When Barack Obama donned the crusader's mantle during the 2008 presidential campaign, his Web-savvy campaign team created KeatingEconomics.com and pushed it on millions of voters. The main video on the site showed the Ichabod Crane-like Charles Keating — the wealthy, politically connected poster child of the 1980s savings-and-loan scandal — in handcuffs. It portrayed John McCain as Keating's stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys bigger and badder. Today's corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and lead lawyer at the Office of Thrift Supervision, who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.

Those watching the compelling attack ad (it's still online) had every reason to believe that Obama's approach would be just as hard-edged and that felon-busting G-men would rout the crooks and recover our money.

This was not to be. As it stands now, there is only one federal prosecution related to the credit crash and bailout cycle, and it was begun by the Bush administration's Justice Department in June 2008.

Obama hasn't exactly surrounded himself with successful regulators.
White House Official Photographer/WENN.com
Obama hasn't exactly surrounded himself with successful regulators.
After specializing in defending rogues, Obama appointee Lanny Breuer (right) will now prosecute them?
Kevin Dietsch/UPI
After specializing in defending rogues, Obama appointee Lanny Breuer (right) will now prosecute them?
Obama's point man: Attorney General Eric Holder.
Chip Somodevilla/POOL-CNP-PHOTOlink
Obama's point man: Attorney General Eric Holder.
Financial criminologist Bill Black warns that the "zombie" megabanks aren't done feeding.
Financial criminologist Bill Black warns that the "zombie" megabanks aren't done feeding.
Joseph Cassano: AIG's most toxic asset.
Keith Waldgrave/SOLO Syndication
Joseph Cassano: AIG's most toxic asset.
Timothy Geithner claims the government was blind-sided last year but now can see. Critics say he needs new glasses.
Carl de Souza/AFP
Timothy Geithner claims the government was blind-sided last year but now can see. Critics say he needs new glasses.

Not that there aren't culprits. Bernie Madoff and other accused Ponzi schemers like Allen Stanford are mere pickpockets compared with Wall Street's institutional buccaneers, who so far have carted off up to $12.7 trillion — that's nearly equal to the entire gross domestic product. They've multiplied their booty with billions in subsidies and a flood of derivatives — some of them merely old soured wine in new bottles. Today's pirates are sailing away from the light regulatory scrutiny that apparently will continue in our benighted, weakened, financially top-heavy and bubble-addicted economy.

Black says Obama's current efforts are doomed to fail — and, in a twist, it's for lack of trying. "There is not a single successful regulator giving him advice," Black notes. Obama's is a fresh face, but those of his crew aren't. Black pointedly views Treasury Secretary Timothy Geithner and SEC Chair Mary Schapiro as flops in the prelude to the crisis who flacked for the financial industry's "self-regulation." Some of Obama's appointees have a history as ardent advocates for financial crooks and active foes of regulation. Because neither the Obama team nor its proposed reforms pack the requisite punch, Black predicts, "There will be far more catastrophic losses." That would be on top of the trillions of dollars already lost.

Though the public has been cast away, all hope for justice is not lost. Scammed consumers could get their day in court, thanks to a Supreme Court decision this past June in Cuomo v. Clearing House Association. Justice Antonin Scalia broke ranks and joined the court's four most liberal judges in ruling that the federal government cannot stop states from conducting their own crackdowns on financial crooks — with laws more stringent than Washington's — for perpetrating such evils as the predatory mortgage lending that sparked last fall's meltdown.

In that case the Obama administration shed its crusader's mantle and defended the dark side in vain.


In 2008 American households lost 18 percent of their wealth — more than $11 trillion. But like energy, wealth doesn't just vanish. Most of it is parked in unregulated hedge funds, in ex-hedge funds that are now just bulging foreign bank accounts and in a variety of opaque financial institutions. The money almost certainly remains parked — otherwise there would be massive inflation after the amount of bailout money that has spewed from the Fed, the U.S. Treasury and foreign central banks.

Conceivably, what money was taken away could be "clawed back," in the parlance of regulators. A precedent exists: a similar crisis a decade ago involving Long-Term Capital Management, a Connecticut hedge fund that included two Nobel Prize-winning economists and a few ace traders from Wall Street and had bet on bond spreads in Russia, Italy and Latin America. The outfit started well, but then crashed and dug a trillion-dollar hole that was considered dangerous to the entire system at the time. Instead of paying the fund's many investors at retail, the New York Fed forced Wall Street to settle the whole thing for about $3.5 billion — in other words, a couple of beans on the dollar. There was no bailout by taxpayers.

