STAFF NEWS & ANALYSIS
Everything Wall Street Does Is Illegal?
By Staff News & Analysis - November 29, 2011

Judge Blocks Citigroup Settlement With S.E.C. … Taking a broad swipe at the Securities and Exchange Commission's practice of allowing companies to settle cases without admitting that they had done anything wrong, a federal judge on Monday rejected a $285 million settlement between Citigroup and the agency. The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency's settlement with Citigroup was "fair, reasonable, adequate and in the public interest," as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud. – Bloomberg

Dominant Social Theme: In this case, we need more information to make sure Wall Street is an ethical place. If it's not, we'll pass enough laws to make it better.

Free-Market Analysis: This decision by Judge Rakoff is being heralded as a breakthrough in "cleaning up Wall Street." But in a larger sense Wall Street cannot be cleaned up. Regulations cannot clean up Wall Street. Laws cannot clean up Wall Street. Judges cannot clean up Wall Street.

The idea implicit in what Judge Rakoff has done is that the American judicial system can supersede the marketplace and extract justice. Rakoff has thrown down a metaphorical gauntlet. He has told America's premier securities regulator, the SEC, that it needs to do more. Here are some additional quotes from the article:

As it has in recent cases involving Bank of America, JPMorgan Chase, UBS and others, the agency proposed to settle the case by levying a fine on Citigroup and allowing it to neither admit nor deny the agency's findings. Such settlements require approval by a federal judge.

While other judges are not obligated to follow Judge Rakoff's opinion, the 15-page ruling could severely undermine the agency's enforcement efforts if it eventually blocks the agency from settling cases in which the defendant does not admit the charges.

The agency contends that it must settle most of the cases it brings because it does not have the money or the staff to battle deep-pocketed Wall Street firms in court. Wall Street firms will rarely admit wrongdoing, the agency says, because that can be used against them in investor lawsuits.

The agency in particular, Judge Rakoff argued, "has a duty, inherent in its statutory mission, to see that the truth emerges." But it is difficult to tell what the agency is getting from this settlement "other than a quick headline." Even a $285 million settlement, he said, "is pocket change to any entity as large as Citigroup," and often viewed by Wall Street firms "as a cost of doing business."

According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup's falsely telling investors that an independent party was choosing the portfolio's investments. Citigroup made $160 million from the deal and investors lost $700 million.

Judge Rakoff said the agency settlement policy — "hallowed by history, but not by reason"— creates substantial potential for abuse because "it asks the court to employ its power and assert its authority when it does not know the facts." That undermines the constitutional separation of powers, he said, by asking the judiciary to rubber-stamp the executive branch's interpretation of the law.

This is certainly big news. It may well "freeze up" the investment industry as we know it. But in a sense EVERYTHING that is done on Wall Street can likely be seen as illegal under current law, in our view. Here are some examples:

• Prudent Man: The "prudent man" law says fiduciaries need to be "prudent" in their handling of funds and their dealings with clients. But Wall Street NEVER offers up language to its clients regarding the evident and obvious BUSINESS CYCLE that can decimate one's brokerage account for a decade or longer. Seems kinda "fraudulent" to us.

• Central Banking: And speaking of central banking, there are numerous anti-monopoly laws in place. But the Fed is basically a mercantilist entity, a private corporation operating under color of law. The securities industry and commercial banks as well never explain ANYTHING about the ruinous effects of this money monopoly to investors and savers. Again, seems "fraudulent" to us.

• Inflation: In fact, the securities industry (and regulators as well) continually misrepresents what "inflation" is – using the word inflation when they should be using the term "price inflation." By using the wrong term, these investment professionals are preventing their clients from finding out the truth about how the money system REALLY works. Also seems "fraudulent" to us.

• Syndicates: Wall Street firms routinely set up syndicates to promote new offerings and yet when one looks at these syndicates, they are basically always the same parties over and over again. How is it that these repetitive syndicates do not fall afoul of anti-monopoly laws? Seems "criminal" to us.

