The Wall Street Cartel

By Pam Martens: July 30, 2013 

The financial crimes you can’t see are the ones that can really hurt you. 

When Congress, the media, the financial experts talk about transparency on Wall Street, it is always in abstract terms: we should have more transparency; we should know more details about the kinds of risks Wall Street is taking with other people’s money; we should be able to see the nature of derivatives trading being conducted in private agreements between Wall Street firms; we should make the big banks hold more capital to offset all the risks we know they’ll never let us see until it’s too late. 

Unfortunately, we can’t fix Wall Street’s problems by discussing them in the abstract. We need to be comprehensively cognizant of what Wall Street has become, peel away the artifices layer by layer, and put in legislative fixes that get quickly to the problem – not 848 page snafus like Dodd-Frank that require implementation rules to be debated and massaged for years by a tangled web of regulators, most of whom are already captured by Wall Street. 

The very first artifice that has to be crushed is Wall Street’s private justice system. Wall Street is the only industry in America that is operating its own self-regulatory court system. It is benignly called mandatory arbitration but if you step back and look very closely, it’s a full blown private justice system that was structured by Wall Street’s biggest law firms to give an edge to Wall Street. 

Today, if you want to become a customer of the largest Wall Street firms, it requires that you to sign away your rights to access the nation’s courts and use Wall Street’s court instead – the Financial Industry Regulatory Authority’s (FINRA) dispute resolution program. This is a program where transparency dies. 

There is no ability to see a repetitive pattern of fraud because claims are not heard in an open courtroom. Typically, the press is barred from the proceedings. Case law and legal precedent are not required to be followed. Brief decisions are written by an arbitrator which rarely provide the public with adequate insight into the full details of the dispute or any legal rationale for the decision. There have been numerous charges in the past that arbitrators who give a large award to a plaintiff against a Wall Street firm are blackballed from serving in the future. 

On July 20, 2000 the Public Investors Arbitration Bar Association (PIABA) issued a statement charging the predecessor to FINRA, another self-regulatory body known as the National Association of Securities Dealers (NASD), with rigging its computerized system of selecting arbitrators. PIABA stated that: “In direct and flagrant violation of federal law, the NASD systematically evaded the Securities and Exchange Commission approved ‘Neutral List Selection System’ arbitration rule requiring arbitrators to be selected on a rotating basis.  Instead, the NASD secretly programmed its computers to select some arbitrators on a seniority basis – just what the rule was designed to prevent.” 

Arbitrators serve as judge and jury in deciding whether Wall Street can fleece the public with impunity. Rigging the judge and jury pool is indeed a serious matter.  

PIABA discovered the manipulation when its attorneys attempted to test the arbitrator selection system at a conference in Chicago on June 27, 2000.  PIABA said in their statement that “this rule violation tainted hundreds or even thousands of compulsory securities arbitrations – many still ongoing.  In every such instance, the substantive rights of public investors to a neutral panel have been cynically violated.  Many public investors were thus twice cheated: first, by an NASD member firm that fraudulently conned them out of their life’s savings, and second by the NASD Arbitration Department’s rigged panels.” 

Think carefully about the above statement and apply it to what we know today about Wall Street, as details have slowly trickled out from the shroud of darkness it has drawn around itself. 

We know today that big Wall Street firms substituted their own version of the County Clerk offices that operate in counties across America to make sure that when we buy a home, our title to the property is properly registered with a government agency to protect and preserve clear title to property ownership in America. 

Wall Street’s version of County Clerk offices, like Wall Street’s version of our nation’s court system, was a disaster for consumers. It was called MERS (Mortgage Electronic Registration Systems, Inc.). Its parent, MERSCORP, was owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies. According to the MERSCORP web site, these “shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.” MERS was the mechanism through which Wall Street cranked up its vast mortgage securitization machine and when that blew up, its vast foreclosure machine. 

Timothy McCandless, a California lawyer, wrote the following about MERS: 

“…all across the country, MERS now brings foreclosure proceedings in its own name — even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note — the legal sine qua non of foreclosure — much less documentation that could support predatory lending defenses.” 

Next comes the Libor scam. Libor stands for London Interbank Offered Rate and was sold to the public as a reliable reflection of the rate at which banks are lending to each other.  Based on the average of that rate, after highs and lows are discarded, the Libor index is used as a key index for setting loan rates around the world, including adjustable rate mortgages, credit card payments and student loans here in the U.S. Libor is also one of the leading interest rate benchmarks used to create payment terms on interest rate swaps which Wall Street sold to cities and counties around the country. 

Libor was overseen by the British Bankers Association, a lobby group of big Wall Street banks and foreign banks. Needless to say, we now have learned that Libor was rigged to enrich the banks while fleecing students, consumers,  municipalities and people trading interest rate futures. 

Last week, we learned that the decisions coming out of the London Metal Exchange are controlled by Wall Street firms – decisions allowing Wall Street to hoard physical commodities in their own warehouses and force up the prices that the consumer and corporate buyers pay. 

Moments ago we learned that JPMorgan will pay a $410 million fine to settle claims that it rigged electricity markets in California and the Midwest. 

And on and on it goes while Congress sporadically holds isolated hearings and lets the unbridled looting against the public continue. 

We have the big picture if not all of the details: Wall Street is a rigged, wealth transfer machine. It must be stopped with the immediate restoration of the Glass-Steagall Act, the legislative repeal of its private justice system, and stringent legislation to outlaw cartel activity with criminal remedies.

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