It's clearly too late for that approach to the current crisis. The best way to retrieve at least a significant portion of our wealth is through prosecution, followed by forfeiture. This is what we do when we catch money launderers and drug lords. It's what we're trying to do to Ponzi schemers like Bernie Madoff. It's retributive justice. It fills a social need as well as an economic one.

So where is the justice in the current crisis? Why have there been so few prosecutions and only feeble attempts, at best, to claw the money back? One reason may be that, in such infamous cases as the Lehman Brothers collapse and Bank of America's absorption of Merrill Lynch, the Fed and the Treasury were intimately involved with the financial elite's deal making at the time. It's difficult to prosecute others for securities fraud if you condoned the deals to begin with.

And there's another, more pertinent reason: The top federal law-enforcement establishment is simply not in the mood. People who expect President Obama's Department of Justice to take the lead will be severely disappointed — not necessarily because the task is difficult, but because the Obama administration is showing that it lacks the will.

Instead the new administration is putting its energy into creating what it believes will be a meltdown-proof new system of elite "too-big-to-fail" banks regulated by a beefed-up Federal Reserve.

Even the business establishment's Wall Street Journal used the word "oligopoly" when it noted this past summer that the Obama administration, "after saving the banks, is now planning regulatory changes that could establish an elite group of U.S. institutions with large investment-banking activities" that will be "hard to join and compete against."

Bill Black calls that elite group of megabanks, like Citigroup and Bank of America, "zombies." And they're not done feeding. All of the devilish tools remain in place, says Black, including "the subprime loans, with securitization and the credit default swaps. And the Obama administration, astonishingly, wants to re-create a secondary market in subprime loans — even though it cost us more than a trillion dollars."

It may seem that some sort of über-regulator is needed. But Camden Fine, a small-town banker who now leads a trade group of 5,000 community banks, sees a pumped-up, unified regulatory agency as "a big, hairy cyclopean beast" that would protect the megabanks no matter how reckless they are and continue to favor Wall Street over Main Street. Compared with the Obama administration, America's small-town bankers look like populists.


An administration whose claws are far from sharpened shouldn't really surprise us: Obama was Wall Street's preferred candidate in terms of campaign contributions. His SEC chair, Mary Schapiro, ran FINRA, the Street's self-regulatory private agency. Gary Gensler, chair of the Commodity Futures Trading Commission, actually worked a decade ago to exempt credit default swaps and other derivatives from regulation.

More important, the nation's new top prosecutor, Attorney General Eric Holder, has a history of preferring that deviant corporations be held to no more than a "voluntary cooperation" system in which they investigate themselves privately.

Under the "Holder Memo," which he wrote in 1999 as deputy AG in the Clinton administration, bad-boy executives and their corporations who turn over evidence to the government qualify for lenient sentences and fines and, sometimes, for settlements without even indictments. The consequences of their crimes often amount to only the cost of doing business.

After leaving government Holder followed the mandates of his own memo and made a lucrative living by conducting internal probes for companies and negotiating outstanding results for white-collar clients. He was public about it: Holder's 2002 op-ed "Don't Indict WorldCom" in the Wall Street Journal argued on behalf of the corporate perpetrator of one of the sleaziest frauds of the past decade.

Holder takes a hard line on social issues but not on financial issues: He favors rededicating the DOJ to civil rights, and he has vowed to investigate Bush-era torture. But when asked if he plans to prosecute the financial mayhem that erupted under Bush, Holder has said that he isn't inclined to engage in what he calls "witch hunts."

The previous chief of the DOJ's Criminal Division, Rita Glavin, seemed motivated: She testified to Congress last spring, before she was replaced, about the need to hire numerous FBI agents to fight white-collar crime. After 9/11 hundreds of FBI agents had been shifted from financial fraud to counterterrorism, so the agency was perilously thin when the tidal wave of financial fraud inundated the system.

Glavin's successor couldn't be further from the right person to root out white-collar crime. Last spring Holder tapped Lanny Breuer, his former partner at the major Washington, D.C. firm Covington & Burling, to head the DOJ's Criminal Division. In 2008 Breuer represented Roger Clemens at Senate hearings when the big right-hander denied under oath using steroids or human growth hormones. If Clemens gets indicted for perjury, the next question would be whether Breuer suborned him.

More to the point of high-level white-collar crime, in 2006 Breuer represented Mario Gabelli, a billionaire broker and money manager who, in some recent years, has been the highest-paid person on Wall Street, with compensation in former Merrill Lynch CEO John Thain's class. When Gabelli got in hot water for setting up straw entities to bid at federal auctions of coveted cell-phone licenses, Breuer savaged the person who blew the whistle on the scheme and kept his client out of criminal court. "Super Mario" eventually paid a $130 million settlement under the federal False Claims Act, but he made more than $200 million from the scam, so the litigation amounted to the cost of doing profitable business.

