Why Is The S.E.C. Concealing Massive Citigroup Fraud?

Citigroup, the most insolvent bank ever to foul the earth, is being protected by the S.E.C.  We want to know why.

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Guest post submitted by Cheyenne, writer and producer of the soon to be released documentary, Bailout. Watch a trailer for Bailout here.

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What is the SEC hiding?

Part One

William Cohan of Bloomberg wrote a curious story last week, "Why does the SEC protect banks’ dirty secrets?"

It's a really good question.

Standing alone, however, Cohan's article is just another electric tile in a giant mosaic that flashes intermittently in a news cycle, briefly illuminating another piston or grommet in the Wall Street-Washington corruption machine before fading without impact.

But when coupled with other evidence, Cohan's piece, concerning the S.E.C.'s wholesale expungement of information from Citigroup documents in response to a Freedom of Inforation Act (FOIA) request, leads to what looks very much like a criminal conspiracy by Citigroup executives, up to and including Robert Rubin, to defraud the company's investor-clients on a scale that is nothing short of colossal.

In this light, the S.E.C.'s concealment effort on behalf of Citigroup--not its first, as we shall see--poses issues about the exact nature of the S.E.C.'s role with respect to financial crime, because neither "regulator" nor "crime fighter" applies under any reasonable interpretation of the evidence.

The questions raised here are both fair and viable. They’re fair because the S.E.C. elected to make a mockery of both the law it's supposed to follow and the public it's supposed to serve by redacting in their totality documents sought under the FOIA, leaving the inference of criminality to waft plume-like through its own stench. They’re viable because while the statute of limitations for criminal fraud may have run, the statute of limitations for conspiracy to commit fraud—a crime whose very essence, secrecy, precludes the statute from running in the first place—presents no such legal obstacle.

Part One examines the available evidence, which includes Cohan's article, the congressional testimony of former Citigroup risk officer Richard Bowen, and a lawsuit against Citigroup that the S.E.C. filed and immediately tried to settle--unsuccessfully--a year ago. Along the way, we'll see just how pernicious bailouts are to a functioning democracy.

Part Two will explore the potential ramifications of the S.E.C.'s failure to sweep its suit against Citigroup under the rug. The S.E.C.'s failure was due, almost laughably, to the random assignment of its case to Judge Jed Rakoff, a jurist whose revulsion at the S.E.C.'s corruption, already legendary, may well carry everyone involved into unchartered territory.

Cohan's Article About The S.E.C.'s Response to FOIA Requests Involving Citigroup Mortgages

Cohan’s particular focus was on documents that the S.E.C. produced relating to congressional testimony given by Richard Bowen. Bowen is the former Citi risk officer who told the Financial Crisis Inquiry Commission, among other things, that Citi sold MBS products despite knowing—based on information that Bowen provided to the top ranks of the company, including ex-CEO Robert Rubin himself—that huge swaths of mortgages owned by Citi were defective to the tune of between 60 and 80%.

To pursue Bowen’s revelations further, another Bloomberg reporter, Bob Ivry, filed FOIA requests with the S.E.C. seeking documents related to Bowen’s potent disclosures.

What Ivry likely hoped to discover was additional documentary evidence (beyond Bowen’s email to Rubin included with his testimony) that Citigroup officers, including Rubin, had defrauded purchasers of Citi’s MBS products by intentionally selling investments that Citi executives knew to be dogshit. (The term “dogshit” is used in accordance with Citigroup technical parameters for its investment products, which we’ll come to in a minute.)

What Ivry received in response, after a bit of wrangling, was a pile of documents notable only for their extensive redactions, i.e., blacked out content. The S.E.C. contends that the information that it’s concealing on Citi’s behalf qualifies as trade secrets.

The rub here isn’t whether or not the information satisfies the legal criteria for trade secret status. A bit of it probably does while the heft undoubtedly does not. What carries the trade secret assertion into the theater of absurd moral hazard isn't the nature of the information itself, but rather the fact that Citi is able to make the claim at all.

How Bailouts Cover Up Ineptitude and Potential Crime

Citigroup is the most pathetic TBTF bank in business, no mean feat among a herd of behemoths that is deathly ill. Citi exceeds its peers in just about every category you can think of associating with “broke bank” since the crisis began in 2008:

• Citigroup received the most TARP money, $45 billion, tying it with Bank of America as Wall Street's top welfare recipient known at the time
• Citigroup was alone among its peers in having its toxic assets, $306 billion of them, ring-fenced at taxpayers’ expense
• Citigroup received more secret loans from the Federal Reserve--$2.5 trillion—than any other bank, $500 billion more than Morgan Stanley, which Neil Barofsky informs us (via Ben Bernanke) in Bailout (the book, not the film) would have been the next domino to topple in the Fall of 2008
• Citigroup is the only bank that resorted to a reverse stock split, at 1-to-10, to put its share price back over $5, the low watermark for purchase eligibility among many institutional funds

When the crisis hit in 2008, Citigroup should have followed Lehman Brothers—or perhaps led it—into the morgue of corporate obesity. Citigroup posted losses that year of $27.7 billion, more than four times Lehman’s losses before it collapsed into dust during the third quarter, and yet Citi paid out $32.4 billion in compensation—the bulk of it in bonusesafter receiving the $45 billion welfare check.

