Abstract
Four essays on the regulation, reform, and reformulations needed to rebuild and fortify the U.S. economy, on scales personal and national.
As far as acronyms go, SIGTARP is a stiffly prosecutorial one. It stands for the Office of the Special Inspector General for TARP. The latter, of course, is the Troubled Asset Relief Program created in 2008 to address the subprime mortgage crisis by buying toxic assets and equity from financial institutions. SIGTARP investigates crime at institutions that received those taxpayer bailout funds. Where the media describes it as “obscure”, the banks it has fined and the bankers it has arrested are well aware of the agency’s bite.
SIGTARP has recovered hundreds of millions of dollars in assets. It has dozens of investigators with guns and badges who travel the country in vehicles bedecked with police strobes and sirens. And those investigators make arrests. To date, the agency and its partners have filed charges against 366 individuals and are responsible for the criminal convictions of 259 defendants, of whom 163 have been sentenced to prison (others are awaiting sentencing). A signature example of SIGTARP’s power to search, seize, and arrest is the conviction of the former chief executive of Virginia’s Bank of the Commonwealth whose “brazen greed and dishonesty” was said to have contributed to the financial crisis. He was sentenced to more than 20 years.
And yet, there remains a sense that the agency is suspended at the threshold of success. Its head, Christy Goldsmith Romero, says that while her office has been enormously effective in prosecuting senior executives at small- to mid-sized banks, it has been unable to catch the CEOS of large Wall Street firms. In the Wall Street culture that insulates and protects the most powerful, high-level executives (though they may have their suspicions) are often kept deliberately in the dark about shady schemes and potential fraud. See no evil, hear no evil, speak no evil. A shroud of willful and strategic ignorance protects the grandees in the corner offices.
Says Goldsmith Romero: “I have called for Wall Street reform based on the difficulties SIGTARP has faced as a law enforcement agency in proving criminal intent of senior executives at large institutions given how isolated they are from knowledge of fraud in their company. …This isolation is part of the culture at large institutions, and is something that is unlikely to change absent reform. That is why I am proposing a reform to bring accountability to the ‘Insulated CEO’ and other high-level executives.”
The proposal would require Wall Street CEOs and other senior executives to annually certify that their company is fraud-free. “No longer allowed to stay ‘in the dark,’ a crime and fraud certification forces the CEO to be ‘in the know.’” Goldsmith Romero said. “Crime and fraud cannot be allowed to go unchecked at our largest institutions.”
So much about the U.S. economy hinges on questions of transparency. In this issue’s Viewpoints, Daniel Beunza reports on a nascent push within large banks to investigate and reform internal organizational culture and the values and norms that shape it. Most regulations passed in the wake of the financial crisis have targeted the structure of the financial industry, doing little to address banks’ risk-taking and win-at-all costs mentality. Reform pressures are partially coming from the “outside”—the U.K. Parliament, for example, has set up a banking standards board to look into these issues, and it is an open question how much of these self-inquiries are self-interested. What is clear is that the investigative spotlight needs a higher voltage.
Exposure needn’t be revealing, however, warns Alex Preda who writes about the financial sector’s increasingly chummy relationship with the media. An industry that has prized secrecy is finally opening up, but only on its terms. Instead of transparency, media appearances by “financial performers” generate spectacle and hype, as they often act on behalf of banks and brokerage houses. Likewise, Frederick Wherry, Kristin Seefeldt, and Anthony Alvarez describe how the financial sector too often is allowed to control the narrative. Moderate- and low-income families facing economic strain are turning to payday loans and to other high-cost financial services to help make ends meet, but they are portrayed not as the victims of an unfair economy and unscrupulous lenders. They are often depicted as irresponsible dullards in need of fiscal disciplining. The authors discuss how to regulate a runaway payday industry and shift matters in the consumers’ favor.
Finally, Kevin Leicht writes about the ascendancy of a culture of finance and how it has distorted the U.S. economy in critical ways. In the place of the production-powered prosperity of Keynesian economics we have seen the rise of supply-side fantasies of growth untold, unleashed by massive tax cuts and the deregulation of finance and banking. The result is that we are now heavily dependent on borrowing rather than earning. We are more, not less, vulnerable to fluctuations in the global economy.