As chief of Covington's white-collar department, Breuer was known for his "rogues' gallery" of corporations and individuals under investigation or indictment. His clients included Halliburton, the Federal Home Loan Mortgage Corporation (Freddie Mac), Exxon Mobil and big pharmaceutical companies. He also represented Canadian mogul Eugene Melnyk, who was charged with accounting fraud by the SEC, and the lieutenant governor of American Samoa, who was indicted for bribery and bid rigging. Breuer represented so many companies that had problems with the federal government that the Department of Justice promised to erect "Chinese walls" around him to keep him from traipsing into his former clients' matters. The napping Senate confirmed him, 88-0.

Breuer's connection to Freddie Mac is especially troubling. One of the executives at the heart of the global meltdown was Franklin Raines, the CEO of Freddie's older sister, the Federal National Mortgage Association (Fannie Mae). Freddie and Fannie bought and securitized mortgages from other banks at a breakneck pace that fueled the bubble and led to their federal bailouts and takeovers in September 2008. Politically wired — he was Bill Clinton's director of the Office of Management and Budget — Raines aided and abetted the process by orchestrating massive accounting and compensation fraud at Fannie Mae. He paid a small civil settlement and has never been criminally charged. Will the DOJ indict him? That would be a problem for the Obama administration: Although Freddie was set up to compete with Fannie, the two often operated similarly, so an investigation of Fannie and Raines' practices could spread to Freddie, which is not something Breuer or any other lawyer would want for a former client. The Justice Department refused requests to interview Breuer and Holder. Asked whether Raines will be indicted, a senior DOJ spokesperson would neither confirm nor deny it.

Obama played the populism card during the campaign, making fodder of Countrywide, then the nation's largest mortgage company and a dominant player in the subprime scandal: "These are the folks who are responsible for infecting the economy and helping to create a home-foreclosure crisis — 2 million people may end up losing their homes." We are, in fact, north of 3 million, and the widely expected criminal prosecution of Angelo Mozilo, Countrywide's chief during the heyday of predatory home loans, hasn't materialized. Mozilo's case was merely channeled to the SEC for civil sanctions.

The SEC accused Mozilo and two top aides of selling $140 million in stock based on inside knowledge of the riskiness of credit that Countrywide extended while it told investors the loans were secure. A Mozilo e-mail called one subprime loan "the most dangerous product in existence.... There can be nothing more toxic," and another "poison." It would seem as if a criminal securities-fraud case could be made against Mozilo and his crew. The Justice Department wouldn't confirm or deny pending indictments, but Mozilo is probably safe. Usually when there's going to be a prosecution, the SEC refers the case to the DOJ and doesn't press it alone.

You would think that AIG's Joseph Cassano would also be prosecuted for securities fraud. As boss of AIG Financial Products, Cassano made ungodly amounts of money by selling credit default swaps (CDS), which were side bets on collaterized debt obligations (CDO) swelled to the gills with subprime-mortgage toxins. In fact the AIG arm sold so many credit default swaps that it lost track of the number, but they totaled more than the total value of AIG, which was one of the world's biggest companies. The ensuing collateral calls to satisfy the deals choked AIG nearly to death, triggered the financial crisis of September 2008 and led to the biggest bailout of all: $182.5 billion to keep AIG afloat as an 80 percent government-owned company.

A grand jury was reportedly convened to look at Cassano. Again the DOJ won't confirm or deny the existence of a probe, but given the remarks of Cassano's lawyer, F. Joseph Warin, in September, the grand jury probably exists. Warin said that his client was cooperating and that AIG had known about all of Cassano's deeds. Will the Justice Department seek to indict AIG's leadership, including its CEO, chief financial officer and boardroom audit committee? No comment.

You have to go back to the Bush era for the only real prosecution related to the subprime crisis. Two Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, are accused of securities fraud for not telling investors in 2007 about the shaky nature of their fund — based on subprime mortgages — before it collapsed. While the act was typical of the times, the two are far from the top rungs of Wall Street, and there seems to be little else going on in the justice process. Elite white-collar defense attorneys report no clamor for their counsel from major financial managers. Regulators talk of no demand for their services and for evidence from prosecutors. As they say in the trade, there's no "buzz."