And Citigroup’s figures that year, as pustulent as they appear, in all likelihood mask even deeper rot within the company. Compare Citigroup's valuations of its MBS holdings with those of another sick TBTF firm at the time, Merrill Lynch.

Merrill matched Citi’s loss with a $27.7 billion loss of its own, and its deteriorating corpus had to be kept alive by Hank “The Hammer” Paulson, who shoved it snugly within a warm Bank of America cavity.

Merrill's troubles reltated in no small part to MBS. In July 2008, Merrill sold $31 billion in mortgage-backed securities at 22 cents on the dollar. A 78% discount, while huge, was not at all unusual as the darkling reality of MBS assets materialized before a market that was sobering up after a very long binge. A few months earlier, Citadel had bought MBS at 27 cents on the dollar. And yet in this very market decline, Citi was marking equivalent investments at the imperial rate of 61 cents.

Of course, when Citi was appraising its MBS assets at nearly 3 times as valuable as those of the soon-to-be-ambulance-bound Merrill, and regulators were looking the other way (often at pornography rather than the raging crisis), no one knew that Richard Bowen would come before Congress and testify that Citigroup mortgages were 60% defective in 2006 and 80% defective in 2007, casting further doubt—this time from within the company itself—on Citi’s 61-cent MBS valuation.

Were Citi's incredibly rich valuations the product of accounting fraud? After all, the congressional repeal of mark-to-market accounting rules wouldn't occur until the following year. Or did Citi have some foresight about that event?

Threat of a Complete Financial Meltdown: IMF Report Points to Growing Instability

World Socialist Website
Nick Beams

Four years after the collapse of Lehman Brothers, the latest Global Financial Stability Report published by the International Monetary Fund (IMF) makes clear that the threat of a complete meltdown of the international financial system remains. And the dangers of such an event are increasing.

The report, issued earlier this week, began by noting that risks to financial instability had increased since the previous report last April and that “confidence in the global financial system has become very fragile.”

The main risk to financial stability was a further deterioration in the euro area crisis, but “rising imbalances elsewhere are also a cause for concern.”

The report pointed to the increasing fragmentation of the euro zone, which could set off a massive withdrawal of capital from the weaker economies, as well as from central and eastern Europe. Such a withdrawal would push record unemployment levels even higher. There was now a “wedge” between the euro zone periphery and the core.

The crisis arises from the imbalances that were built into the euro zone from the outset. For the so-called periphery economies, adopting the euro as the common currency meant that they could no longer rely on a fall in the value of their national currencies to maintain their export markets. Hence, they increasingly suffered from a balance of payments deficit.

However, this was covered by an influx of capital from the stronger economies, in particular Germany. The inflow of capital boosted demand and provided valuable markets for German exports, setting up a virtuous circle. Now a vicious circle has replaced it, as capital flows in the other direction. “Liquidity in the core economy banks,” the report noted, “is not being recycled to the periphery but is instead being deposited at core central banks or in relatively safe government bonds.”

Bank bailouts have been accompanied by the imposition of austerity programs and recession, leading to a further withdrawal of funds.

The IMF report also warned that the corporate sector could become “an additional force in this pernicious feedback loop” as sovereign downgrades pulled investment grade corporate debt toward junk status.

The report’s forecasts were made on the basis of what the authors called a baseline scenario. This assumed that European policymakers would move to closer economic and political integration, establish a single supervisory mechanism for the financial system and take action to close the gap between the high interest rates in the periphery and the very low rates in core countries, such as Germany.

Unless these measures were carried out—and that is far from likely, given the growing conflicts among the European powers—then the eurozone would slide into a “weak policies scenario”.

That scenario would bring a rapid worsening of the financial crisis. The forces of fragmentation would become “entrenched” and the capital problems of banks would increase, posing a “far-reaching threat to the global financial system and the global economic outlook.”

So far as policy prescriptions were concerned, the IMF demanded an intensification of the attacks on the working class. One of the key elements of any recovery program had to be the implementation of “growth-friendly fiscal consolidation”.

Such a thing does not exist. “Fiscal consolidation” is a euphemism for budget cuts, the impact of which is to reduce demand—either through cuts in social services or by the cutting of public sector jobs—leading to a further economic contraction, followed by demands for more cuts.

