How They Got Away with It

How They Got Away with It: White Collar Criminals and the Financial Meltdown

SUSAN WILL
STEPHEN HANDELMAN
DAVID C. BROTHERTON
Copyright Date: 2013
Pages: 384
https://www.jstor.org/stable/10.7312/will15690
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  • Book Info
    How They Got Away with It
    Book Description:

    A team of scholars with backgrounds in criminology, sociology, economics, business, government regulation, and law examine the historical, social, and cultural causes of the 2008 economic crisis. Essays probe the workings of the toxic subprime loan industry, the role of external auditors, the consequences of Wall Street deregulation, the manipulations of alpha hedge fund managers, and the "Ponzi-like" culture of contemporary capitalism. They unravel modern finance's complex schematics and highlight their susceptibility to corruption, fraud, and outright racketeering. They examine the involvement of enablers, including accountants, lawyers, credit rating agencies, and regulatory workers, who failed to protect the public interest and enforce existing checks and balances. While the United States was "ground zero" of the meltdown, the financial crimes of other countries intensified the disaster. Internationally-focused essays consider bad practices in China and the European property markets and draw attention to the far-reaching consequences of transnational money laundering and tax evasion schemes. By approaching the 2008 crisis from the perspective of white collar criminology, contributors build a more general understanding of the collapse and crystallize the multiple human and institutional factors preventing capture of even the worst offenders.

    eISBN: 978-0-231-52766-8
    Subjects: Law, Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. ACKNOWLEDGMENTS
    (pp. xi-xii)
  4. INTRODUCTION
    (pp. xiii-xx)

    In a 2011 New York Times article, the authors ask why no bankers have gone to prison for activities related to the financial meltdown (Morgenson and Story, “In Financial Crisis, No Prosecutions of Top Figures,” April 14, 2011). Such a question, raised by one of the leading newspapers in the United States, goes to the heart of this volume: How did the movers and shakers of a world financial and economic system make the decisions they did, creating untold social harm to millions, and yet fail to be held accountable by our various governments?

    This book grew out of an...

  5. Part I Roots of the Crisis
    • 1 WALL STREET: Crime Never Sleeps
      (pp. 3-25)
      DAVID O. FRIEDRICHS

      The global economic and financial crisis that began in 2007, and reached an especially intense apex in the fall of 2008, has been widely described as the worst such crisis since the Great Depression of the 1930s. If the financial meltdown has multiple dimensions and involves a variety of causes, fraudulent misrepresentations in many different forms and on many different levels were clearly at the center of this catastrophe.

      Analysis of, and commentary on, the global economic crisis has poured forth from a wide range of sources; and in the academic realm, in particular, from historians, economists, political scientists, law...

    • 2 THE LOGICS OF FINANCE: Abuse of Power and Systemic Crisis
      (pp. 26-44)
      SASKIA SASSEN

      The end of the Cold War launched one of the most brutal economic phases of the modern era. Following a period of Keynesian-led relative redistribution in developed market economies, a mix of government action and corporate economic interests led to a radical reshuffling of capitalism. Two logics organized this reshuffling. One is systemic and gets wired into most countries’ economic and (de) regulatory policies—most important, privatization and the lifting of tariff s. We can see this in the unsettling and de-bordering of existing arrangements within the deep structures of capitalist economies. This unsettling took place through the implementation of...

    • 3 AMERICA’S PONZI CULTURE
      (pp. 45-67)
      SUSAN WILL

      Writing about the American economy for Harper’s during the 1980s, L. J. Davis submitted article after article about Ponzi schemes despite his editor’s complaints. “It’s the same story over and over again,” the editor said. “I can’t keep printing the same story. Can’t you find something that’s not a Ponzi scheme?” (Davis 2002).

      In fact, Davis saw what most people failed to see or did not want to see: Ponzi schemes were everywhere. Clever operators like Bernard Madoff, R. Allen Stanford, and—much earlier—Charles Ponzi represented the most iconic examples. But they were small fries compared with the smoke-and-mirrors...

    • 4 BERNIE MADOFF, FINANCE CAPITAL, AND THE ANOMIC SOCIETY
      (pp. 68-82)
      JOCK YOUNG

      Bernie Madoff was, before he went to jail, considered a solid and reputable citizen. A man well thought of in the world of finance, he worked out of offices in the prestigious Lipstick Building at the corner of Third Avenue and East 53rd Street in midtown Manhattan, the world center of finance capitalism. He was for a time chair of NASDAQ and, as would later prove ironic, of the National Society of Security Dealers, which regulated members of his profession. A noted philanthropist, he lived in great luxury with a pent house apartment on the Upper East Side and houses...