So far, then, the common person has reaped little relief. Well, maybe clearer credit-card statements, plain vanilla mortgages with slightly less fine print and probably some "green" infrastructure jobs. But these have been slow to come on stream, and so far there is no great morality-based thrust as there was in the New Deal with the WPA, CCC, AAA and TVA, the labor-intensive alphabet soup of that era that was fed to the bottom first. About a billion dollars have been dedicated to putting and keeping "cops on the street." Remember the poignant vignette during the State of the Union address in which Obama talked about saving 57 police jobs in Minneapolis? Well done and warranted, yes, but keeping the public safe from financial criminals is another story: The administration and Congress have failed to bulk up white-collar fraud enforcement with either new FBI agents or new forensic specialists.

Which annoys the hell out of proven financial-crime fighter Bill Black. Athletic and red-bearded, Black looks more like a lumberjack than a scholar, criminologist and bureaucrat who in 2005 authored The Best Way to Rob a Bank Is to Own One, the definitive history of the S&L debacle as well as an insider's report. A legend among regulators, he faced down House Speaker Jim Wright and the "Keating Five" senators (including McCain), who fought tooth and nail to protect that corrupt industry, and he also overcame stiff resistance from within the Reagan administration and from Keating himself. Wright, who later resigned in disgrace over ethics charges, called Black a "red-bearded son of a bitch." Keating hired detectives to get dirt on Black. When that failed, the thrift magnate told his Washington lobbyists to "kill him dead," which he probably meant figuratively, in the sense that Keating wanted Black's power shut off. It wasn't, and Keating, though he was as plugged into the Republicans as Franklin Raines is to the Democrats, ended up doing hard time.

Black always has a big smile and a ready joke, but he burns with the intensity of an Old Testament prophet, especially against "control fraud," the lawlessness that emanates from the top of legitimate businesses and causes bigger financial losses, he has said, than all other forms of property crime combined. Corporations practice control frauds with crooked accounting and perverse compensation systems, using bonus formulas that lead executives to loot their companies rather than serve them.

Now an associate professor of law and economics at the University of Missouri-Kansas City, Black has continued the fight against fraud and for regulatory controls as a consultant to a gamut of agencies from the FBI (where he trained agents in white-collar forensics) to the World Bank.

In 2007 the Office of Federal Housing Enterprise Oversight hired him to investigate the problems at Fannie Mae. His 70-page report plainly outlined how Raines and his lieutenants used "fraudulent accounting" and "perverse incentives," and took "unsafe and unsound risks" that "collectively caused Fannie to violate the law and deceive its investors and regulators."

Almost two years before the financial crisis broke in late 2008, Black, the FBI and others outlined the structural problems that would wreck the economy, but Washington did nothing and continued to exercise "regulatory forbearance." In fact, the crisis did not have to happen, and there was certainly no need for the panicky response to it by Washington in the fall of 2008.

Black vents particular ire at Timothy Geithner, who as New York Fed chair fiddled while Wall Street imploded; Henry Paulson and Geithner again, who as Treasury secretaries refused to enforce a key banking law; and Alan Greenspan and Ben Bernanke, who as Fed chairs were supposed to regulate banks, especially the renegade mortgage units. The two Fed chairs closed their eyes to excess and continued to blow easy money into the bubble.

The key statute that Treasury flouted under Paulson and Geithner is the Prompt Corrective Action (PCA) law. Congress passed it in the wake of the S&L scandal in 1991, and the first President Bush signed it. It's probably the best, fairest and clearest piece of financial legislation since the New Deal. Under the law Federal Deposit Insurance Corporation (FDIC) examiners initially rate banks as "Well Capitalized," "Adequately Capitalized," "Undercapitalized," "Significantly Undercapitalized" and "Critically Undercapitalized." The tags determine the examiners' actions, if any. Undercapitalized banks must build up their capital and get FDIC approval for acquisitions and opening new business lines. When a bank becomes significantly undercapitalized, a regulator can order serious sanctions, ranging from firing management to restricting stock sales and forcing divestitures. Critically undercapitalized banks must be placed in receivership, unless the FDIC determines that some other action like a merger or sale would better protect the depositors. That's it in a nutshell — obviously there was a whole lot more that regulators were allowed to do, like forcing a change in accounting systems and blocking bonuses. Bottom line: The PCA worked like a charm.

In the entrepreneurial Reagan-Bush era, the banking system had become a mess. Often more than a hundred banks failed annually (as has happened this year). After the PCA, banks cleaned up and failures became rare — only a handful per year and sometimes none. U.S. Treasury secretaries even pushed the PCA idea to Japan during its "lost decade."