At the same time, finance capital demands that real wages be reduced and the exploitation of workers intensified. Accordingly, the IMF called for “wide-ranging … structural and institutional reforms” in order to “strengthen competitiveness and narrow external imbalance.”

What this means is that, given that the countries running a balance of payments deficit cannot devalue their currency, they must carry out what is termed an “internal devaluation” in order to lower their costs, above all wages, and thereby become competitive on international markets.

The history of such “internal devaluation” was the subject of a comment by Financial Timescolumnist Martin Wolf, published on Wednesday. He pointed out that when the UK carried out such a regime between the wars, economic output in 1938 was barely above what it had been in 1918. “High unemployment,” he noted, “was the mechanism for driving nominal and real wages down.”

This is the program to be now applied across Europe.

While focusing attention on Europe, the IMF report also commented on the worsening situation in both Japan and the United States, two of the major pillars of the world economy.

Sovereign credit risk was an important “challenge” to stability in the US, with an already weak economy facing slow growth and inadequate demand. In addition, a “fiscal cliff” posed “near-term risks.” That is, the series of tax increases and spending cuts due to come into effect at the end of the year could, if implemented, cut US economic growth by as much as 2 percentage points.

The report warned that the present problems in the euro region were a “cautionary tale” for Japan, given its high public debt and the heavy investment by banks in government bonds.

The crisis has had contradictory effects. On the one hand, Japan has become a beneficiary of “safe-haven” inflows as a result of the crisis in Europe. These inflows have pushed the yields on government bonds to near-record lows, facilitating easy financing of the national public debt.

On the other hand, the foreign capital inflow has pushed up the value of the yen, thereby weakening Japanese exports and impacting on domestic production.

The increasing investment by domestic Japanese banks in government bonds could be sowing the seeds for future problems. If, for any reason, the yields on Japanese bonds started to rise (that is, there was a fall in bond prices) then the banks would incur a capital loss on their assets. And as the experience of Europe has shown, this can rapidly lead to the onset of a full-blown financial crisis.

Global Research TV Interview on Iceland's debt and people's revolt - corbettreport.com

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Iceland was one of the hardest hit nations in the immediate aftermath of the September 2008 economic meltdown. Asked by their own government to pay Britain and Holland for bailing out their Icesave-exposed banks, the people overwhelmingly said "no." Do the actions of the Icelandic people present an example for the rest of the world as we see the global economy teetering on the edge of collapse? Find out on this week's GRTV Feature Interview with Michael Hudson.

 

Michael Moore's Mistake: "Keep The Fed, End Capitalism"

Editor's note: The next two posts provide an example of how specific objectives evolve when people begin to consider the root causes of our socio-economic breakdown.  The Federal Reserve is a key component of society's ills, but the rationale for arriving at this doorstep seems to be support for "unfettered capitalism".  A naive position to justify a worthy cause- to end the Fed.

 The Daily Bail




Don't skip the clip inside - Runs 2 minutes. Peter Schiff provides sanity at the end.

Moore is cluelessly deranged regarding bailouts, the Federal Reserve and capitalism. The problem is not unfettered capitalism; the problem is that favored industries were spared from the market by government assistance.

Capitalism does NOT exist on Wall Street.

Every single over-leveraged, fraudulent financial institution that was saved by TARP and Bernanke and Geithner's trillions in stealth bailouts should have been allowed to fail. We are talking about investment banks, after all, not your grandmother's church choir.

Investment banks take risks by nature. And they should face dissolution and bankruptcy when those bets don't work out.

We've said it from the beginning, against the ignorant and misinformed current of status-quo talking heads and wannabe financial experts, including Inside Job director Charles Ferguson and over-hyped author Ellen Brown, allowing Lehman Brothers to fail was the only thing Bernanke and Paulson ever got right.

The market spoke and the government didn't intervene. That is capitalism. And not coincidentally we learned later that Lehman was an over-leveraged cesspool of fraud and criminal malfeasance with a $600 billion crater in its balance sheet, despite assurances from Dick Fuld that $20 billion from taxpayers would have saved the company. Complete and utter nonsense. And there is little reason to believe that Lehman's fraudulent financials were any different than what we would have found at Goldman Sachs, JP Morgan, Morgan Stanley, Citigroup or Bank of America.

Each and every major investment bank was then, and to this day, remains MASSIVELY insolvent. It's not even a close call - with 30:1 leverage on inadequate capital, assets need only decline 4% in value to wipe out the balance sheet, and assets have declined 30-40% on average. We are talking about insolvency by orders of magnitude.

Only in the Bernanke-Geithner, CNBC-promoted, 'can-kicking' world of purple unicorns and psychedelic money printing, can any other conclusion be reached.



In just 15 seconds this clip perfectly encapsulates the madness of bailing out Wall Street millionaires and billionaires.

