Helen Davis Chaitman is a well-known attorney with extensive experience in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. The National Law Journal named her as one of the nation's top ten litigators in 1995. Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).
By Helen Davis Chaitman
I confess: Larry Doyle is my hero. Along with a handful of courageous, brilliant people, Larry has spoken out about the corruption that is Wall Street in his wonderful book “In Bed with Wall Street.” This is a must-read if you want your grandchildren to live in a country that protects against the ravages of the super-rich.
Americans like to believe they can teach third world countries about good government... But wait--do we really want to spread the word on how to corrupt our regulators and prostitute our legislators?
The Fraud that is FINRA
Larry shows how, step by step, the rich and powerful have distorted the purpose for the existence of FINRA, the securities industry’s self-funded, self-regulatory organization whose stated purpose is to be Wall Street’s own private police. FINRA is a private organization formed as a result of a merger of the National Association of Securities Dealers and the regulatory arm of the New York Stock Exchange. It is funded and run by the Wall Street firms but it is completely above the law: Unlike even the SEC, FINRA cannot be sued – no matter what it does. Larry describes FINRA as the “Cops on the Take” and he is 100% correct. How convenient that Wall Street supervises itself!
Mary L. Schapiro, former Chief Executive Officer of FINRA and then Chairman of the Securities and Exchange Commission, described FINRA as having overarching objectives of investor protection and market integrity. If you believe that, read Larry’s book. You will see that FINRA exists to enrich itself and to protect the big Wall Street players, no matter how illegal their practices, while tormenting the small players who can’t afford to grease the appropriate palms.
Speaking of greasing palms, Congress does not come cheap. During the ten-year period from 1998 – 2008 – the lead-up to the catastrophic world financial crisis – Wall Street contributed $1.7 billion to favored legislators’ campaign funds and $3.4 billion to lobbyists who, of course, spread the wealth among those who count. Wall Street plays both sides of the aisles; 55% of the contributions want to Republicans; 45% went to Democrats. Wall Street is not interested in one political parties’ credo or the others'. It simply wants to own Congress. And it does. Larry lays out all the details in his book. Nobody can say that Wall Street is reckless with its money. As Larry writes: “The funds may have bought Wall Street the desired ineffectual oversight, but they also bought America and the world a crisis of epic proportions.”
Larry does an excellent job of explaining the crisis with auction rate securities (“ARS”) which represented approximately 10% of the total US money market and of the municipal bond market. And he explains how FINRA failed to protect investors because it was busy protecting its own $650 million investment in ARS--the securities regulator was competing with the public it was supposed to be protecting.
Larry describes how Wall Street outsmarted the public by requiring customers to litigate disputes with the Wall Street firms through FINRA’s own arbitration process. About half of the people in the United States, about 160 million people, own stock or a stock fund. All of the securities firms require customers to sign agreements that, in the event of a dispute, the customer must litigate through a FINRA arbitration. But guess what? The FINRA arbitrators “are paid by the regulators that are funded by the industry.” As some have said, “in order to get along, the arbitrators had better go along.”
The Fraud that is SIPC
If you invest in securities and you rely upon your broker’s promise of SIPC insurance, read this book. The Securities Investor Protection Corporation (“SIPC”) is a scam. SIPC was formed by Congress in 1970 to be made up of all the securities firms. SIPC is supposed to assess its members to fund insurance to protect customers whose brokers steal their money or their securities. The insurance provides a substantial inducement for people to do business with securities firms and SIPC’s members enjoyed the increased business that the promise of SIPC insurance provided.
Now let’s talk about how they paid for the insurance. For the entire period from 1996 through 2008 each SIPC member paid a flat fee to SIPC of $150 year in exchange for which each member was able to assure all of its customers that their accounts were insured up to $500,000? That’s not a typo. Goldman Sachs, JPMorgan Chase, Schwab, with their tens of thousands of customers, wrote one check each year for $150 to fund tens of billions of dollars of promised insurance. And Larry explains how, after the Madoff collapse, SIPC changed its mind about what the insurance was that it had promised investors. Why? Because the SIPC fund was under-funded and the thought of making a special assessment against SIPC’s members never occurred to SIPC’s members. Should we be surprised?
