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Accounting Fraud Continues to Plague U.S. Economy

Accounting Fraud Continues to Plague U.S. Economy

Senate Banking Committee Chairman Chris Dodd (D-CT) unveiled his latest financial reform proposal on Monday, and the stakes for the new legislation couldn’t be higher. After consumer groups raised a major ruckus, Dodd has dropped one of his most egregious concessions to the bank lobby—cutting enforcement authority from the proposed Consumer Financial Protection Agency (CFPA). That’s good news: Without a major regulatory overhaul, the U.S. economy’s destructive boom and bust cycle will start all over again.

We’ve been down this road before. The Enron fiasco should have served as a wake-up call for policymakers, but instead, the weak federal response to Enron’s major fraud helped pave the way for the current economic slump.

What does Enron have to do with the crisis?

As Megan Carpentier emphasizes for The Washington Independent, one of the key “reforms” Congress enacted in the Enron aftermath was a law requiring every CEO to sign-off on their company’s accounting statements—but it has accomplished almost nothing.

Enron collapsed due to accounting fraud. Its executives weren’t stupid or careless—they made their money by engaging in deliberate and coordinated acts of illegal deception. But CEOs of companies like Enron had always been able to deny that they knew about the shenanigans that were playing out in their accounting departments. By forcing CEOs to sign off on their accounting statements, Congress was attempting to “deny them plausible deniability,” as Carpentier puts it.

But accounting fraud has plagued the U.S. economy, even after the Enron scandal. It also plays a major role in the Wall Street crisis. A recent court report from Lehman Brothers’ bankruptcy examiner reveals that the company arranged a series of complicated transactions to hide $50 billion in debt, making Lehman appear healthier than it was. By hiding this debt, Lehman was able to make bigger bets on the mortgage market. The defense issued by Lehman CEO Richard Fuld? He apparently didn’t know the accounting hijinks were happening

An epidemic of fraud

Most U.S. policymakers are still having a hard time coming to grips with the fact that our financial system is rife with fraud at almost every level. Writing for AlterNet, Joe Costello reports on a recent Roosevelt Institute conference featuring several major economic luminaries. Costello argues that some of Wall Street’s biggest problems were driven by run-of-the-mill fraud. And a key vehicle for this fraud, Costello notes, was the derivatives market—the same market that allowed Enron to perpetrate its own frauds. Many of the scams aren’t even particularly new or creative. They’re simply the same cons that helped usher in the Great Depression.

“If we’re going to get our economy up and running again, the first thing we’re going to have to do is end the fraud,” Costello writes.

Protecting Whistleblowers

But astonishingly, even after the worst financial crisis in history, bigwig bankers have been able to avoid fraud charges and investigations. Even when the Justice Department went after Swiss banking Giant UBS for a massive tax evasion scheme, they let the company’s U.S. executives off the hook and instead jailed the very whistleblower who told the government about the fraud.

The whistleblower, Bradley Birkenfeld, is by no means innocent of wrongdoing—he even smuggled diamonds in a toothpaste container for a wealthy UBS client. But as Corbin Hiarr notes for Mother Jones, jailing the man who blows the whistle sends exactly the wrong message to anybody in Big Finance who recognizes a problem. Not only will your employer come at you with everything it has, but the government you aid will actually send you to prison. The fraudsters you finger get to retire to the Caymans.

This is part of the reason that successful financial reform is not just what the rules are, but who gets to enforce them. There were many reasonable rules against predatory lending that bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency (OCC) could have used to thwart the financial crisis early on, but neither agency was interested in doing so. They were more concerned with short-term banking profits, and up until 2007, sketchy accounting was allowing banks to book big gains on the subprime market.

Why we need a CFPA

That’s why all the way back in June of 2009, President Barack Obama proposed establishing a CFPA focused exclusively on defending consumers against banks. With no concerns for bank profitability, CFPA regulators could go after unfair practices and fraud because they were wrong, regardless of what they did for bank balance sheets.

The proposal was watered down significantly in the House, as Kai Wright notes for The Nation, and just a week ago it appeared that Dodd was ready to completely torpedo the new regulator in an effort to craft bipartisan support for a so-called “reform” bill.