Economic Collapse, Financial Manipulation and the Dollar Crisis

Global Research
Bob Chapman

The question plays out on three fronts. England quietly is immersed in its own financial problems, churning out their version of quantitative easing, as the US FOMC meeting rises in the distance for two days this time.

Will we get the twist? Of course we will. If we do not the bottom will fall out. That will signify the issuance of more funds plus what is needed to purchase some 80% of Treasury securities, or about another $850 billion.

It is no secret that the Fed, Bank of England, Bank of Japan and the Swiss national Banks are going to provide dollars to European banks that are the victims of American lenders who have pulled their funds out of Europe for fear of losing their investments. They are phasing out an orderly fashion. The commitments of these central banks are doing three things putting their citizens at more financial risk; driving inflation higher; aiding in the increase in gold prices and following a path they already know is doomed to failure. The players did not want a replay of the Lehman Affair of just three years ago, or the ongoing immediate consequences. Everyone wanted to look like they were in motion, that they were doing something about the problem. The underlying problem is that banks in Europe cannot issue much more debt or they will look like bigger fools than they already are. Due to the banks poor choices in the past these banks are on the edge of failure and were Greece to default they’d get closer to the edge. If all insolvent nations were to default these banks would all go under. Thus, we see another bank bailout engineered by the Fed and other central banks. As this new crisis unfolds the European and world economies are slowing down, which will compound problems.

Under the best of circumstances the European banks and sovereigns will lose half of their investments in Greek bonds and loans. We stated two years ago the 100% default is the only answer for Greece and the other five problem countries. The losses would then be $4 to $6 trillion. Not only are many European banks already insolvent, but also the future portends a bank wipeout. The banks did everything wrong expecting as always a taxpayer bailout. In addition in this process these banks assumed leverage of about 30% in an attempt to raise profits. If these banks do not go under they will be nationalized and again the public will be allowed to assume again the banker’s losses. This crisis already in motion is going to be worse than the one experienced three years ago and its mutating into an ongoing crisis, because no one is willing to purge the system. In the wings we see the ECB, which already has made an illegal foray into the bond market to purchase Italian and Spanish bonds. The big question there is who is going to pay for their purchases? We will find that out on September 29th when the German Bundestag votes on German participation. If they say no the European financial world will go upside down. If they vote yes we could see anarchy in Germany. As we have cited often European countries are a collection of different tribes that do not like to be forced into anything. At this juncture we are told by our sources that the funding bill will be passed. If not passed, we could see military action between Greece, Israel and Turkey, as a deliberate diversion to force European countries to fund Greece and other bailouts. When in doubt have another war.

The US Treasury Secretary Mr. Geithner managed to make a fool of himself in Poland, but did find support among other elitists regarding the regulation and full implementation of banking federalization. This supposedly is needed to mitigate the crisis and prevent future confusion, when in fact it is a move to remove the sovereignty of member states. The Fed, that endless source of swaps, money and credit, would supply recapitalization. Trillions of dollars can easily be conjured up for just about anything and especially to further a European Federal Reserve. The upshot of this move would be to give the ECB or another authority the ability to create money and credit at will, which is totally apposed by the Germans. In total they do not want anyone telling them what to do especially after the mess in part created by the ECB. This is a war the internationalists cannot win, but they will try anyway.

These attempts at centralization and federalization are not what the Germans want. They want something similar to the Bundesbank and they want direct control via representation. What has transpired is another bailout for Europe via the Fed, BoJ, BoE and the SNB. That certainly spells much more inflation as a consequence of this policy, which is something Germany is dead set against. The newest swap facility is for 45 days, so that the ECB would convince US and other money market funds and other large investors to repurchase the banks’, notes and bills of EU banks and government, of course with the aid and pressure of the Fed and the US Treasury. There were strong reasons for American lenders to pull out of euro zone short-term paper markets. It is called risk-reward. Higher yields are desperately needed by money managers, but not at the risk of losing capital. Just look at the correction in the US commercial paper market, nine-weeks of rising yields and plunging participation.

In fact, such policies are really a QE 3 in motion although concentrated on Europe. The absence of such backdoor financing had to make players realize that funds were needed quickly, because without them there would have been another European banking crisis that would have spread into the UK and US markets. The European economies are slowing down and in the absence of such a move the downside would have accelerated into a large recession or depression. The only way the Fed can operate such a swap would be with freshly minted money, because if they buy dollars in the Forex market they would drive the dollar higher and the euro lower and they do not want that to happen. The Fed is well aware that some European banks and sovereigns are insolvent, as is the US system and by using such policies they keep the whole structure functioning and buying valuable time. Default is on the way and all the players know that. They want to be sure it is an orderly default. The same is true of currencies. They want a big meeting where all currencies are revalued and devalued simultaneously and where multilateral defaults go smoothly. From a liquidity viewpoint European banks have bought 45 days to November 5th. We do not think that is enough time and that the swaps, QE 3, will be extended through the end of the year.