But in the U.S., after the second Bush's election in 2000, the PCA began to wither from disuse, especially because of opposition from the megabanks and the laissez-faire policymakers. Toward the end of the Clinton administration, Washington caved in to the financial lobby and passed new laws that promoted risk. Congress repealed the Depression-era Glass-Steagall Act, which had drawn a sharp line between commercial banks and investment banks. Another new law immunized securitizers from lawsuits even if their products were rubbish. A third new law permitted the wildest form of derivatives — "naked" credit default swaps — side bets on CDOs that could be placed by investors who didn't even own the bonds. The old prudent conservative banking model gave way to the sleek megabank casino, which was fine with the Fed. Ben Bernanke, then a Fed regional governor, spoke in 2004 of the new "Great Moderation," which the industry took to signal a period of ultra-lax regulation.

The message from the Bush administration was clear: The PCA "ceased to be applied to the big boys," says Camden Fine, president of the Independent Community Bankers of America. With his square jaw and plainspokenness, Fine calls to mind Jimmy Stewart in It's a Wonderful Life. Like Stewart's George Bailey, Fine is a small-town banker, though now he is the sole lobbyist for about 5,000 member banks around the United States. For more than twenty years, he ran the Mainstreet Bank on Main Street ("not Wall Street," he emphasizes) in Ashland, a central Missouri town of 2,000 about twenty miles south of Columbia. He had eleven employees. Like the members of his trade group, Fine isn't fond of Wall Street or the "too-big-to-fail" banks — the "systemically important" megabanks that the taxpayers bailed out.

"The community banks didn't cause this [crisis]," he points out. "This was Wall Street, the mortgage banks and near-banks," by which he means the herd of largely unregulated non-depository institutions that extend credit. "Much of the regulated industry didn't have anything to do with this."

Fine says he can live with the PCA law and even endorses it, but he detests the fact that it was no longer being used for the megabanks. It makes him smolder. "Greenspan — banks couldn't get too big for him," Fine says ruefully. He recalls a 2004 battle in which the Fed wanted to remove all capital-reserve requirements from the big banks. Fortunately the FDIC won that scrum. Otherwise the megabanks' behavior could have been even riskier and more devastating than what occurred.

It was bad enough that, during the run-up to the crash, bank examiners who wanted to scrutinize the giants were intimidated. One told Fine that a bank's CEO had "a direct line into Washington, and it could destroy the examiner's career." In another incident that Fine says "outraged" him, an examiner who tried to sanction Wells Fargo had his decision reversed after the CEO visited the Office of the Comptroller of the Currency; the examiner was transferred out of the bank's district.

Eventually it became clear that "nothing was happening to the big banks, and everyone knew they were sliding south," says Fine. When four majors — Wachovia, National City, Bank of America and Citigroup — became critically undercapitalized, Fine went to FDIC Chairwoman Sheila Bair to ask why they weren't being subjected to the PCA law, which could have resulted in replacing their executives or even breaking them up. Fine likes Bair, who has a populist streak of her own and whom he finds to be a candid, "hard-as-nails regulator." But he says she "basically gave a non-response": that there were complicated issues and that perhaps, if she had a free hand, action would be taken. "She was very sympathetic," he says, but what he gathered was that there "was great resistance from the political community."

Fine isn't merely griping that the free pass given to the big banks was grossly preferential and anticompetitive. He means to underscore that the financial crisis didn't need to reach full bloom, and that we could have avoided the bailouts following the "too-big-to-fail" theory, which he detests as anathema to the free market. The big banks could have been put in conservatorship, reduced to rational size or sold off in working pieces. The depositors, consumers and taxpayers would have been protected, but "we would have had to wipe out the investors and shear off the management," he says. It's a plan he still favors.

Like his members, Fine has feared a "Citibank or Bank of America on every corner." Would the new administration tackle the big banks? Last winter, twelve hours after being sworn in as Treasury Secretary, Geithner summoned Fine to a meeting. "He asked me what was on the mind of the community bankers of America," Fine recalls. "I said, 'Do something about "too-big-to-fail."'"

Fine says he told Geithner he was worried that the taxpayers would be on the hook again for further bailouts and that the economy would suffer. He raised the anticompetitive impact of propping up Citigroup and Bank of America. "Why are they treated differently from us?" Fine recalls asking.

Fine says Geithner's response was, in effect: "I understand where you're coming from, and it's something the Treasury should address." Then, says Fine, "I asked him point-blank if he thought these firms should be bailed out. He looked me in the eye and said, 'No, I don't.'" The Treasury Secretary has recently hinted to Congress about ultimately getting rid of the "too-big-to-fail" concept, but his suggested measures "don't go nearly far enough," says Fine.

