of the economic food chain, where the salesman on the street is operating, to the top with Iris Evans in charge of Alberta Finance and the ASC, does it have to be a pathological pursuit for money?  Where are the professionals?  Where are the public servants?  Iris Evans, what public interest is being served by granting legal exemptions like this (with no notice to the public)? When will you own up to what is on the public record, recognize it and take responsibility?  Third request for an answer from Iris Evans.
Larry Elford, (former CFP, CIM, FCSI, Associate Portfolio Manager, retired)

(advocate comments, see below for what Iris Evans has been busy with as she "serves" the public, while we pay for her public service in more ways than one.
(from www.eyeswideopeninalberta.blogspot.com)

As Health Minister she globe-trotted on a pretty regular basis, yet Albertans have yet to see any benefit from the thousand upon thousands of public dollars she spent seeing New Zealand, Australia, France and the U.K. (at a cost of over $20,000 – and that’s just for France and the U.K.), Switzerland, Sweden, Washington (and don’t fool yourself that this would be an inexpensive trip – it came in at just under $12,000. – a relatively CHEAP outing for Minister Evans). As employment Minister Iris had some lovely adventures, spending your $32K plus to visit the Philippines, Japan and China October 5 – 19 2007, just shy of $36K to see Paris, France. London, England. Berlin, Germany. Amsterdam, Holland from April 19-29 in 2007, and a mere $14,419.72 in Dallas from March 21, 2007 to March 27, 2007.
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Re: Politics assists financial fraud against public

Postby admin » Thu May 07, 2009 6:30 pm

May 7, 2009 questions for a public meeting with Iris Evans, Alberta Finance Minister. (I will post her answers tomorrow after presenting her with these questions)

My name is Larry Elford and I have three questions for Mrs. Evans.

By way of preamble to those questions, I refer to Bank of Canada governor Mark Carney, who yesterday in our paper said that “the Central Bank had warned years in advance about the risks in the $32 billion dollar ABCP market......” It was ignored.
Those warnings could have saved us billions. Could have saved the City of Lethbridge $32 million, treasury branch would not have placed nearly half of all customer deposits into these products. University of Calgary might not have given away $18 million.

Fast forward, and we learn that the Alberta Securities Commission, which you are responsible for, gave away the public interest, the interest of protecting Albertans from these known toxic investments when it allowed them into our province. The Alberta Securities Commission went so far as to accept payment from about 20 investment companies to allow those investment companies to sell these bad investments which, without this payment to the ASC, would otherwise be illegal. A crown corporation accepting money to allow certain people to violate our laws???? I can only express shock and dismay at the thought of this.

Would we accept toxic products sold into our food system? Would we accept toxic infections entered into our health system? Here it appears that we knowingly, and in exchange for a payment of money, accepted infected investments into our financial system.

My questions are these:

What possible public interest is served by accepting money in exchange for allowing our laws to be violated?

Why are such transactions done outside of public view, with no ability to accept public input and no public notice when toxic products are sold to consumers with the aid of having purchased a legal pass?

Why does it appear, that despite numerous notice, and billions lost, that your ministry seems more intent on protecting the ASC, or suppressing investigation into this matter, than in protecting the public of Alberta.
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Re: Politics assists financial fraud against public

Postby admin » Thu May 07, 2009 9:38 am

May 7, 2009

Dear Nova Scotia Voters

I write to you from Alberta, where we have learned a painful lesson on how our regulators and politicians have sold out our financial interests for their own political interests.

The recent economic crisis is something we all know about. What you may not know, however, is that the tainted or toxic investments, which migrated here from poor loans in the USA, were allowed into this country like a case of the swine flu, by the very protective agencies that are supposed to keep these out.

One must realize that it was known in advance, that the Asset Backed Commercial Paper (ABCP) toxic investments were infected with bad credit, which could cause a financial pandemic. How did officials know this in advance you ask? Because they did not meet your Nova Scotia Securities Act laws designed to protect your citizens from financial flu. The only way in which these toxic investment products were allowed into your province (as they were in my province of Alberta) was by means of an exchange of money, paid to the Commission, in return for what is called a “legal exemption”, a free pass, so to speak, for an investment firm to violate your laws.

This is done regularly without your knowledge. If you search the web site for the Nova Scotia Securities Commission ( http://www.gov.ns.ca/nssc/exemptionsCO.asp ) you will see how often your public protective crown corporation have traded a sum of money for allowing an investment firm to violate your laws. My Alberta Finance and Enterprise department says that provincial laws were exempted “about twenty times” to allow short term commercial paper to be sold, without meeting our laws. You will find roughly the same happened in your province. The damage here was in the billions, and caused our once strong province to be now running in the red.

Your securities commission states in the first line of their mandate, that “Our mission is to protect investors in Nova Scotia...........”, and this mission is overseen and backed up by your Justice Minister. A justice minister who I am not aware of, but who is probably campaigning for his or her job at this moment.

You might want to ask your justice minister, “ what possible public interest is served by selling out the protections of our laws, to financial firms”? I have tried with thirteen provincial and territorial securities commissions and ministers responsible, and so far, they are dodging and weaving. Perhaps one in your province might inform you.

Best regards from Alberta, and good luck with your election.

Larry Elford

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Re: Politics assists financial fraud against public

Postby admin » Wed Apr 29, 2009 9:44 am

I can't claim to know a damn thing about politics, and I am sure that I do not want to, but here is what it feels like from a layperson.

It feels like the country (every country) is crying out for leaders, and we keep ending up with liers. We hope and pray for people in office, who will do everything possible to protect the public, and instead we find politicians who will say and do everything possible to protect their own positions. Not healthy to any country.

I applaud the election of Obama in the USA, as it seems clear from the contrast between he and George Bush that they have finally started going in the right direction. It seems they have gotten an elected official who is willing to try and do the right thing. To try and speak the honest truth. I just do not see that here. Despite best intentions and perhaps best efforts of those who get elected, efforts to lead, serve, help the public interest. Despite these best efforts, it appears that once elected, they enter a different world. A world of gamesmanship, of political tricks. A musical chairs game where one must constantly play a game of deception to retain your chair. We are certainly starting to pay the price for such failed leadership.

Eventually, someone will figure it out. They will realize how temporary and how wrong it is to go into public service, and then to use this public position to serve yourself. A political hero will emerge. We hope sooner rather than later.

I think the world is a bit tired of middle aged white men, (and women) who will lie, cheat and steal to get whatever it is that they want. We saw it in finance, we are tired of it in our politicians.
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Political assists in financially abusing the public

Postby admin » Mon Apr 13, 2009 3:22 pm

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
by Simon Johnson
The Quiet Coup

ONE THING YOU learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Click the chart above for a larger view

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor
Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis
The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out
Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths
To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

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