While this goes on the twist will take place in the US that is holding short-term rates static and deliberately lowering long-term rates by manipulating the markets. We are afraid that will cause upward pressure on short-term rates. The resultant lower rates are to encourage economic activity, investment, and revival in the real estate market. On the short end it is not going to happen. Rates will rise and bank leverage will be neutralized. All those months of riskless profits will end at least temporarily. Lower mortgage rates are fine, but suppressing long-term yields is a mistake. These moves are inflationary and we now see that an official CPI of plus 3.8%. Real inflation is 11.4%. They are the highest in two years and we predicted more than a year ago real inflation will match that of three years ago of 14%. We find it astounding that people are dumb enough to buy a 10-year note yielding 1.83% in an 11.4% inflationary environment and deliberately lose 9.4%. In 10-years almost all your purchasing power is gone. It is a small wonder that people are resorting to gold and silver coins, bullion and shares.

The bond market continues to reach ridiculous levels as the twist gets underway. During that process the dollar has rallied and the US 10-year note has begun trading at 1.83% yield. It is obvious that the Fed wants the 10 somewhere near 1%. That would put the 30-year fixed rate mortgage at 3% and perhaps lower. This move should boost official inflation from 3.8% to 5.5%, along with other factors to 5.5%. Unofficially that would put real inflation at 14%.

The higher bond levels have the Chinese all excited and they want to liquidate US Treasuries, but not dollars. That presents quite a problem for the Fed because worse yet they want to use those dollars to gobble up American assets, and securities. This demand has come at a most unfortunate juncture.

There is definitely fear among bankers and central bankers who have no choice but to throw monetary caution to the wind. Leading the pack believe it or not is the Swiss National Bank, that great recent devaluer of currency. Have they ever opened a can of worms? We wonder whether the Japanese will get the go ahead from the Fed, as a reward for supplying dollars to Europe, to further devalue its yen? We will just have to wait and see. Will 45 days be enough for Europe? Of course not, and neither will 90 days suffice. The slide of the European banking system won’t happen overnight. It will still take a year or two. The elitists will do everything possible to extend the process. You also have to take note regarding how fast the swap line was set up. Intervention is the name of the game, and everyone in the UK, US and Europe are in on it. All the professionals have to know this is not going to work, but no one is saying anything. A conspiracy of silence. No one wants to say it but fascist Keynesianism is a failure. This is the foundation for future economic life for the New World Order and it is falling apart at the seams. You might say it is the end product of centuries of fraud, deceit and the looting of each successive civilization. The personification of what has been and is the evil within society. The monstrosity the Illuminists have created is in the process of collapsing and rightly so.

Irrespective of how dollars are created they still make up about 60% of world Forex reserves and oil producers are forced to accept the dollar for oil in exchange for protection from the US and Britain. The dollars only challenge in a sea of fiat currencies is gold, which we believe has become again the world’s only real currency. What we see in Europe reminds us that the euro is a failed experiment. Trillions more dollars have been and will be created to keep the current system functioning and each time more dollars are created it strengthens the case for gold. Under current circumstances the dollar is not going to crash, although it will eventually. It still is the only viable paper world reserve currency, even though foreign central bank holdings have fallen from 72% to 60% in recent years. The closest competitor, the euro, can’t come close to challenging the dollar, only gold can.

In Europe September 29th is a big day. On that day the Bundestag will decide whether to approve another Greek bailout. Our sources say they will approve it, although anything could happen. If this crisis passes over the next three months there will be a rush to pass legislation to allow the ECB to issue bonds. Once accomplished that would give the ECB the money and credit creating powers of the Fed and that would allow the ECB to stretch the problem out over a number of years. These moves might solve the current liquidity crisis, but they won’t solve the solvency crisis. It is difficulty to tell how long this sort of bailout will go on and how difficult the problems will be. One thing is for sure inflation will rage and many nations will not want to subsidize others indefinitely. This will be especially true in smaller nations. The goal by the ruling EU in Brussels will be to totally control the entire 27 nations involved. Can this be accomplished? We do not know, but we do know it will be very difficult to accomplish.

While Mrs. Merkel, German Chancellor, sees nothing suggesting a recession in Germany, the government is maneuvering behind the backs of its citizens to give unlimited power to the EFSF, the European Financial Stability Facility, which is not a legitimate entity, to support the hopelessly bankrupt euro system at the expense of German taxpayers and the common good. This facility will strip Germany and all other participants of their sovereignty in its process of handling one facet of euro zone finance. The $500 billion in Swaps and the eventual bond issuance will guarantee much higher inflation. Europe’s present problems are going to make the 2008 Lehman episode look like a walk in the park. The pooling of the debt burden and a further easing of monetary policy threatens to weaken the institutional framework of the EU.

