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October 17, 2015

Al Jazeera America: Criminal prosecutions won’t change the financial industry

“Last month, U.S. Deputy Attorney General Sally Yates announced that the Department of Justice will be going hard after corporate crime, white-collar criminals and Wall Street fraud.

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“Our financial system, even absent straight-up crime, is a wonderfully efficient system for upwardly redistributing money into the portfolios of the 1 percent. The focus on prosecutions only preserves the fiction that our financial system is fundamentally OK and that anything bad that happens — say, an enormous asset bubble collapse — must be the result of criminals. There is a bit of the just-law fallacy at work here, the deeply held American folk belief that our legal system, including the regulatory latticework of laws that makes our financial system possible, is by nature fair and decent. That, alas, is a superstition.

“Why? Because our laws are often god-awful. Most nonlawyers understand this as well as, if not better than, anyone with a J.D. And the fact remains that most — not all, but most — of what led to the financial crash of 2008 was legal. The advocacy group Better Markets, led by veteran securities litigator Dennis Kelleher, takes care to distinguish among crash-causing behavior that was gratuitously risky, what was stupidly reckless and what was, finally, illegal. He recently emphasized that there was still a vital need for criminal prosecutions but that they were one just one among many tactics to tame our predatory financial system, including especially aggressive civil enforcement measures.”

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“The most effective tool for building a well-run financial system is administrative law. It is critical that the Commodity Futures Trading Commission, a small regulatory agency with the enormous task of regulating derivatives and other complex financial products, be given the power to grow staff and teeth. How Dodd-Frank, a financial regulatory bill enacted into law but still amorphous in many of its practical details (how strictly derivatives will be regulated, prudential standards for counterparty risk, capital and liquidity requirements), takes shape in the next couple of years is far more important than the latest PR stunt from the Department of Justice. Given the sumo-scale lobbying clout of the financial sector, are these less dramatic regulatory reforms even possible? “It’s the fifth inning,” says Kelleher. “Too soon to tell, but not at all hopeless.””

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Read the full Al Jazeera America article by Chase Madar here.

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