He’s backed off since then, but without strong enforcement authority, nothing is gained—the same corrupt regulators will simply continue to look the other way. But Dodd would still house the new agency at the Federal Reserve. Dodd insists the Fed would have no authority over the CPFA, but if that were the case, why would he introduce the provision at all?

“Reform in name alone will be useless to both consumers and politicians,” writes Wright.

Strong financial reform is overwhelmingly popular. While it’s good to see Dodd backing away from some of the gifts he’d previously proposed to bank lobbyists, progressives must keep the pressure high to ensure that financial reform is strengthened as it moves through the Senate.

It’s easy for a corrupt lawmaker to vote against a weak bill: He can always plead that the bill wasn’t good enough and be right. But serious, popular reform is not so easy to oppose. If Dodd and the Democratic leadership make the politicians backed by the bank lobby—that’s literally every Republican, plus a handful of conservative Democrats—stand up and vote against a good bill, many of them will have to choose between their lobbyist friends and their political future.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. 


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photo credit: thanks to americans 4 financial reform via flickr
By Zach Carter, Media Consortium blogger

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52 comments

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5:41AM PDT on Aug 5, 2010

I've come to the conclusion that the great American experiment has failed. It has failed. We will either revolt or we will soon become Mexico, absent any middle class... just rich and penniless peasants, begging on the streets and making dolls out of corn husks and happy to clean the wealthy folks toilletes for some corn meal.

At this point, I'm just trying to speed up the inevitable outcome of all of this corporate and government greed... a complete and total collapse of our government and currency. Let's boycott the
credit card machine Let them keep printing more billions to bail out private, for profit entities! Let them continue cutting taxes for the wealthiest folks around. Let's continue buying every last thing on earth from China

4:10PM PDT on Mar 20, 2010

Michael R. : Be careful .. you are walking very close to advocating armed resistance to the "Money Masters". That stance is a very dangerous one. Men who would reduce a proud country to its knees for money would not hesitate to silence a voice raised against them. As a child I read a lot of Taylor Caldwell's books .. she was writing about a "world wide monetary control conspiracy" .. think about that for a while .. look around you .. in the meantime .. be very careful.

2:47PM PDT on Mar 20, 2010

This story reminds me of the old saying, that goes something like this: Those, who do not learn from history, are doomed to repeat it.

10:35AM PDT on Mar 19, 2010

One other thing, protest if the Consumers Protection Financial Agency is placed within the Federal Reserve. The Federal Reserve is NOT a Government Agency but an organization of, by and for banks. It is a private entity to assure the profits of banks. Can you imagine they would let bank credit cards have controls on their usury rates on lending? Christ in the Bible condemned it for those who give authority to the bible for values. If that happens it will be a huge fraud.
CPFA must be within one of our government agencies.
Roosevelt was a traitor to let the Federal Reserve start printing our money. It is a government responsibility and we got sold to the corrupt Bilderberg, Carlisle, the " " Triangle groups. Am sorry for you younger folks. If I was younger I would become an expatriate. No kidding.
Folks, you need to consider someone like Ralph Nader for President, or Dennis Kuchinich both men of integrity. Unless congress is changed, however, they will get nothing done with the vipers protecting the wealthy corporations money.It doesn't look pretty folks.
This was all predicted and the history laid out in a book still available if you Goggle it. "Fourth Reich of the Rich", by Des Griffin.

10:20AM PDT on Mar 19, 2010

This article leaves out the other screwing of American taxpayers, and that was the bailout during the Savings and Loan debacle. It seems every twenty years or so the wealthy need to raid the middle class to keep up their standard of living. There were certified public accountant firms who reviewed them at least twice a year. I know because my ex-husband was one. I called a business department at the Seattle Times, and asked how could all those S & L's crash when they all had accountants. He told me that many were being prosecuted and were in prison. My ex then a Partner in the firm committed suicide later that year, but I always believed they used another body and he escaped to a tropical island. The autopsy didn't get his hair color or eye color right.
Then we had Enron, and then the latest Wall Street Crash. Incidentally, Gov. Spitzer wasn't disgraced because of a prostitute but because of the editorial he wrote to the Washington Post about predatory lending and that George Bush filed a law suit to keep the states' Attorney Generals from enforcing their own Consumer Protection Laws to stop it. He was a whistle blower (paid the prostitute 6K) and they stopped the scandal. G.W.'s brother was involved in the S&L scandal too in Texas, but that was hushed up quickly as well. We have crooks on all corners who think we are fools. Reason my ex is my ex, he said, "If they are dumb enough to let you take it, might as well cause someone else will."