            German finance minister Wolfgang Schäuble, who resides in the back pocket of the bankers has proposed a doubling of funds to be made available to the bankrupt sovereigns of just over $1 trillion. On September 29th the banker’s idea is to have the Bundestag the EFSF carte blanche to carry out measures to save the euro, the insolvent countries and banks. If that were passed, all control passes to the EFSF and the ECB. We believe that most Germans and selective others are finally realizing that Brussels is the enemy.

            The passage of legislation by Germany, which in part has already been passed by the Bundesrat (Senate) would leave Germany with no more say on the use or increase in funding just to save the euro, Greece and the other five countries, which is an impossible task at a cost of $4 to $6 trillion. What the Bundestag does on 9/29/11 will dictate the future of Germany as an industrial and social nation far into the futures. Will it be enslavement to the EFSF or freedom to run its own affairs? This amounts to a coup d'état. Coming on the heels of abject failure to solve the economic problems of the insolvent six countries.

            What is happening in Europe, and particularly in Germany, is beyond belief - a plan to prop up the hopelessly bankrupt financial states through deregulation of the financial sector. If legislation allow all this to happen you could have revolution in Germany and other countries. It is a frightful situation.  

SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman

Mish's Global Economic Trend

Senator Chuck Grassley, Republican of Iowa, says SEC may have destroyed documents

“From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” said Sen. Chuck Grassley, Republican of Iowa, in a letter to the agency’s chairman, Mary Schapiro.

“It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”

Agency staff “destroyed over 9,000 files” related to preliminary agency investigations, according to a letter sent in July to Grassley, the top Republican on the Senate Judiciary Committee, and obtained by MarketWatch.

The allegations were made by SEC enforcement attorney, Darcy Flynn, in a letter to Grassley. Flynn is a current employee, and according to the letter, received a bonus for his past year’s work.

Flynn alleges the SEC destroyed files related to matters being examined in important cases such as Bernard Madoff and a $50 billion Ponzi scheme he operated as well as an investigation involving Goldman Sachs Group Inc. trading in American International Group credit-default swaps in 2009.

Flynn also alleged that the agency destroyed documents and information collected for preliminary investigations at Wells Fargo, Bank of America,, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley, and the now-bankrupt Lehman Brothers.

The letter goes into particular detail about Deutsche Bank, the former employer of current SEC enforcement chief Robert Khuzami as well as former enforcement chiefs Gary Lynch and Richard Walker.

The allegations that the SEC destroyed documents were first reported by the Rolling Stone magazine in a report Wednesday.

Senator Grassley's Letter to the SEC

Inquiring minds may be interested in Senator Grassley's Letter to the SEC

Slap of the Wrist of MarketWatch

Once again I am irritated by articles and authors who quote other sources and do not have the decency to post a link. In this case the author is Ronald D. Orol, a MarketWatch reporter, based in Washington.

Orol should have caught that and if not the editors at MarketWatch should have caught it.

Is the SEC Covering Up Wall Street Crimes?

Please consider Rolling Stone: Is the SEC Covering Up Wall Street Crimes? by Matt Taibbi

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”

That is the opening snip. The entire article is worth a read.

I rather suspect the SEC has safeguarded with perfect care the files on Martha Stewart, two-bit Joe, and blogger Bob.

Why Banks Aren’t Lending: The Silent Liquidity Squeeze

Editor's Note:  As Suggested by Mike Rivero of WhatReallyHappened.com:

Raising the debt limit is not necessary. Congress has the right to revoke the Federal Reserve's charter - at any time.

Call or email your local congressman and ask them,

"Why does the government insist on borrowing money from outside banks when Article 1, Section 8 of the constitution allows the government to simply print its own money?"

Contact the Whitehouse:

http://www.whitehouse.gov/contact 

Contact Congress:

http://weeklyintercept.blogspot.com/p/complete-contact-list-for-us-congress_15.html

Global Research
Ellen Brown

Why aren’t banks lending to local businesses?  The Fed’s decision to pay interest on $1.6 trillion in “excess” reserves is a chief suspect.

Where did all the jobs go?  Small and medium-sized businesses are the major source of new job creation, and they are not hiring.  Startup businesses, which contribute a fifth of the nation’s new jobs, often can’t even get off the ground. Why?

In a June 30 article in the Wall Street Journal titled “Smaller Businesses Seeking Loans Still Come Up Empty,” Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17% of smaller businesses said they were able to land needed bank financing.  Businesses have to pay for workers and materials before they can get paid for the products they produce, and for that they need bank credit; but they are reporting that their credit lines are being cut.  They are being pushed instead into credit card accounts that average 16 percent interest, more than double the rate of the average business loan.  It is one of many changes in banking trends that have been very lucrative for Wall Street banks but are killing local businesses.