The Fraud that is Whistleblower Protection
Nor should we be surprised to learn that the SEC’s 20-year whistleblower program rewarded only five people from 1989 – 2009 and the total bounty paid to those five people was less than $160,000 altogether! The SEC just doesn’t like whistling. Larry quotes Preet Bharara, US Attorney for the Southern District of New York, stating that insider trading was “rampant and routine and that this criminal behavior was known, encouraged and exploited by authority figures in several investment funds.” And, of course, the SEC did nothing, in 20 years, to prosecute insider traders.
Larry recounts the work done by several admirable whistleblowers – all of whom were ignored by the regulators. The stories make you want to take all of your money out of the stock market and put it in your mattress!
The Fraud that was Congress’ Response to the 2008 Global Economic Collapse
In perhaps the most important chapter of the book, Larry reviews the work of the Financial Crisis Inquiry Commission (“FCIC”) appointed by President Obama to investigate the cause of the global economic collapse. Clearly, the failure to regulate Wall Street allowed the greed of the Street to destroy the economic lives of millions of innocent people. And the regulators did nothing to stop at. Wall Street successfully paralyzed them. The star of the FCIC’s hearings was former Citigroup chief underwriter for consumer lending, Richard Bowen. As Larry explained:
Bowen highlighted that he had determined in mid-2006 that more than 60 percent of the mortgages that Citi had purchased from third-party originators and sold to investors such as Freddie Mac and Fannie Mae were defective – that is, they did not meet Citi’s standards. Bowen sent messages to senior Citi management, including former US Treasury Secretary Robert Rubin, indicating the seriousness of this matter and the urgency with which it needed to be addressed, but his whistleblowing fell upon deal ears. Bowen also testified that in 2007, the defective mortgages purchased by Citi increased to over 80 percent.
Bowen had been fired by Citi in 2009 after having blown the whistle within the bank.
The FCIC’s final report fell far short of its mission, apparently in an effort to appease the major Wall Street firms. As former SEC Commissioner Arthur Levitt explained, once word of a proposed regulation got out, industry lobbyists would rush to complain to members of Congress with jurisdiction over the specific activity at issue.
The power of Wall Street to decimate legislation intended to protect the public against the greed of securities firms is most evident in the enactment of the Dodd Frank legislation. Dodd-Frank directed 22 separate federal regulators to undertake work on over 400 separate rules. Years after the enactment of the legislation, most of the regulatory work has still not been done.
As Larry explains, the banks that were too big to fail are now, six years later, much, much bigger. “The four largest mortgage originators (Wells Fargo, JPMorgan Chase, U.S. Bancorp, and Bank of America) now write approximately 50 percent of the home mortgages in our country. The largest originator, Wells Fargo, has approximately 30 percent of the market. The four largest banks issue close to 70 percent of the credit cards. The six largest banks by assets (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) hold assets valued at close to two-thirds of our nation’s GDP. In 1995, the six largest banks held assets equal to 17 percent of our nation’s GDP. The four largest banks hold close to 40 percent of our nation’s bank deposits, up from 32 percent pre-crisis. The five largest banks hold 95 percent of the exposure within the quadrillion-dollar (this is a thousand trillion) derivatives market. That figure represents approximately $3.2 million for every man, woman, and child in the United States of America.”
Is there hope for the future?
Larry cries out for change. My favorite sentence in Larry’s book sums up his message – a message which every American should take to heart:
Financial institutions that are “too big to fail,” combined with politicians who are too compromised to govern and regulators who are too captured and corrupted to protect, produce an incestuous cabal that is simply too big to trust.