Recently Paul Volcker, the former Fed head and current Obama adviser, indicated that the White House remains committed to the concept of "too-big-to-fail," meaning that the megabanks will continue to have a safety net and may ask for more bailouts. At present, nineteen financial institutions are on the protected list. Their business model hasn't changed materially since the crisis. They're still bloated and addicted to gambling. They could have benefited from prompt correction but were spared.


Washington may very well foist one unified regulator on the industry, a consolidation that, at first glance, could seem like a good idea. The Big Four banks — Citi, BofA, Wells Fargo and JPMorgan Chase — now control about 53 percent of all bank assets; the biggest twenty banks control 80 percent. There's no denying the appeal of a Transformers-type battle between a heroic Autobot regulator and the financial world's Decepticons. But that's make-believe.

The cyclops theory of bank regulation that would fuse all four bank regulators into one "superagency" is actually the heart of a bill by Senator Christopher Dodd (after Obama, the No. 2 recipient of AIG money in the 2008 campaign cycle). A number of other proposals have been floated by the administration and by Barney Frank, chair of the House Financial Services Committee. Those drafts have been discussed for almost a year and have mutated all the while. What we'll end up with is uncertain, but comprehensive reform is unlikely to be hashed out until after healthcare is settled.

Will it result in real protection or platitudes?

Camden Fine is concerned about such a monolithic regulator, saying the big boys would be able to influence it more easily than they can the current mélange of the Fed, FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision. But the structure of such a new beast is far from set.

For instance, Dodd wants the Fed to lose its regulatory hold over banking and consumers (especially credit cards). Conversely, the Obama administration strives to make the Fed the über-regulator of banks and "shadow banks" — non-depository units like Countrywide and GE Capital. You may have heard some TV pundit say that this is a great idea, that the Fed has tremendous expertise and that Bernanke has done a fabulous job.

But the idea of Super Fed as top financial cop as well as the nation's central bank is colossal and colossally bad, and not just because the Fed is notoriously secretive — the opposite of Obama's pledged "transparency." The Fed chair is, by law, independent and doesn't answer to the president or Congress. A lax chief — and there's every reason to expect him or her to be lax, considering the cheek-by-jowl closeness of the Fed to banking and other financial magnates, and the baleful history of Fed enforcement — could not be simply removed.

As for Bernanke, he's an academic economist with no enforcement or justice chops who, in tandem with Henry Paulson, force-fed the nearly worthless Merrill Lynch to the foundering Bank of America.

And that story just keeps getting worse. When the House Committee on Oversight and Reform recently investigated the federal outlays of $20 billion to help BofA buy Merrill in one of last year's most questionable bailouts, it also heard evidence that BofA CEO Ken Lewis committed securities fraud for which the bank already had been charged civilly by the SEC (again without a DOJ criminal indictment). The facts speak for themselves: Lewis sold the BofA shareholders on the merger without telling them that the bank would not only swallow $12 billion of Merrill's $27.6 billion in losses, but also pay accelerated bonuses of $3.6 billion to Merrill executives.

It was such a clear case of securities fraud that BofA and the SEC reached a quick settlement of $33 million, a relatively skimpy amount. In September federal judge Jed Rakoff rejected the settlement, which didn't specifically name Lewis or any other executive, as a shady deal between Wall Street and Washington. He said that it "cannot remotely be called fair." Rakoff added that the agreement "suggests a rather cynical relationship between the parties: The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, and the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all of this is done at the expense, not only of the shareholders, but also the truth."

The judge scheduled the case for trial in February and has ordered the SEC to tell him why it didn't charge Lewis personally. Long at odds with the SEC for its coziness with Wall Street, the New York Attorney General's Office announced it would also file civil charges against BofA and Lewis. On October 1 the embattled CEO resigned and received a platinum parachute wafted on TARP funds — BofA had already received a $45 billion bailout and would not have had the wherewithal for such a severance without it.

What the House Oversight Committee found and Ohio Representative Dennis Kucinich showed through internal Fed documents was that Paulson and Bernanke ignored "evidence that the Bank of America withheld information from its shareholders about mounting losses at Merrill Lynch before the crucial shareholder vote on December 5 — a potentially illegal act." In short, the Fed and Treasury have been accused of condoning a titanic securities fraud. But government approval of an offense often makes it more difficult to prosecute the culprit criminally, which may be why Lewis hasn't been indicted. Interestingly, internal e-mails from Bernanke to his top counsel, Scott Alvarez, reflect that Lewis requested a letter from the Fed that, in Bernanke's words, would show that the Fed "supported the safety and soundness case for proceeding with the merger and that we communicated that to Lewis." Bernanke favored giving Lewis the note — what could be seen as a get-out-of-jail-free card. The Fed chair asked Alvarez, "What would be wrong" with such a letter, if requested by the defense in litigation?