Why banks aren’t lending is a matter of debate, but the Fed’s decision to pay interest on bank reserves is high on the list of suspects.  Bruce Bartlett, writing in the Fiscal Times in July 2010, observed:

Economists are divided on why banks are not lending, but increasingly are focusing on a Fed policy of paying interest on reserves — a policy that began, interestingly enough, on October 9, 2008, at almost exactly the moment when the financial crisis became acute. . .  

Historically, the Fed paid banks nothing on required reserves. This was like a tax equivalent to the interest rate banks could have earned if they had been allowed to lend such funds. But in 2006, the Fed requested permission to pay interest on reserves because it believes that it would help control the money supply should inflation reappear.

. . . [M]any economists believe that the Fed has unwittingly encouraged banks to sit on their cash and not lend it by paying interest on reserves.

At one time, banks collected deposits from their own customers and stored them for their own liquidity needs, using them to back loans and clear outgoing checks.  But today banks typically borrow (or “buy”) liquidity, either from other banks, from the money market, or from the commercial paper market.  The Fed’s payment of interest on reserves competes with all of these markets for ready-access short-term funds, creating a shortage of the liquidity that banks need to make loans.

By inhibiting interbank lending, the Fed appears to be creating a silent “liquidity squeeze” -- the same sort of thing that brought on the banking crisis of September 2008.  According to Jeff Hummel, associate professor of economics at San Jose State University, it could happen again.  He warns that paying interest on reserves “may eventually rank with the Fed's doubling of reserve requirements in the 1930s and bringing on the recession of 1937 within the midst of the Great Depression.” 

The Travesty of the $1.6 Trillion in “Excess Reserves”

The bank bailout and the Federal Reserve’s two “quantitative easing” programs were supposedly intended to keep credit flowing to the local economy; but despite trillions of dollars thrown at Wall Street banks, these programs have succeeded only in producing mountains of “excess reserves” that are now sitting idle in Federal Reserve bank accounts.  A stunning $1.6 trillion in excess reserves have accumulated since the collapse of Lehman Brothers on September 15, 2008.

The justification for TARP -- the Trouble Asset Relief Program that subsidized the nation’s largest banks -- was that it was necessary to unfreeze credit markets.  The contention was that banks were refusing to lend to each other, cutting them off from the liquidity that was essential to the lending business.  But an MIT study reported in September 2010 showed that immediately after the Lehman collapse, the interbank lending markets were actually working.  They froze, not when Lehman died, but when the Fed started paying interest on excess reserves in October 2008.  According to the study, as summarized in The Daily Bail:

. . . [T]he NY Fed's own data show that interbank lending during the period from September to November did not "freeze," collapse, melt down or anything else.  In fact, every single day throughout this period, hundreds of billions were borrowed and paid back.  The decline in daily interbank lending came only when the Fed ballooned its balance sheet and started paying interest on excess reserves.

On October 9, 2008, the Fed began paying interest, not just on required bank reserves (amounting to 10% of deposits for larger banks), but on “excess” reserves.  Reserve balances immediately shot up, and they have been going up almost vertically ever since.

By March 2011, interbank loans outstanding were only one-third their level in May 2008, before the banking crisis hit. And on June 29, 2011, the Fed reported excess reserves of nearly $1.57 trillion – 20 times what the banks needed to satisfy their reserve requirements.  

Why Pay Interest on Reserves?

Why the Fed decided to pay interest on reserves is a complicated question, but it was evidently a desperate attempt to keep control of “monetary policy.”  The Fed theoretically controls the money supply by controlling the Fed funds rate. This hasn’t worked very well in practice, but neither has anything else, and the Fed is apparently determined to hang onto this last arrow in its regulatory quiver.  

NYT: Tim Geithner Convinced NY AG Andrew Cuomo To Back Off Wall Street Prosecutions

Daily Bail

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”

NYT: Tim Geithner Convinced NY AG Andrew Cuomo To Back Off Wall Street Prosecutions

It's long past time for jail sentences and orange jumpsuits.

Source - New York Times

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”

Even civil actions by the government have been limited. The Securities and Exchange Commission adopted a broad guideline in 2009 — distributed within the agency but never made public — to be cautious about pushing for hefty penalties from banks that had received bailout money. The agency was concerned about taxpayer money in effect being used to pay for settlements, according to four people briefed on the policy but who were not authorized to speak publicly about it.

To be sure, Wall Street’s role in the crisis is complex, and cases related to mortgage securities are immensely technical. Criminal intent in particular is difficult to prove, and banks defend their actions with documents they say show they operated properly.

But legal experts point to numerous questionable activities where criminal probes might have borne fruit and possibly still could.

Investigators, they argue, could look more deeply at the failure of executives to fully disclose the scope of the risks on their books during the mortgage mania, or the amounts of questionable loans they bundled into securities sold to investors that soured.