• IPOs (pump and dump): When Wall Street brokerages have an IPO to flog, they use their massive sales forces (thousands of brokers) to offer it to clients. As customers buy the IPO, the price is often forced up (especially in a hot market), thus enriching the firm that owns additional quantities of shares that can be sold at higher prices. Finally, the selling is done and the price of the shares deflates. Some customers will sell shares back to the brokerage. And perhaps the brokerage will buy back shares as well. But then when additional "news" is discovered, the shares will be labeled a "buy" by the firm and the process shall begin all over again. Ever hear of a "pump and dump"? Up go share prices. And then down they go. The big broker sells on the "up" and buys on the "down." Sell high and buy low. Seems like a "pump and dump" to us.

• Insider trading: Occasionally, people go to jail over insider trading, which is knowing something before others and acting on that knowledge. Of course, efficient markets are constructed on insider information, but the SEC, via insider trading regs, is apparently hell-bent on making markets LESS efficient under the misguided idea that more people will invest in markets if they are perceived as "fair." But we've brought up in the past the idea that firms that employ advanced technology are creating a kind of "insider" effect for themselves as well. Of course, we are not surprised that life in this case "imitates art." The SEC is now considering ways to limit the advantages that technology gives some firms over us. But what about smart people? Is it fair that some firms have the budgets to hire smarter people than others? Seems like "insider trading" to us.

• Regulatory Capture: We've just written about regulatory capture in another article in today's issue, "The Real Reason Bloomberg Sued to Open Up Fed Records?" We explained it as follows: "The large, strong businesses capture the regulatory departments by offering their top people lucrative contracts. Then the top regulators, when they are older, join the businesses they used to 'regulate.' These 'grayhairs' then counsel their juniors at the regulatory facilities in Washington as to what 'must be done.' The junior people in Washington, DC are willing to listen because they, too, want to get the big payoff by joining a big firm. They don't want to be too tough because it will affect their job prospects if they get all 'doctrinaire' about anything." Sounds like significant "conflict or interest" to us – maybe outright "bribery."

These are just practices that occur to us at the moment, but there are hundreds more examples, both large and small. And by the way, we've put all these crimes and frauds in quotes to show that, while we can make the argument for broad-based criminal activity on Wall Street, we don't believe that the way crimes are defined by the US Justice System today has much if any relevance to what is actually going on. We've written about this a lot, as a matter of fact.

The entire corporate power structure is driven by a pyramid of phony money-printing owned and operated covertly (so far as we can tell) by a few large families and their associates and enablers. You would think someone would subpoena these families or their representatives since they are well known. But no one shall ever do so because the world's entire central banking-driven economy is a kind of racket run by a bunch of seeming "smooth criminals."

The point of all this is to say that you can NEVER legislate morality or fairness and likely you shouldn't even try because all it does is give false hope to people who are then suckered because they believe "government" is looking out for them. Private justice (of the sort that existed for thousands of years), as we've argued numerous times, would be far preferable to what we've got now, which is selective "justice" supported either by incompetent lawmakers or those who wish to pass legislation to fulfill secret agendas.

Government is NOT looking out for you. Government is a collection of people who have seemingly gathered under one roof to pillage and intimidate without reaping the consequences. Some are more adept at it than others, and some even mean well. But at the end of the day, government is legalized force and its operators are there mostly out of self-interest, not public service.

Wall Street seen through this construct is also an avenue of self-interest. Wall Street and its denizens for the most part will advance their own self-interest at the expense of the clients. That's just the way that it is because Wall Street is a CORPORATE agglomeration. Wall Street firms are creatures of their ENVIRONMENT. And the environment has been created by central banks that print money-from-nothing. The big lie is that the money system is honest. But it is not. And because the money system is fraudulent, SO IS EVERYTHING ELSE.

So sorry, Judge. You are but scratching the surface. You can make big banks pay more; you can make their executives suffer more but it won't really change a thing. In fact, the usurpation of the private market by regulators and laws has only retarded what defenses there might have been.

Were there private watchdogs available with self-interest in doing a good job, Western securities industry participants might be held to a higher level of accountability. This will never happen, however, so long as government is involved, sucking up all the oxygen.

After Thoughts

End the Fed.

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