When the history of government being controlled by one powerful force is written – if this story is allowed to be told – perhaps the most fascinating profile will be that of outgoing U.S. Attorney General Eric Holder.
Regulatory watchers and those close to the levers of power, speaking off the record for fear their jobs and livelihood would be at risk, have said that big bank forces in Washington DC have not just grabbed control of financial regulators, they have oozed into the ability to control the most senior levels in Justice Department itself. There have been said to be many behind the scenes fights, brave souls who risk isolation and career degradation to warn of a force that is now bending justice itself.
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The story reads like a good spy novel. With one group seemingly having all the benefits of power, they operate in the shadows, knowing if their tactics and dirty deeds are generally exposed in mainstream media, such transparency could defeat them. This is the role journalism was designed to play in the US Constitution.
The career of Alayne Fleischmann
When the history of financial reform is written it will show utter control where a shadow justice system that operates without being questioned and has the power to ruin people and their careers, and then the story of Alayne Fleischmann will likely stand out.
Fleischmann is the former JPMorgan Chase & Co. (NYSE:JPM) lawyer who, in 2006, is documented to have sent memos and emails to senior JPMorgan executives warning about the unregulated mortgage derivatives that ultimately were a large contributor to the 2008 financial crisis. Of course the great recession that impacted the entire world followed, but the little discussed kicker is that the problem has only gotten worse. The massive derivatives exposure is now $700 trillion and financial insiders and regulators are concerned the next derivatives implosion – which insiders say will happen – could wipe out the world economy this time. When there is no serious punishment or even mass media acknowledgement of who and what was responsible for the most devastating financial crisis in history – former Fed Chairman Ben Bernankee called it worse than the Great Depression – odds are it will repeat.
This is the backdrop upon which Fleischmann’s bravery is painted. In an attempt to stop what she describes “massive criminal securities fraud” at the bank, Fleischmann, after wanting to deliver testimony, was never seriously used Holder’s justice department to go after individual criminal acts.
In a piece for Rolling Stone, author Matt Taibbi, back in the home that made him famous after a brief hiatus, perhaps pens one of the most important pieces of his career to date. It is most important because it exposes the utter control one narrow force in financial services has over the entire system. Industry insiders are concerned and some who can afford to confront the evil force are going public. Hedge fund luminaries have spoken out, calling Wall Street “Lawless,” while warning about the next derivatives implosion which could be a risk to US national security this time. Carl Icahn and other hedge fund insiders have warned about the derivatives (Icahn’s warning on CNBC was oddly edited out of the video they posted on the web site.)
This is serious, but it’s also fascinating to watch brave individuals fight a controlling establishment that appears to have taken a criminal turn, but even more interesting to understand how elites behind the scenes are standing up for the justice system and democracy itself.
Fleischmann filed reports warning JPMorgan management about the toxic mortgage packages
Fleischmann is the flash point of this story, showing how investigations are blocked then covered up to protect powerful interests. The petite, principled blond from a middle class Canadian upbringing believed in the system, until she discovered the truth. Then, when what she considered fraudulent mortgage derivatives were outed, she filed reports warning bank management about the toxic contents the mortgage packages. But something odd happened. People inside the bank started altering her reports, the article says. Fleischmann was told not to communicate with certain divisions via email, a sign of fraud because email communication, along with memos, are document-able and can be used in court to confirm knowledge of a criminal act before the act was executed.
“It used to be if you wrote a memo, they had to stop, because now there’s proof that they knew what they were doing,” she says. “But when the Justice Department doesn’t do anything, that stops being a deterrent. I just didn’t know that at the time.”
After the tactic of documenting what Fleischmann said was fraudulent behavior didn’t work, she then pleaded with a senior bank official, Greg Boester, not to sell high risk loans and package them as low risk investments.
She was on a quest to stop what some consider blatant criminal behavior.
The article notes the warnings were apparently not formally acted upon or recognized at the top, but JPMorgan Chase & Co. (NYSE:JPM)’s revered CEO Jamie Dimon would dump the bank’s toxic mortgage derivatives holdings before the 2008 implosion, but not before first selling the toxic waste to institutional investors, who would later sue the bank.
It’s at this point that financial insiders note the utter lack of deterrence. Those committing what was apparently blatant criminal acts with documented knowledge of the issue appear, from the outside, like they might have had a knowledge that their crimes would not be individually punished – or even investigated. The bankers responsible for the 2008 mortgage derivatives that imploded are said to have kept their bonuses while the world suffered. This talk of no deterrence later spread like wildfire during the MF Global episode, which some insiders consider the ultimate example of brazen defiance of the law and regulatory authority. At one point insiders thought the customer’s money, technically stolen out of segregation in ordered wire transfers, would never be returned in full. Individuals stood up in that case and made a difference, although what are considered criminal acts have yet to be punished.
In the big bank derivatives story, the person who was punished was Fleischmann, the whistle blower. After the 2008 crisis she had accurately predicted, Fleischmann was let go from JPMorgan Chase & Co. (NYSE:JPM), but worse, Fleischmann was apparently blackballed. Despite having ample qualifications and a distinguished record as a lawyer, she couldn’t find a job on Wall Street. This is real power when those committing the crimes can apparently ruin someone’s life when they speak out – and no one confronts the powerful, with the exception of a few powerless individuals and a handful of aggressive journalists.
Fleischmann wanted to testify. These appeared like obvious crimes, a slam dunk case. But, as the Taibbi story highlights, Fleischmann was prevented from providing testimony at almost every turn. The banks finally settled with Holder’s Justice Department. After unnerving behind the scenes direct communications between the bank and senior Justice officials, a record fine was reached but the real details of what transpired remain a secret. The bank signed a watered down statement of facts that didn’t detail the facts.
The resistance movement to fight what is a narrow group of interests inside the elite establishment that have taken a criminal turn continues, mostly occurring out of public view. To win this fight reformers should look at the MF Global story, which worked from inside the system. How a small group of insiders was able to motivate certain elites to fight a criminal element has yet to be told. But the lesson is identifying the good elites and motivating them to take a risk to benefit freedom and democracy itself.
To read the full Taibbi piece, click here.