Liberty Blitzkrieg – by Michael Krieger
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
– Charles Dickens, A Tale of Two Cities
One of the major objectives of this site over the years has been to highlight the demoralizing and extremely destructive reality that two completely different justices systems exist in America — one for the wealthy, powerful and connected, and another for everyone else. While there will always be some element of this in any society of humans, extremes can and do occur, and the pendulum now has shifted in these United States to extremely dangerous Banana Republic-like levels.
Nowhere is this divergence of justice more in your face and deplorable than with respect to how Wall Street financiers are treated compared to the rest of us. Not only was the industry rewarded with endless financial lifelines and zero executive prosecutions after it destroyed the global economy, but the industry continues to do whatever it wants, whenever it wants, with zero repercussions. It doesn’t take genius to understand that if there’s no risk in committing financial crimes, you get a lot more of them.
Speaking of Wall Street being able to do whatever it wants, let’s take a look at what Goldman Sachs is up to courtesy of some excerpts from a recent article by David Dayen published at The Fiscal Times:
Goldman Sachs is on a shopping spree. Last week, it spent $500 million to buy 12 percent of Riverstone Holdings, a private equity firm focused on energy investments. This is part of a $2 billion private equity strategy for the vampire squid. Through a couple of subsidiary funds, Goldman has already acquired stakes in private equity players Littlejohn & Co. and ArcLight Capital Partners, and Accel-KKR, a firm specializing in tech companies.
There’s only one problem with these investments: They’re supposed to be illegal under the Dodd-Frank Act. But “the law” is only as good as the men and women willing to enforce it, as Goldman Sachs has discovered to its delight. Big banks have turned one key section of Dodd-Frank into mush, such that Goldman can flaunt its defiance openly without an ounce of fear. It makes me wonder why House Republicans are working so hard to repeal Wall Street reform when regulators have shown so much willingness to repeal by neglect.
Bank lobbyists weakened the Volcker rule before it was finalized. Then-Senator Scott Brown, the 60th vote for Dodd-Frank in the Senate, inserted a loophole that enabled firms like Goldman Sachs to keep a “de minimis” 3 percent stake in hedge funds or private equity firms. But what Goldman announced with Riverstone equaled four times that number. How is this allowable?
Under a regulatory interpretation from the Federal Reserve, if a new investment fund is in its “seeding” phase, banks can own as much as 100 percent for a “brief period” of up to one year. But Riverstone isn’t new, having been founded in 2000. However, if the investment were structured to look like it’s initiating new funds within Riverstone, the Fed could accept the deal.
At least under that interpretation, Goldman would have to scale back its investment to the 3 percent threshold after a year, right? Wrong. In their rule, the Fed officials write that they “understand that the seeding period… may take some time, for example, three years.”
The Fed has been all too happy to grant elongated timelines for the Volcker rule. Banks initially had four years from the passage of Dodd-Frank to get rid of existing investments in hedge funds and private equity firms. But the Fed delayed the divestiture for a year, then for another two years, which defied the statute, because the central bank was only permitted to delay one year at a time. Last week we learned in Goldman Sachs’ quarterly financial report that last December, the Fed allowed banks to apply for another five-year extension to liquidate the investments. “The firm received this extension for substantially all its remaining investments,” according to the filing.
So Goldman Sachs doesn’t have to jettison its old private equity investments, doesn’t have to limit itself to a 3 percent stake on new investments and doesn’t have to reduce those new holdings for at least three years. You begin to wonder whether the Volcker rule exists in name only, with the dictates mere suggestions instead of directives.
Even if Goldman were misbehaving, Volcker rule enforcement has been practically non-existent. Since the 2014 implementation date, exactly one bank has been fined for non-compliance, for a grand total of $19.7 million.
Goldman has found other ways to, in the words of The Wall Street Journal, “navigate the new rules” — for example, eliminating the private equity middleman and buying up real estate assets and private corporations through its merchant banking business, using a mix of client funds and in-house money. Goldman has essentially dared regulators to stop its degradation of the rule. As then-Goldman president Gary Cohn said in 2012, “we will continue to source and pursue attractive investments on behalf of our clients.”
Cohn’s statement speaks to the near-impossibility of expecting anyone inside government to challenge Goldman; he’s now director of the White House’s National Economic Council. If the SEC wanted to look into this, it would go through former Goldman Sachs lawyer and current chair Jay Clayton. The main regulator, the Fed, has already shown its eagerness to interpret the law loosely. That’s why banks want the Fed to have sole authority on Volcker rule enforcement. And Donald Trump’s nominee to run financial supervision at the central bank, Randal Quarles, comes out of the private equity industry, and is presumably content with continued big bank investments in the space.
This gives Goldman the confidence to build a $2 billion fund for activities it’s not really supposed to be undertaking. And it’s why banks are far less interested in House Republicans’ attempt to overturn Dodd-Frank, which passed the Financial Services Committee last week, than in the regulators who will choose to ignore the law.
It speaks to the weaknesses of half-measures and technocratic tweaks when the banking industry is the adversary. The Volcker rule was needlessly vague and complex, providing industry lobbyists the space they needed to render it irrelevant. The lesson for the future is this: To really impact Wall Street’s activities, you have to attack the structure of finance directly, not at the margins. It’s the only way to even hope to get the job done.
Couldn’t agree more. Meanwhile, who in Congress is seriously talking about doing this?
So that’s what life feels like for Goldman Sachs, but what’s the law look like when your just an average American debt slave? Let’s turn to Attorney General Jefferson Sessions for some perspective.
From The New York Times:
WASHINGTON — Attorney General Jeff Sessions is expected to soon toughen rules on prosecuting drug crimes, according to people familiar with internal deliberations, in what would be a major rollback of Obama-era policies that would put his first big stamp on a Justice Department he has criticized as soft on crime.
Mr. Sessions has been reviewing a pair of memos issued by his predecessor, Eric H. Holder Jr., who encouraged federal prosecutors to use their discretion in what criminal charges they filed, particularly when those charges carried mandatory minimum penalties.
The policy under consideration would return the department to the era of George W. Bush. In 2003, Attorney General John Ashcroft ordered the nation’s prosecutors to bring the most serious charges possible in the vast majority of cases, with limited exceptions. Mr. Sessions could, however, craft his own policy that does not go quite so far; a draft is still being reviewed.
Mr. Sessions, who cut his teeth as a young prosecutor in Alabama during the height of the crack epidemic, came to office promising to make being tough on crime a top priority, and his new guidance on charging and sentencing would be the strongest articulation yet of his emphasis on a law-and-order agenda.
Sure, he wants harsh law and order when it comes to all those weak, poor American peasants, but where’s the “law and order” for white collar criminals? Crickets, of course.
“We do have strong evidence that aggressive prosecutions of federal laws can be effective in combating crime,” he wrote, attributing a rise in the number of murders in the United States to a decline in prosecutions for violent crimes. “Our department’s experience over decades shows these prosecutions can help save lives.”
If this is true, then why not aggressively prosecute Wall Street and corporate criminals generally more aggressively? After all, those crimes are much more destructive to society at large than some street corner drug pusher.
This twisted application of the law when it comes to two different classes of Americans is extremely corrosive, unethical and ultimately potentially fatal to any society. Until this is dealt with, nothing will get sustainably better for the masses of our fellow citizens.
In Liberty,
Michael Krieger