Rotten Winners

By: William Greider

The $300 million Enron "settlement" government regulators worked out with the nation's two largest banks smells so bad that even Wall Street Journal editorial writers gagged on the rank odor. What Citigroup and JP Morgan Chase did, remember, was to design the funny-money financial deals that directly pumped up Enron's profits and stock price. When Enron's fraudulent scheme unraveled and the stock collapsed, the nation's pension funds lost somewhere between $25 billion to $50 billion. And these two famous banks each profited mightily from their role as financial architects for the great swindle. The pay-up costs will not even require an asterisk on their balance sheets.

"Bank fraud" is a legal term of art. It means if you were one of those savings and loan hustlers who got nailed in the 1980's S&L crisis, you might go to jail. At least you would be financially ruined in the unwinding. If your name is Sandy Weill of Citigroup or one of those patrician bankers at Chase, the merged Morgan-Rockefeller institution, forget about it. Citi executives at least had the decency to say they felt sorry. The men of Morgan - stiff upper lips, gentlemen - "neither admitted nor denied the SEC's allegations".

Where is the outrage? This settlement was not a "warning shot to banks", as the New York Times claimed. It was the impotent whimper of a toothless government. The prosecutors and SEC regulators expressed complete confidence that both of these banks were expressly aware of the fraud they were helping to commit. As evidence, the lawmen cited a 1998 e-mail from a Morgan executive: "Enron loves these deals as they are able to hide funded debt from their equity analysts because they (at the very least) book it as deferred revenue or (better yet) bury it in their trading liabilities."

Yet the fraud case, the government concluded, was too weak to pursue. In truth, they are probably correct (though seeking indictments would have been a therapeutic exercise). It could helped even more if the failed prosecutors, instead of lamely claiming victory, had explained forthrightly why and how the law more or less guarantees that the biggest, most esteemed crooks will get off the hook. The corruption of law is the core scandal here. It suffuses American capitalism and American politics too.

The banking laws are not handed down from Hammurabi. They are far more likely to be written - no surprise - by the bankerly lawyers and lobbyists who work for people like Sandy Weill. The legal definitions for criminal fraud or the threshholds of evidence required to impose personal and institutional liability on bankers and banks are shaped and massaged by the very folks who might someday stand at risk. For that matter, so are the fictitious distinctions embedded in corporate accounting and the tax code that allow the Enrons to manipulate and swindle - doing magical deals designed by their financiers that turn new debt into revenue and create fictional profit from real losses.

There are now many Enrons - more seem to surface everyday - and we can count on sophiscated high-stakes fraud as a permanent feature of American capitalism so long as the corporate-financial suits write the laws governing their own behavior. I repeat: where is the anger? In the last three years, we have experienced one of the largest corporate scandals in U.S. history and certainly the most costly since investors large and small lost several trillion dollars in the meltdown of false expectations. In Washington, aside from a few brave voices, all one hears are self- congratulations for the pale "reform" measures that allegedly are to restore faith in the stock market and corporate management. Democrats have gone mute on the matter. Republicans worry that "reform" went too far.

But the smoldering anger persists across the country among millions of citizens who at least know what they lost personally. Is there a political party bold enough to turn this hurt and resentment into a red-hot political issue? To clean up this mess, conscientious lawmakers would have to dig deeper into the fraudulent legal distinctions protecting prestigious swindlers and ask larger questions about the functional realities of business and finance. Lliberal Democrats might have to acknowledge that the great financial-regulatory reforms enacted by the New Deal, including the SEC, have largely failed their purpose. The same scandals persist across decades, the victims are the same hapless investors. There is not much appetite in Congress to take on such weighty matters, especially during the fund-raising season for the next election.

But, who knows, maybe there is a presidential candidate among the Democrats brave enough to try. He or she would not have to describe legal remedies for all of the obvious loopholes and snares. It would suffice if someone makes a serious commitment to reexamining the origins of systemic fraud and standard assumptions about how capitalism functions, perhaps promise to launch a serious independent investigation of why such scandals are recurring in the economic system. Asking big fundamental questions is high risk but, who knows, it might wake up some voters.