  6. Part II Enablers of Fraud
    • 5 UNACCOUNTABLE EXTERNAL AUDITORS AND THEIR ROLE IN THE ECONOMIC MELTDOWN
      (pp. 85-103)
      GILBERT GEIS

      The SEC has been pelted, deservedly, with criticism for its abject failure to monitor the financial crimes and shenanigans engaged in by investment banks and other irresponsible entities whose reckless behavior collectively triggered what become known as “the Great Economic Meltdown.” The SEC, ideologically identified with the Republican Party, became an appetizing target when the Democrats came to power. The SEC’s negligent and overmatched chairman, Christopher Cox, had reflected the George W. Bush administration’s indifferent attitude toward the self-indulgent excesses of real estate brokers and financial institutions involved in the subprime lending racket and toward Wall Street investment firms that...

    • 6 AND SOME WITH A FOUNTAIN PEN: Mortgage Fraud, Securitization, and the Subprime Bubble
      (pp. 104-129)
      HAROLD C. BARNETT

      In 2006, an elderly African American couple lost their home to a foreclosure rescue scheme in Chicago’s North Lawndale neighborhood when a fraudulent subprime loan issued to Charlotte Delaney was used to strip their equity. Ms. Delaney was the office manager for the real estate agency that perpetuated the fraud. This loan, funded by subprime lender MILA (Mortgage Investment Lending Association) and securitized by Goldman Sachs, was one among many 2006 vintage subprime loans characterized by fraud and misrepresentation. It also was the subject of a lawsuit to return the property to the homeowners.¹ Following this loan from origination to...

    • 7 GENERATING THE ALPHA RETURN: How Ponzi Schemes Lure the Unwary in an Unregulated Market
      (pp. 130-148)
      DAVID SHAPIRO

      Why do Ponzi schemes flourish? Does it take a financial crisis, such as the one that overcame the U.S. economy in 2007–2008, to expose them? As the crisis grew, many Ponzi swindlers’ investment schemes were exposed as fictions when requests for redemptions from investors dwarfed available cash and access to capital. But many hedge and private equity fund investments also collapsed in value as underappreciated credit and market risks in these investments were recognized. The nature of today’s unregulated or lightly regulated market often makes the distinctions between outright fraud and high-risk vehicles hard to discern. The Ponzi manager...

  7. Part III Perverted Justice
    • 8 THE TECHNOLOGICAL ADVANTAGES OF STOCK MARKET TRADERS
      (pp. 151-170)
      LAUREEN SNIDER

      With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in the United States on July 21, 2010, the market-banking meltdown of 2008 appeared to have reached the final stage in the typical crisis-reform cycle.

      When such disasters occur, nations historically move from outrage to proposals for reform to legislation. Each disaster bequeaths its own “regulatory legacy” (Haines and Sutton 2003), and each new legislative response is hailed as “the” definitive, once-and-for-all solution. Thus, each of the corporate meltdowns in the recent past—the Great Depression of the 1930s, the now-forgotten collapse of the savings...

    • 9 WHY CEOS ARE ABLE TO LOOT WITH IMPUNITY—AND WHY IT MATTERS
      (pp. 171-177)
      WILLIAM K. BLACK

      The defining characteristic of crony capitalism is the ability of favored elites to loot with impunity (and be bailed out). Crony capitalism drives honest competitors from the market, makes democracy fail, and causes recurrent, intensifying financial crises (Akerlof 1970; Akerlof and Romer 1993; Black 2007; Black, Calavita, and Pontell 1995; National Commission on Financial Institution Reform, Recovery and Enforcement 1993; Pierce 1994).

      Savings and loan regulators learned the unique advantages of criminal prosecutions in the 1980s. In the Texas “Rent-a-Bank” scandal of the 1970s, two ringleaders—Herman K. Beebe and George Aubin—created a fraud network of fifty lenders that...

    • 10 THE FAÇADE OF ENFORCEMENT: Goldman Sachs, Negotiated Prosecution, and the Politics of Blame
      (pp. 178-202)
      JUSTIN O’BRIEN

      The degree of state intervention required to stabilize still-febrile capital markets in the United States has partially changed the enforcement dynamic in the prosecution of white collar crime. Exhortations by industry, backed by funded academic research, to policymakers that high levels of public and private enforcement needed to be curtailed (see, e.g., Committee on Capital Markets Regulation 2006, 32; 2007) on the grounds that a highly litigious culture threatened investor confidence, privileged overzealous enforcement, and contributed to a loss in prestige, have been demonstrated to be at best naive. In the United States, at least for now, the need for...