The hard-nosed attorney rebuffed his boss: "I don't think it's necessary or appropriate to give Lewis a letter along the lines he asked."

It's unclear whether Lewis ever got the permission slip he sought from the Fed. But he probably has made enough of a record of government assent to enjoy his retirement package not behind bars, and perhaps to beat his upcoming civil cases as well.

The problem of the financial elite not being indicted owing to the sensitive involvement of the government may be cooling the securities-fraud investigation of Lehman Brothers and its CEO, Richard Fuld, who puffed the stock to investors while on the brink of diving into bankruptcy a year ago. It's well known that the Fed and SEC had camped at Lehman with full access to books and financial records after Bear Stearns had burned down six months before. So Fuld may draw a pass, too.

The Fed's obsession with secrecy is another major problem. Take Congressman Ron Paul's popular bill to subject the central bank to audits like every other federal financial agency. The Fed pushed back vindictively through Alvarez. He warned that, if passed, the bill could cause the Fed to raise interest rates — it remains a mystery how an audit could affect macro-economic conditions on which rates are based. Even when Geithner — himself a former New York Fed chief — asked for a public review of the Fed's murky governance and structure, the secretive agency declined.

In August a federal judge granted a Freedom of Information Act request by Bloomberg News to reveal the identities of banks that borrowed from ten Federal Reserve programs during the peak of the financial crisis last fall, the dollar amounts and the collateral pledged. The Fed claimed the material was confidential and would hurt the banks' "competitive position." Nonsense. Americans have the right to know how their money is spent, and the information also has historical value in understanding the meltdown. "One way or another," says Florida Representative Alan Grayson, "the Fed is going to have to come clean." Maybe. Maybe not. The Fed won't willingly give it up — unseemly behavior, you would think, for a regulator.

But at least the public would get some measure of satisfaction if executive compensation were reined in, right? That's not coming along well, either. All of the reform packages contemplate limiting executive compensation or, at least, bonuses. The administration plans to support "say on pay," which means that shareholders in public companies would get the right to vote on executive pay. But such votes would be non-binding on companies' management and boards, so that equals nothing.

Shareholders, by the way, can be pretty avaricious themselves, especially during bubbles, when speculation pumps stock values to hookah highs, as in recent years. It's hard to see "say on pay" as other than vacuous.


All hope is not lost. The administration and congressional Democrats do support a promising reform called the Consumer Financial Regulatory Agency (CFRA). Obama's 80-plus-page proposal contains yawning gaps that Congress may fill and the financial industry will fight: Insurance isn't covered, nor are 401(k) retirement plans, and the majority of financial consultants and planners (including all the mini-Madoffs out there) evade scrutiny and standards. But the CFRA would actually wrest consumer-protection powers away from the Fed, which has them now and has failed consumers utterly.

Critically, a CFRA could allow scammed consumers to go to court against the securities industry. This is major. Any claimant who has been through the securities industry's kangaroo court might prefer the courts of Iran. At present individual rights against financial predation are about where anti-discrimination protections were 60 or 70 years ago. Then the Civil Rights Acts came along, with their provisions allowing Thurgood Marshall and thousands of lawyers who followed in his footsteps to sue in courts everywhere. Financial reformers want nothing more than what the Founding Fathers contemplated when they crafted the Seventh Amendment as a public-jury-trial antidote to rigged, remote, windowless, non-jury British enforcement proceedings on the Stamp Act and other forms of financial bullying.

Of course, this is a bridge too far for the financial industry. Its lobby, the most powerful in recent American history, has won every major legislative battle in the past twenty years. Wall Street's lobbyists and their congressional allies can be expected to fight hard. They'll call in all their markers to ensure that securities-fraud and other financial-crimes cases won't be heard in front of hometown juries.

There's something more encouraging: The CFRA, at least as now envisioned, would be a model of financial federalism, allowing states to pass even more stringent protections. In other words, there would be plenty of room for populists like New York's Andrew Cuomo, Connecticut's Richard Blumenthal and California's Jerry Brown to enforce more protection for consumers.

