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Friday, Aug. 24, 2012

Who's robbing banks now?

Special to The Japan Times

HONG KONG — Between the late 1920s and 1952, Willie Sutton gained a fortune and infamy from robbing more than 100 banks of an estimated $2 million. But he really gained fame for his supposed response when a reporter asked him why he robbed banks: "Because that's where the money is."

Christopher Peterson, a law professor from Utah, turns the question around today: "What is a bank robber?" He answers: "There are some profound organizational similarities between organized crime and the behavior of many of the most important American bankers in the past 10 years."

His short paper titled "What is a bank robber?" has recently been published by the highly respected Kirwan Institute of Ohio State University.

Peterson notes that many newspaper columnists and bloggers, as well as ordinary Americans, use words like "crooks", "criminals" and "Wall Street gangsters" to describe the bankers responsible for the recent financial crisis. Peterson disappoints by not mentioning my favorite word "banksters," coined in the 1930s by a Catholic priest Charles Coughlin and resuscitated by Liaquat Ahamed in his 2009 book "The Lords of Finance."

The terms of abuse are part of the popular rhetoric, says Peterson, but are not taken seriously either in academic or in mainstream political circles. "But perhaps there is more to these claims than initially meets the eye," says the law professor, clearly determined to make his name by breaking into academic circles with unholy thoughts of criminal "banksters."

He presents the Italian-American "Mafia" families as the prototypical U.S. gangsters. Though the Mafia were romanticized by Hollywood, at the height of their power they exerted significant influence on the economy and on political institutions.

Peterson notes that: "Mafia organizational structure relied on insulating leadership positions from government prosecution through the use of expendable soldiers. Soldiers were expected to suffer through periodic arrests, incarceration and violence associated with the illegal acts on which these criminal enterprises depended. But because the compensation for soldiers was high relative to their other employment prospects, crime families could maintain adequate staffing in the soldier class."

To objections that that's nothing like the way the modern financial sector is organized, Peterson points out some uncomfortable similarities.

"In residential mortgage-backed securitization deals, the management of investment banks insulated themselves and the bonuses they received through the use of less powerful, less capitalized mortgage origination and brokerage companies. Like Mafia soldiers, mortgage brokers and originators were expected to commit or abet fraud, violate sound underwriting practices, and ignore or undermine consumer protection statutes."

When times got tough, the frontline soldiers were expected to suffer by declaring insolvency, equivalent to Mafia soldiers doing time in prison.

"Originator and broker insolvency absorbed and deflected government sanctions, preserving the vital link to world capital markets provided by the large investment banks," claims Peterson. "Both the Mafia and structured finance featured and relied on high, but manageable, casualty rates in the soldier class."

Of course, the oath of silence was a vital feature underpinning Mafia control over their criminal empire and protecting the bosses from legal authorities.

Peterson also sees a similar omerta in the modern financial crisis: "In securitization, the 'true sale' of residential mortgages served a comparable organizational function. When law enforcement efforts pursue thinly capitalized originators and brokers, the securitized assets churned out by these soldier-class financiers are bankruptcy remote.

"This means that the insolvent originator's creditors, including law enforcement, cannot capture the assets that were produced through fraudulent underwriting. Although securitization does not involve an oath, true sales are organizationally similar to omerta in that the organizational norm erects a barrier between soldiers and leadership that law enforcement has difficulty surmounting," argues Peterson.

The Mafia also stamped their control through violence, murder and bloodshed, but there have been few murders in the modern financial crisis. There have, however, been suicides by people driven to despair at seeing their homes foreclosed.

Peterson agrees that the financial system has not resorted to physical violence and torture, but "Structured finance of subprime and exotic mortgages continues to rely on another form of violence that is structurally similar to homicide and disturbing in its own right. Foreclosure on family homes, the 'American dream' transformed into a nightmare, relies on the very real threat of state-sponsored violence."

He argues that "the strong and admirable respect for law and order" in middle-class America ensures that there is little actual violence when people lose their homes. But "The threat of violence is quite real and casts a shadow across the decision making and well-being of American families and their children," says Peterson. "The physical and emotional harm suffered by families who have lost their shelter is no less real if produced by threat of force rather than actual force. ...

"People who are expelled from their homes suffer such stress and sense of loss that they become more susceptible to disease, including depression and suicide."

Peterson's conclusion: "It is perhaps ironic, but given the nature of corruption not surprising, that one of the first and primary targets of organized criminals — banks — have in some cases taken on the organizational strategies of our country's most successful and feared criminals. If we learn nothing else from the Great Recession it should be this: the definition of "bank robber" needs an update.

The big banks have done more economic damage since 2007 than the combined total of all bank heists in the history of modern banking. "Banksters" endanger the global economic system by rigging interest rates and constructing shaky derivatives. When robbers hit a bank, depositors don't lose money. Nor does the stock market crash.

Kevin Rafferty is editor in chief of PlainWords Media.

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