  8. Part IV Perspectives from Afar
    • 11 REAPPRAISING REGULATION: The Politics of “Regulatory Retreat’ ” in the United Kingdom
      (pp. 205-222)
      STEVE TOMBS and DAVID WHYTE

      As the contributions to this volume ably demonstrate, the current economic crisis is a result of a systemic uncontrollability in the international economy. Yet our understanding of how we have reached the present crisis has generally been framed within a macroeconomics that has consciously and systematically distorted what markets are, how markets work, and the role of regulation therein. Of particular interest is the framing of the idea of regulation in ways that separate states from markets, indeed subsuming the former into the latter within some crude zero-sum conception of power.

      In this essay, we offer a critique of the...

    • 12 HOW THEY STILL TRY TO GET AWAY WITH IT: Crime in the Dutch Real Estate Sector Before and After the Crisis
      (pp. 223-245)
      HANS NELEN and LUUK RITZEN

      By 2008, the impact of the U.S. financial crisis had reached across the globe. Stock markets in numerous countries fell drastically and large financial institutions collapsed or were bought out. Even in the wealthiest nations, governments were under pressure to come up with rescue packages for their financial systems. Although economists disagree on many aspects of the global financial crisis (GFC), there is widespread consensus that the collapse of the subprime mortgage market and the end of the housing boom in the United States had a ripple effect on the world’s industrialized economies.¹ As other weaknesses in the global financial...

    • 13 ECONOMIC AND FINANCIAL CRIMINALITY IN PORTUGAL
      (pp. 246-277)
      RITA FARIA, JOSÉ CRUZ, ANDRÉ LAMAS LEITE and PEDRO SOUSA

      While economists agree that a financial crisis such as the one that spanned the globe in 2008 is a characteristic of the market system, many believed that instruments to detect and neutralize its noxious effects without undermining the foundations of capitalism were well developed. But the macroeconomic instruments designed to combat instability in the “real economy” in fact proved unable to deal with the complexities that global access to complex financial products present to decision making, particularly when risks are concealed.

      Economic decision makers’ faith that the tremendous elasticity within the financial markets would dilute risk actually distorted the healthy...

    • 14 GREECE “FOR SALE”: Casino Economy and State-Corporate Crime
      (pp. 278-295)
      SOPHIE VIDALI

      In contrast to many other countries, the Greek financial meltdown in 2008 was tied not to a collapsing real estate market or a crisis in the banking system but to government deficit spending and illegal refinancing. A key contributing factor was the troubled relationship between the state and the private sectors that had evolved over the previous 20 years, which produced a shift in the state’s approach to economic crime. My hypothesis is that while the collapse of the real economy is connected to wider changes related to financial economic expansion and to privatization, these processes, in Greece, took the...

    • 15 FINANCIAL FRAUD IN CHINA: A Structural Examination of Law and Law Enforcement
      (pp. 296-314)
      HONGMING CHENG

      Financial fraud is increasing in both volume and complexity and, arguably, is now having a major impact on the lifeblood of China’s economy and society (Cheng and Ma 2009). Although official statistics are underdeveloped and unreliable in China, financial fraud has been described as “one of the most challenging areas of economic crime” by China’s Ministry of Public Security, the nation’s top police authority, and is expected to worsen with rapid economic development (Wu 2008). Some analysts suggest that bank fraud alone has cost Chinese banks more than $2.8 billion annually since 2000 (Zhou 2006).

      Although the total costs of...

  9. EPILOGUE: Can They Still Get Away with It?
    (pp. 315-332)

    What has happened in the years since the financial meltdown? Are we out of the woods? Has the debt crisis that long plagued the Third World now become one of the most significant problems facing the First World? What have we learned? Nelen and Ritzen, in this volume, claim that financial crises create both problems and opportunities. Have we taken advantage of the opportunities to restructure the regulatory environment to prevent a recurrence, or can they still get away with it? The financial landscape has been shifting rapidly ever since the U.S.

    subprime mortgage crisis and the collapse of Iceland’s...

  10. APPENDIX A SHORT (GLOBAL) HISTORY OF FINANCIAL MELTDOWNS
    (pp. 333-340)
  11. LIST OF CONTRIBUTORS
    (pp. 341-346)
  12. INDEX
    (pp. 347-364)