So, where is the justice in the current crisis? Why have there been so few prosecutions and only feeble attempts to claw the money back? One reason might be that, in infamous cases such as the Lehman Brothers collapse and Bank of America's absorption of Merrill Lynch, the Fed and Treasury were intimately involved with the financial elite's deal making. It's difficult to prosecute others for securities fraud if you condoned the deals to begin with.

And there's another, more pertinent reason: The top federal law enforcement establishment is simply not in the mood. People who expect President Obama's Department of Justice to take the lead will be severely disappointed — not necessarily because the task is difficult, but because the Obama administration is showing it lacks the will.

Instead, the new administration is putting its energy into creating what it believes will be a meltdown-proof new system of elite "too-big-to-fail" banks, regulated by a beefed-up Federal Reserve.

Tim Geithner claims the government was blindsided last year but now can see. Critics say he needs glasses.
Carl de Souza/AFP
Tim Geithner claims the government was blindsided last year but now can see. Critics say he needs glasses.

Black calls that elite group of megabanks, such as Citigroup and Bank of America, "zombies." And they're not done feeding. All of the devilish tools remain in place, Black says, including "the subprime loans, with securitization and the credit default swaps. And the Obama administration astonishingly wants to re-create a secondary market in subprime loans — even though it cost us more than a trillion dollars."

It might seem that some sort of über-regulator is needed. But Camden Fine, a small-town banker who now leads a trade group of 5,000 community banks, sees a pumped-up, unified regulatory agency as "a big, hairy cyclopean beast" that would protect the megabanks no matter how reckless they are, and continue to favor Wall Street over Main Street. Compared with the Obama administration, America's small-town bankers look like populists.

Paul Volcker, the former Fed head and current Obama adviser, recently indicated that the White House remains committed to the concept of "too-big-to-fail," meaning the megabanks will continue to have a safety net and may ask for more bailouts. Currently, 19 financial institutions are on the protected list. Their business model hasn't changed materially since the crisis.


In one of last year's most questionable bailouts, the feds helped Bank of America buy Merrill Lynch for $20 billion. To make sure the deal went through, CEO Ken Lewis sold the BofA shareholders on the merger without telling them two salient facts: (1) the bank would swallow $12 billion of Merrill's $27.6 billion in losses, and (2) it would pay accelerated bonuses of $3.6 billion to Merrill executives.

It was such a clear case of securities fraud that Bank of America and the SEC reached a quick settlement of $33 million, a relatively skimpy amount. In September, federal Judge Jed Rakoff rejected the settlement, which didn't specifically name Lewis or any other executive, as a shady deal between Wall Street and Washington. Rakoff said the agreement "suggests a rather cynical relationship between the parties: The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, and the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all of this is done at the expense not only of the shareholders, but also the truth."

The judge scheduled the case for trial in February and has ordered the SEC to tell him why it didn't charge Lewis personally. The New York Attorney General's Office announced it would also file civil charges against Bank of America and Lewis. On October 1, the embattled CEO resigned and received a platinum parachute.

Such deals have fueled talk in Washington about creating one agency to oversee bank regulation, but such a monolithic regulator could make it easier for the big boys to influence it.

The cyclops theory of bank regulation that would fuse all four bank regulators into one "superagency" is actually the heart of a bill by Sen. Chris Dodd (after Obama, the number two recipient of AIG money in the 2008 campaign cycle). The administration and Barney Frank, chair of the House Financial Services Committee, have floated a number of other proposals. Dodd wants the Fed to lose its regulatory hold over banking and consumers (especially credit cards). Conversely, the Obama administration strives to make the Fed the über-regulator of banks and "shadow banks" such as Countrywide and GE Capital.

The idea of a super-Fed as top financial cop as well as the nation's central bank is colossal and colossally bad, and not just because the Fed is notoriously secretive — the opposite of Obama's pledged "transparency." The Fed chair is, by law, independent and doesn't answer to the president or Congress. As for Bernanke, he is an academic economist with no enforcement or justice chops who, in tandem with Henry Paulson, force-fed the nearly worthless Merrill Lynch to the foundering Bank of America.

And that story just keeps getting worse.

The House Committee on Oversight and Government Reform recently investigated the federal outlays that helped Bank of America buy Merrill Lynch. During the hearings, Ohio Rep. Dennis Kucinich showed through internal Fed documents that Paulson and Bernanke ignored "evidence that the Bank of America withheld information from its shareholders about mounting losses at Merrill Lynch before the crucial shareholder vote on December 5 — a potentially illegal act." In short, the Fed and Treasury have been accused of condoning a titanic securities fraud. But government approval of an offense often makes it more difficult to prosecute the culprit criminally, which might be why Lewis hasn't been indicted.

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