6:33AM PDT on Mar 19, 2010

No Lore E. "I am not sure if this has been used yet, but here goes, "the root of all evil is M O N E Y."

Get it right; The LOVE of money is the root of all evil. It's not having money which constitutes evil it's your lust for it whereby you will eg. stamp all over other people to get it, you'll throw someone out of their home if they're having a hard time rather than give them a break or eg. let them do some work for you in lieu of rent when you can easily afford to do so. You need to not misquote that maxim because doing so is itself ignorance and in effect corrupting the true root cause of the problem.
We are all individually responsible for our own "accounting". For effort, for sharing, for demonstrating both strength NOT to harm others even when they hurt us, for showing compassion.
My fuel supplier has acknowledged in writing that they have £hundreds of my money unassigne dto my account and cont to bully and harass me for fantasy figures whilst at the same time admitting having charged me £25 for am Inspector Visit that they know never happened. Ebay and Paypal are now the biggest crooked companies on the planet,ignoring International Laws right left and centre because compliance with centuries old laws doesnt earn them as much money as ignoring them.
Whilst I try to ensure that I DONT buy any counterfeited goods, those whose rights I protect, eg. Fox Media, ignore my emails asking how to identify the genuine article. There in a nutshell is a reason w

1:17AM PDT on Mar 19, 2010

Watch. As more and more people simply CAN'T pay their credit cards and other debts, the government is going to bring back debtors prison.

MBNA wrote W's bankruptcy legislation!...Don't think they're not thinking up some other ways to squeeze blood out of our stones. We'll be told it's to "punish" bad deadbeats and such and the bourgeoisie idiot masses will support it in the name of "getting tough" or some other such nonsense.

1:03AM PDT on Mar 19, 2010

We the people? Puh...leeze. We are no more powerful than the man in the moon. Corporate money owns EVERYONE at all levels of government and it's only going to get worse with the latest SCOTUS ruling.

America is for all essential purposes already over. It's just one giant sharecroppers farm. A handful in control let the rest of us live here as long as we pay most of what we "earn" to them.

I've come to the conclusion that the great American experiment has failed. It has failed. We will either revolt or we will soon become Mexico, absent any middle class... just SUPER rich and penniless peasants, begging on the streets and making dolls out of corn husks and happy to clean the wealthy folks toilletes for some corn meal.

At this point, I'm just trying to speed up the inevitable outcome of all of this corporate and government greed... a complete and total collapse of our government and currency. Let them keep printing more billions to bail out PRIVATE, FOR PROFIT entities! Let them continue cutting taxes for the wealthiest folks around. Let's continue buying every last thing on earth from China!

When this whole country collapses due to greed... and China just walks right in, scrapes up the sickly remains of our once great nation and puts us in her pocket, I'm going to laugh. After one ruthless capitalist gets its ASS handed to it by an even MORE ruthless and unrestrained capitalist, maybe the world will see that unfettered greed is actually bad. Maybe

7:04PM PDT on Mar 18, 2010

I am not sure if this has been used yet, but here goes, "the root of all evil is M O N E Y. These are sad times, the banks who are our credit card companies, demand 24 percent interest, but you are lucky if you get .000002 percent on your savings account.
Hello!

4:44PM PDT on Mar 18, 2010

the poor get poorer and the corporate masters become more powerful they have more power and control over your life than any government in our history. They better study history because there are more of us than there are cops or troops,we should consider ALL forms of civil disobediance and methods to resist the new serfdom or as i see it economic slavery, oppression must be fought for the sake of the planet and the people.

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