An American Hero: Alayne Fleischmann

Alayne Fleischmann is risking her career and all her assets by going public with information about the fraud perpetuated by JP Morgan Chase, a Wall Street bank.

If you really want to read about how dirty the big banks are, take the time to read through this piece, published in Rolling Stone by Matt Taibbi.  Here’s a very condensed version.   Everyone knows that the 2008 economic crisis was caused not by the real estate market or sub prime loans, but by a nearly $700 trillion dollar per year market in unregulated derivative bonds.

The banks were making so much money with these bonds that they got in bed with dirty mortgage brokers (i.e., the biggest ones) who engaged in inflating the incomes of people applying for loans, approving without documentation, and creating wild mortgage packages that would have payments low the first two years then kick in to incredibly high rates.   All of this created a massive bubble, as people saw prices rising and wanted in.  The banks then doubled down and made more money.   By 2005 these bonds were backed by mortgages that would never be repaid.

Note how fast over the counter (unregulated) derivative trade increased after 2000 – it was the motor of the economic crisis, and still could be hiding financial shenanigans.

In short, the crisis of 2008 was a free market creation, caused by unregulated big Wall Street banks selling bonds they knew were bad – leaving investors from schools, fire departments, retirement accounts and the like holding the bag.  Moreover it caused a massive recession and structurally weakened the world economy.   Never has there been a more convincing case that proves capitalism does not work without regulation, and that big money will game the system thinking only of itself if allowed the opportunity.

Yet there is more.   Once the collapse hit, the US was faced with the real possibility of a credit crunch that would not only hit banks and the mortgage market, but also even the ability of consumers to buy cars or use credit cards.   That was a looming threat in October 2008, and the immediacy of that threat was handled through TARP – the so called bail out.

So act one: bail out the players who gamed the system, whose executives made billions, leaving both investors and the world poorer.  Yet not to bail them out would have intensified the crisis to the point of causing a great depression.

Act two: the Justice Department of the new Obama Administration would work with the banks to try to avoid them having to pay massive fines, or have the extent of their corruption made public.   That’s what Fleischmann’s case shows.   Rather than go after the big banks for their fraud and crimes, Attorney General Eric Holder choose to get in bed with them and help them cover their tracks.   Why?

Again, to avoid a credit crunch and not to gum up the recovery.   With the big banks on the ropes, the recovery could fade.  If trust in the remaining financial institutions started to fail, we again would risk depression.   The big banks were not only too big to fail, but too big to even hold accountable.

Consider this brief monologue from the film Syriana in which corruption is defended – it’s a more common view than we might want to believe:

In Syriana the government wants the merger of two oil companies to go through, despite clear corruption.   “We’re looking for the illusion of due diligence,” one attorney declares.  But because increasing access to oil is so important, they really don’t want to dig.  In this case, the settlements with Chase and other banks created only the illusion that the Justice Department wanted to keep the banks accountable.  Fleischmann’s revelations we know how deep and thorough the corruption had become.

So what next?   Will JP Morgan Chase set out to destroy Fleischmann as an example for anyone else who might want to come forward?  Will others come forward to give her cover and tell the full story?  Will her courage create a desire to really dig to the bottom of what happened?

Alas, this stuff is complex.  That’s why so many people don’t get the reality of what caused the crisis, and find it easy to blame things like government policy on home loans.   Yet the more we learn, the more we see that Wall Street has immense control over US policy, in part because of their dominance of the economy.  If the banks fail, the world economy is in peril.

Yet this is unsustainable.   As the big banks again gain record profits, with only a meager effort to regulate them after the collapse, we’re setting up the next big crisis – perhaps worse than the last one.  One can only hope that heroes like Alayne Fleischmann show the courage to tell the world what’s really going on, and how whether Republican or Democrat, no one has the guts to take on Wall Street.