Top Judge and Former Head of Fraud Unit: Government Helped Create Epidemic of Fraud

“A C.E.O. … Might, With Some Justice, Claim That He Was Only Doing What He Fairly Believed The Government Wanted Him To Do”

We’ve previously documented that the government helped to create the epidemic of fraud which caused the economic crisis.

Earlier this month, a prominent New York Federal Court Judge – and former Chief of the fraud unit for the U.S. Attorney’s Office for the Southern District of New York (Jed Rakoff) – agreed:

The government … had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the for­a-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.”

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Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

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The Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

We are not excusing the ongoing, systematic criminal actions and widespread manipulations of the big banks.

But the government sure didn’t help.

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  • Rocky Racoon

    Depending on the private sector for economic advice doesn’t help either. All of the top positions in government are provided personal for the government regulatory agencies. This strategy of capturing the government is clear and stretches from Agriculture to Energy to Banking to Space-you name it and some capitalist is stalking it. We have much better advisor’s in public policy all over the country-world but generally they are under siege in an ngo or university depart and would lose their jobs if they didn’t go along to get along.
    RR

 

 

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