The money lobby will have more trouble beating down this reform because of the Supreme Court's Cuomo v. Clearing House Association decision. Though it carries the name of the current New York attorney general, the five-to-four opinion this past summer amounts to a last big regulatory gift to the consumers from former New York AG Eliot Spitzer, who tried to probe the big national banks about whether their credit interest rates for racial minorities were ratcheted up. The Bush administration sued to block New York from enforcing its laws on national banks, a posture strangely continued by Obama's lawyers. But the high court's four liberals, plus usually arch-conservative business ally Antonin Scalia, collaborated to vindicate Spitzer. The decision appears to give the go-ahead to states to pursue big-time financial criminals even if the federal government won't do it. The Wall Street Journal's editorial page sensed real danger to the behemoth banks from pro-consumer local prosecutors, raking the court and treating Scalia as if he had been smoking green shoots.

Despite their atrocious management and performance, the big banks have been propped up, enabled and enshrined in their competition-thumping oligarchy by Washington. In a pleasant surprise, the court is allowing the states to brandish a whip hand to rein them in.

Too big to contain, probably, are the derivatives, especially the synthetic (also known as naked) CDSs that crashed us last fall. Warren Buffett, among others, thinks this financial plutonium can't be controlled and that it should be outlawed, as it was until 2000. But a new ban may already be off the table. Barney Frank, usually the most avid reformer on derivatives, pointedly left out a ban on naked CDS deals in the proposal he submitted in early October. The Obama team wants default swaps cleared by a "central counterparty" — in other words, on a public exchange. That way, we're told, if the slaughter starts, we'll see it and stop trading before it's too late.

It's not enough. Naked swaps are the equivalent of financial gang rape. As soon as hedge funds, investment banks and big-time short sellers sense that a bond is flailing, they can pile on with as many derivatives as they like to make millions in what are, in effect, side bets in a craps game. Today electronic trades take five milliseconds, according to the New York Stock Exchange. The carcass will be picked clean long before any bureaucrat gets regulatory authority to shoo away the vultures. The central-counterparty market only applies to standard, rather than "customized," derivatives. So if you're savvy enough to put a few bells and whistles on your swap, you can still push it through the dark digital over-the-counter alleys, far from the gaze of prying regulators. We're just as vulnerable as we were in the dizzy days of AIG, JPMorgan, Lehman and Bear Stearns.

The truth about naked swaps is that they're as sordid as they sound. To be clear: They're the costliest, riskiest form of gambling on earth. Only a few economic patricians can play: hedge funds, banks, pension funds, insurance companies and governments. But as we learned the hard way in 2008, just about everyone, including the system itself, loses when they win.

Geithner told Congress that the government was "blind-sided" last year by the explosive risk of the derivatives market but can regulate it now. That's wrong on both counts. Everyone in Washington knew or should have known the risks in 2000, when the government stopped regarding these complicated bets as felonies and started calling them "investments." Then, as now, the main argument was that if American markets won't clear such swaps, someone else will. But two wrongs don't make a right; nor do a trillion. Plus, our government takes the opposite stance on, say, bribery in foreign countries by Americans, whom it prosecutes vigorously despite the fact that other nationals could pay the bribes if our companies don't. In fact, the DOJ is emphatic that bribery will stop only when people who pay bribes go to jail (which they do).

Washington's soft-core approach to the epic financial fraud that caused the crash remains hard to understand. As Bill Black says: "When you don't prosecute, things don't get better."

They're not getting better or safer. Credit is tight as a tick — especially for consumers. The financial industry is expanding its use of new and exceedingly complex derivatives. The mortgage market, the source of the raw material for mayhem, remains unchecked. The FBI said this past summer that mortgage fraud is "rampant" and growing. Suspicious-activity reports (known as SAR) rose from 47,000 in fiscal 2007 to 63,000 in fiscal 2008, which ended last September at the height of the crisis and its publicity, and now such reports are on track to exceed 70,000 for fiscal 2009. A growing source of exploitation involves reverse mortgages marketed to the elderly.

People want justice. They've lost savings, homes (or the value of homes), jobs and retirements. Foreclosures continue to rise. People can't believe that the mega-grifters who pulled off mortgage, securitization and derivative frauds walk the streets with lined pockets. And the venal "experts" who issued bogus ratings that deodorized subprime cesspools should be in the dock. But it almost seems as if Bernie Madoff's 150-year sentence for a scheme that had nothing to do with causing Wall Street's meltdown is supposed to cover all the crooks, and that we're supposed to be satisfied.

James Lieber is a lawyer whose books on business and politics includeFriendly Takeover (Penguin) andRats in the Grain (Basic Books). His previous story on the Wall Street meltdown, "What Cooked the World's Economy?" was published this past January inRiverfront Times' sister paper theVillage Voice, where this story also appears.
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