executives were prosecuted and more than 800 convicted. While some of these prosecutions, such as Michael Milken’s, were politically motivated and unjust, the lion’s share were appropriate. After the 2008 financial crisis, which unlike the savings-and-loan mess posed a true systemic threat, virtually none of the individuals who participated in the decisions that caused systemic harm has been prosecuted.
Speaking as a highly experienced attorney and market practitioner as well as a citizen, this breeds disrespect for the law and the government that is obligated to enforce the rules of fair play. As The Economist writes: “If banks have been involved in acts serious enough to qualify for billions of dollars in penalties, then a few more executives must surely have committed a crime.”31 Surely the crimes did not commit themselves, nor did they materialize out of thin air; they were the result of deliberate actions on the part of highly educated and presumably intelligent individuals who deserve to be punished. The fact that they were not punished is a profound regulatory and moral failure that weakens the financial system.
In his classic study of financial bubbles, Manias, Panics and Crashes: A History of Financial Crises, Charles Kindleberger pointed to a common characteristic of speculative booms: “Commercial and financial crises are intimately bound up with transactions that overstep the confines of the law and morality, shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.”32 In May 2015, the government entered into another in a long line of settlements with a group of large financial institutions: a $5.6 billion settlement for the manipulation of exchange rates in the foreign currency exchange spot market. This was just the latest in a series of instances in which individuals working at the heart of the financial system violated the law but nobody went to jail. This settlement followed a similar one involving the manipulation of LIBOR by some of the same institutions.
As part of the settlement, the SEC decided to give another waiver to these institutions that would allow them to conduct business as usual despite the fact that they were repeat offenders. This did not sit well with one SEC Commissioner, Kara M. Stein, who is a frequent target of The Wall Street Journal’s editorial page for being too tough a regulator. In this case, however, Ms. Stein should be applauded for speaking out; she should remind us of Brooksley Born, the former chair of the CFTC whose warnings about the risks of lax derivatives regulation were dismissed by The Committee to Save the World in 1999.
Ms. Stein dissented from the grant of the waivers to UBS, Barclays, Citigroup, JPMorgan Chase, and the Royal Bank of Scotland, pointing out that this was Barclays’ third waiver since 2007, UBS’s seventh waiver since 2008, JPMorgan’s sixth waiver since 2008, Citigroup’s fourth waiver since 2006, and Royal Bank of Scotland’s third waiver since 2013. She wrote that, “[a]llowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored. It is not sufficient to look at each waiver request in a vacuum.”
She pointed out that UBS’s waiver in the earlier LIBOR case was expressly conditioned on no further violations. That condition was violated by its conduct in the foreign exchange case, yet another waiver was granted. She continued: “It is troubling enough to consistently grant waivers for criminal misconduct. It is an order of magnitude more troubling to refuse to enforce our own explicit requirements for such waivers. This type of recidivism and repeated criminal misconduct should lead to revocations of prior waivers, not the granting of a whole new set of waivers. We have the tools, and with the tools the responsibility, to empower those at the top of these institutions to create meaningful cultural shifts, yet we refuse to use them.” In conclusion, she wrote, “I am troubled by repeated instances of noncompliance at these global financial institutions, which may be indicative of a continuing culture that does not adequately support legal and ethical behavior. Further, I am concerned that the latest series of actions has effectively rendered criminal convictions of financial institutions largely symbolic. Firms and institutions increasingly rely on the Commission’s repeated issuance of waivers to remove the consequences of a criminal conviction, consequences that may actually positively contribute to a firm’s compliance and conduct going forward.”
Large institutions that repeatedly break the law have come to see multibillion dollar fines as another cost of doing business. They may complain about them publicly, but until their senior executives are made to pay the ultimate price – the loss of their jobs or their freedom – little is going to change. This may sound harsh, but the systemic harm resulting from the manipulation of markets as important as LIBOR and foreign exchange is profound.
Years ago, the senior executives of Salomon Brothers lost their jobs after it was discovered that Treasury auctions were manipulated on their watch; and we don’t need to be reminded what happened to Drexel Burnham Lambert, Inc. and its visionary leader Michael Milken after he was alleged to have violated laws much less serious than the manipulation of major markets like interest rates and currencies. Today the consequences of law-breaking have been gutted due to regulators’ fears of destabilizing large institutions during an epic credit bubble, something that Charles Kindleberger warned about. We should heed that warning and stiffen our spines against the fraud in our midst before it drags down the system with it. Manipulating markets is not business as usual and should not be tolerated; it should be punished severely before it inflicts harm from which the system can’t recover.
In 2008 the world was facing an economic crisis, but at least the geopolitical situation was relatively stable. That is no longer the case in 2016. Inexcusable foreign policy failures by the Obama administration have left the world a shambles.
The only thing worse than being led by a president lacking the knowledge, experience, and character to lead a great nation is to surround that leader with advisors with similar limitations. But rather than a team of rivals, Barack Obama assembled a confederacy of dunces in Joe Biden, Hillary Clinton, Susan Rice, and John Kerry, a group that supported his worst foreign policy instincts and choices. Principled and competent members of the foreign policy team like Leon Panetta, Robert Gates, General Stanley McChrystal, and General David Petraeus left the administration early. As a result of chronic mismanagement of foreign affairs by the Obama team, the global hegemony of the United States has been profoundly weakened since the financial crisis. It will take decades for America and its allies to recover.
As Charles Krauthammer writes: “For all the sublimity of art, physics, music, mathematics and other manifestations of human genius, everything depends on the mundane, frustrating, often debased vocation known as politics (and its most exacting subspecialty – statecraft). Because if we don’t get politics right, everything else risks extinction.”33 The Obama administration has gotten virtually nothing right when it comes to foreign policy. In the hands of President Barack Obama and his foreign policy staff, statecraft has been a series of abdications of American power and appeasements of America’s enemies throughout the world. It is virtually impossible to name a single place on the globe that is more stable at the end of Mr. Obama’s two terms in office than when he entered in January 2009.
The geopolitical stage deteriorated to such a dangerous extent under Mr. Obama that the United States is facing existential risks that didn’t exist during the financial crisis. Many of the forces creating these risks were simmering under the surface in 2008, but they were so badly mismanaged by the Obama administration that one could reasonably ask whether the errors were intentional. After all, even incompetence is supposed to have its limits. But with this administration, that was not the case. Sunni-Shia conflict and radical Islamic terrorism are hardly new phenomena. Nor are Russian aggression in Eastern Europe or Chinese incursions in the South China Sea. Yet the responses to these destabilizing threats on the part of Mr. Obama, Mrs. Clinton, and the rest of this foreign policy team were so incompetent as to beggar reason.
In November 2008, Americans elected an untested one-term Senator
“Financial Crimes: Unfair Cop,” The Economist, May 23, 2015, 13.
Charles Kindleberger,
Charles Krauthammer, “Are We Alone in the Universe?,”