Prosecutors also could pursue evidence that executives knowingly awarded bonuses to themselves and colleagues based on overly optimistic valuations of mortgage assets — in effect, creating illusory profits that were wiped out by subsequent losses on the same assets. And they might also investigate whether executives cashed in shares based on inside information, or misled regulators and their own boards about looming problems.

Merrill Lynch, for example, understated its risky mortgage holdings by hundreds of billions of dollars. And public comments made by Angelo R. Mozilo, the chief executive of Countrywide Financial, praising his mortgage company’s practices were at odds with derisive statements he made privately in e-mails as he sold shares; the stock subsequently fell sharply as the company’s losses became known.

Executives at Lehman Brothers assured investors in the summer of 2008 that the company’s financial position was sound, even though they appeared to have counted as assets certain holdings pledged by Lehman to other companies, according to a person briefed on that case. At Bear Stearns, the first major Wall Street player to collapse, a private litigant says evidence shows that the firm’s executives may have pocketed revenues that should have gone to investors to offset losses when complex mortgage securities soured.

But the Justice Department has decided not to pursue some of these matters — including possible criminal cases against Mr. Mozilo of Countrywide and Joseph J. Cassano, head of Financial Products at A.I.G., the business at the epicenter of that company’s collapse. Mr. Cassano’s lawyers said that documents they had given to prosecutors refuted accusations that he had misled investors or the company’s board. Mr. Mozilo’s lawyers have said he denies any wrongdoing.

Among the few exceptions so far in civil action against senior bankers is a lawsuit filed last month against top executives of Washington Mutual, the failed bank now owned byJPMorgan Chase. The Federal Deposit Insurance Corporation sued Kerry K. Killinger, the company’s former chief executive, and two other officials, accusing them of piling on risky loans to grow faster and increase their compensation. The S.E.C. also extracted a $550 million settlement from Goldman Sachs for a mortgage security the bank built, though the S.E.C. did not name executives in that case.

Representatives at the Justice Department and the S.E.C. say they are still pursuing financial crisis cases, but legal experts warn that they become more difficult as time passes.

“If you look at the last couple of years and say, ‘This is the big-ticket prosecution that came out of the crisis,’ you realize we haven’t gotten very much,” said David A. Skeel, a law professor at the University of Pennsylvania. “It’s consistent with what many people were worried about during the crisis, that different rules would be applied to different players. It goes to the whole perception that Wall Street was taken care of, and Main Street was not.”

Continue reading at the New York Times...

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At issue is Tim Geithner's criminal behavior in orchestrating the AIG bailout to favor Goldman Sachs through counterparty payouts at par, and then the massive cover-up

Wall Street Whitewash

New York Times

Paul Krugman
December 16, 2010

When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.

How naïve we were. We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem, never the solution. And, therefore, we should have realized that party loyalists, confronted with facts that don’t fit the slogan, would adjust the facts. 

Which brings me to the case of the collapsing crisis commission.
The bipartisan Financial Crisis Inquiry Commission was established by law to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The hope was that it would be a modern version of the Pecora investigation of the 1930s, which documented Wall Street abuses and helped pave the way for financial reform.

Instead, however, the commission has broken down along partisan lines, unable to agree on even the most basic points.

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.

Then the bubble burst, with hugely disruptive consequences. It turned out that Wall Street had created a web of interconnection nobody understood, so that the failure of Lehman Brothers, a medium-size investment bank, could threaten to take down the whole world financial system.
It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.

Last week, reports Shahien Nasiripour of The Huffington Post, all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”

When Democratic members refused to go along with this insistence that the story of Hamlet be told without the prince, the Republicans went ahead and issued their own report, which did, indeed, avoid using any of the banned terms.

That report is all of nine pages long, with few facts and hardly any numbers. Beyond that, it tells a story that has been widely and repeatedly debunked — without responding at all to the debunkers.
In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It’s hard to overstate how wrongheaded all of this is. For one thing, as I’ve already noted, the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.
Beyond that, the timing shows that private players weren’t suckered into a government-created bubble. It was the other way around. During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.

But the G.O.P. commissioners are just doing their job, which is to sustain the conservative narrative. And a narrative that absolves the banks of any wrongdoing, that places all the blame on meddling politicians, is especially important now that Republicans are about to take over the House.
Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”
He later tried to walk the remark back, but there’s no question that he and his colleagues will do everything they can to block effective regulation of the people and institutions responsible for the economic nightmare of recent years. So they need a cover story saying that it was all the government’s fault.

In the end, those of us who expected the crisis to provide a teachable moment were right, but not in the way we expected. Never mind relearning the case for bank regulation; what we learned, instead, is what happens when an ideology backed by vast wealth and immense power confronts inconvenient facts. And the answer is, the facts lose.