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Where’s the reporting on the fraud that led to the crash?

COMMENTARY | October 15, 2009

The mortgage-related crash was the product of wide-scale criminal fraud, says economist James Galbraith, and people should be going to prison. Instead, he says, the press has pretty much ignored that aspect of it, treating the issue as boys-will-be boys.

(Part of our series on "Reporting the Economic Collapse.")

By John Hanrahan

University of Texas economist and author James Galbraith believes the press has paid too little attention to investigating the “criminal and felonious behavior” involved in the economic crash of last year.

“The press as a whole used [Ponzi-schemer] Bernie Madoff as the emblem of wrongdoing, but compared to the wrongdoing in the housing sector, the Madoff scandal was small-bore,” Galbraith told Nieman Watchdog in a recent interview. “The press has tended a bit to treat this issue [mortgage related fraud] as a kind of boys-will-be-boys phenomenon. The press has not been aggressive in investigating this the way they should, to point out to readers the extent to which we’re talking about fraud -- criminal, felonious behavior -- that will end up with people in the penitentiary.”

Galbraith said last year’s economic collapse “was the product of wide-scale criminal fraud,” just as was the case in the savings and loan scandal of the late 1980s, which produced thousands of criminal charges against S&L officials and loan officers.

(In 1987-1988, the Federal Home Loan Bank Board referred more than 11,000 S&L cases to the Justice Department for investigation and possible prosecution. A book, “Big Money Crime” by Kitty Calavita, et al., reported that by the spring of 1992, more than 1,000 defendants had been charged in major S&L cases, with a conviction rate of 91 percent.)

So far, Galbraith said, there have been few prosecutions of mortgage related fraud in connection with the economic collapse. One difficulty, he noted, is that after the 9/11 bombings, hundreds of FBI agents (2,400, according to this Nieman Watchdog piece) were switched by the Bush administration from white-collar crime investigations to terrorist/national security cases, and were not replaced.

The FBI’s ability to conduct full-scale field investigations of white-collar crime appears to be improving somewhat. Since the end of 2007, various mortgage fraud task forces have been established by U.S. attorneys and the FBI, most recently in July in Connecticut. A press report a year ago indicated there were then some 1,500 active investigations involving such giants as AIG, Lehman Brothers, Fannie Mae and Freddie Mac.

Additionally, other press reports have indicated that Countrywide Financial, the nation’s largest mortgage lender, was being investigated for securities fraud by the Justice Department and FBI. Also, officials in various states -- including New York, California, Connecticut, Illinois, Massachusetts and Ohio -- are reportedly investigating mortgage related fraud.

However, there are concerns that Justice Department and FBI investigators are still in too short supply to conduct widespread and in-depth investigations into crimes underlying the economic collapse, and that Congress is exerting inadequate oversight needed to prod federal investigators. Rep. Marcy Kaptur (D-Ohio), on the PBS program Bill Moyers Journal, said recently, "We need to get hired over at the Justice Department, 1,000 agents, in mortgage fraud and in securities fraud. Then, I pray, that the leadership of both chambers [of Congress] will do the kind of robust hearings that the nation deserves to rout out those who did wrong and to change the fundamental financial architecture of this country."

The Nation's national affairs correspondent William Greider, in the magazine's October 26 issue, spotlights one promising vehicle for exposing the root causes of the nation's financial crisis -- the Congressionally-created, bipartisan, 10-member Financial Crisis Inquiry Commission that began operations September 17. (And, as Greider observes, "it was a nonevent for the media," which has "moved on" and seems to regard the financial crisis as "last year's story.") 

The commission is headed by Phil Angelides, the former California state treasurer. Greider quoted Angelides as saying the commission's purpose is "uncovering the facts and providing an unbiased historical accounting of what brought our financial system and our economy to its knees."

Noting that "the landscape remains littered with unanswered questions and informed suspicions about who did what to produce the breakdown," Greider warned: "Given the rush of events, the commission may be the public's last, best chance to get at the truth of the matter." 

"The industry will not be trustworthy until their crimes are investigated and prosecuted," Galbraith said. "The press needs to get on this one. The wheels of justice grind slowly, but they will grind."

Galbraith holds the Lloyd M. Bentsen Jr. chair in government business relations and is a professor of government at the University of Texas, Austin. He is the author of seven books, the most recent being "The Predator State: How Conservatives Abandoned tgeh Free Market and Why Liberals Should, Too," published last year.


Next in the ‘Reporting the Collapse’ series:
What the press can learn from its failure to report the housing bubble before it burst. Reporters and editors need to evaluate arguments for themselves, and get officials and economists to back up their statements, not just make assertions. That’s advice from someone who suspected early on that there was a bubble about to burst and did research that confirmed his suspicions.

Earlier in this series:
Doing a better job coping with economic disaster. Writer Henry Banta lays out what has gone wrong and why it is so important for the press to do a better job.

Rein in entitlements? No. Increase them, says James Galbraith. It’s time the press stopped falling for false, ongoing efforts to portray Social Security and Medicare as going broke, says Galbraith in the first installment of his interview with John Hanrahan.

As joblessness rises, reporters need to focus on calls for a second stimulus. Dean Baker sees a new, large stimulus as urgent. He has an alternate plan, also: Give companies tax credits to reduce workers’ hours (but not their pay) and put on new staff to take up the slack.

Galbraith: Deficits are the solution, not the problem. The University of Texas economist views aiding households, not banks, ia the key to recovery. He is highly critical of most coverage of deficits and fiscal policy and singles out the Washington Post editorial page as the worse offender.

Health care patents cost Americans hundreds of billions a year. Dean Baker says drug and medical device patents drive up costs enormously but are seldom if ever mentioned in the debate over health care reform. Drugs and equipment that could be sold profitably for a few dollars may instead sell for thousands.

Story ideas, from an expert. Dean Baker becomes assignment editor for a day, and asks for stories on deficits, on the mathematical basis for figuring the right size of a stimulus program, and the set-up by which banks borrow money from the Federal Reserve at 0 percent and re-lend it to the Treasury at 3-1/2 percent.



No Recovery - just Equilibrium
Posted by Anthony Maw
02/08/2010, 11:12 AM

The expectation of a "recovery" is a false hope. The fact is that the American economy was overspent. It's just been reset to where it SHOULD be. There will be no cure for America's economic woes until interest rates go up, homebuyers should have to put up substantial down payments and credit card companies need to tighten up credit limits. Get used to it.

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